ICG COMMUNICATIONS INC /DE/ - 10-K Annual Report

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

FORM 10-K

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

For the fiscal year ended December 31, 1998

OR

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

(Commission file Number 1-11965)
ICG COMMUNICATIONS, INC.
(Commission file Number 1-11052)
ICG HOLDINGS (CANADA) CO.
(Commission file Number 33-96540)
ICG HOLDINGS, INC.
(Exact names of registrants as specified in their charters)

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Delaware 84-1342022
Nova Scotia Not applicable
Colorado 84-1158866
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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161 Inverness Drive West Not applicable
Englewood, Colorado 80112

161 Inverness Drive West c/o ICG Communications, Inc.
Englewood, Colorado 80112 161 Inverness Drive West
P.O. Box 6742
Englewood, Colorado 80155-6742

161 Inverness Drive West Not applicable
Englewood, Colorado 80112
(Address of principal executive offices) (Address of U.S. agent for service)
- ----------------------------------------- -------------------------------------
Registrants' telephone numbers, including area codes: (888) 424-1144 or
(303) 414-5000

Securities registered pursuant to Section 12(b) of the Act:
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Title of class
- -------------------------------------------------------------------------------
Not applicable
Not applicable
Not applicable
- -------------------------------------------------------------------------------

Securities registered pursuant to Section 12(g) of the Act:
- -------------------------------------------- ----------------------------------
Name of each exchange on
Title of each class which registered
- -------------------------------------------- ----------------------------------
Common Stock, $.01 par value Nasdaq National Market
(46,770,440 shares outstanding on
March 29, 1999)
Not applicable Not applicable
Not applicable Not applicable
- -------------------------------------------- ----------------------------------

Indicate by check mark whether the registrants: (1) have 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
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. X Yes No

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

On March 29, 1999 the aggregate market value of ICG Communications, Inc.
Common Stock held by non-affiliates (using the closing price of $18.63 on March
29, 1999) was approximately $871,333,297.

ICG Canadian Acquisition, Inc., a wholly owned subsidiary of ICG
Communications, Inc., owns all of the issued and outstanding common shares of
ICG Holdings (Canada) Co.

ICG Holdings (Canada) Co. owns all of the issued and outstanding shares of
common stock of ICG Holdings, Inc.

DOCUMENTS INCORPORATED BY REFERENCE

The definitive Proxy Statement for the 1999 Annual Meeting of Stockholders
of ICG Communications, Inc. to be filed with the Securities and Exchange
Commission not later than April 30, 1999 has been incorporated by reference in
whole or in part for Part III, Items 10, 11, 12 and 13, of the Annual Report on
Form 10-K for the fiscal year ended December 31, 1998 of ICG Communications,
Inc.

TABLE OF CONTENTS

PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
ITEM 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Recent Developments. . . . . . . . . . . . . . . . . . . . . 6
Telecom Services . . . . . . . . . . . . . . . . . . . . . . 10
Strategy . . . . . . . . . . . . . . . . . . . . . . . . . 10
Networks . . . . . . . . . . . . . . . . . . . . . . . . . 11
Services . . . . . . . . . . . . . . . . . . . . . . . . . 12
Industry . . . . . . . . . . . . . . . . . . . . . . . . . 14
Network Services . . . . . . . . . . . . . . . . . . . . . . 14
Satellite Services . . . . . . . . . . . . . . . . . . . . . 15
Customers And Marketing . . . . . . . . . . . . . . . . . . 16
Competition. . . . . . . . . . . . . . . . . . . . . . . . . 17
Regulation . . . . . . . . . . . . . . . . . . . . . . . . . 18
Employees. . . . . . . . . . . . . . . . . . . . . . . . . . 22
ITEM 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . 22
ITEM 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . 22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . . . . . 23

PART II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS. . . . . . . . . . . . . . . . . . . . . . 24
ITEM 6. SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . 26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. . . . . . . . . . . . . . 30
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK . . 56
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. . . . . . . . . . 57
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES . . . . . . . . . . . . . 57

PART III. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANTS. . . . . . . . 58
ITEM 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . 59
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 59
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . 59

PART IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORT ON FORM 8-K. 60
Financial Statements . . . . . . . . . . . . . . . . . . . . 60
Report on Form 8-K . . . . . . . . . . . . . . . . . . . . . 66

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Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Financial Statement Schedule . . . . . . . . . . . . . . . . 66

FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . F-1

FINANCIAL STATEMENT SCHEDULE. . . . . . . . . . . . . . . . . . . . . . . S-1

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PART I

Unless the context otherwise requires, the term "Company" or "ICG" means
the combined business operations of ICG Communications, Inc. ("ICG") and its
subsidiaries, including ICG Holdings (Canada) Co. ("Holdings-Canada") and ICG
Holdings, Inc. ("Holdings"); the terms "fiscal" and "fiscal year" refer to ICG's
fiscal years ending December 31 for 1997 and 1998 and September 30 for years
prior to 1997. The Company changed its fiscal year end to December 31 from
September 30, effective January 1, 1997. All dollar amounts are in U.S. dollars.

ITEM 1. BUSINESS

Overview

The Company is one of the nation's leading competitive integrated
communications providers ("ICPs"), based on estimates of the industry's 1998
revenue. ICPs seek to provide an alternative to incumbent local exchange
carriers ("ILECs"), long distance carriers and other communications service
providers for a full range of communications services in the increasingly
deregulated telecommunications industry. Through its competitive local exchange
carrier ("CLEC") operations, the Company operates fiber networks in regional
clusters covering major metropolitan statistical areas in California, Colorado,
Ohio, the Southeast and Texas. The Company also provides a wide range of network
systems integration services and maritime and international satellite
transmission services. Additionally, the Company began providing wholesale
network services over its nationwide data network in February 1999. As a leading
participant in the rapidly growing competitive local telecommunications
industry, the Company has experienced significant growth, with total revenue
increasing from approximately $154.1 million for fiscal 1996 to approximately
$397.6 million for fiscal 1998. The Company's rapid growth is the result of the
initial installation, acquisition and subsequent expansion of its fiber optic
networks and the expansion of its communications service offerings.

The Federal Telecommunications Act of 1996 (the "Telecommunications Act")
and pro-competitive state regulatory initiatives have substantially changed the
telecommunications regulatory environment in the United States. Under the
Telecommunications Act, the Company is permitted to offer all interstate and
intrastate telephone services, including competitive local dial tone. In early
1997, the Company began marketing and selling local dial tone services in major
metropolitan areas in California, Colorado, Ohio and the Southeast and, in
December 1998, began offering services in Texas through an acquired business.
During fiscal 1997 and 1998, the Company sold 178,470 and 206,458 local access
lines, respectively, net of cancellations, of which 354,482 were in service at
December 31, 1998. The Company had 29 operating high capacity digital voice
switches and 16 data communications switches at December 31, 1998, and plans to
install additional switches as demand warrants. As a complement to its local
exchange services offered to business end users, the Company markets bundled
service offerings provided over its regional fiber network which include long
distance, enhanced telecommunications services and data services. Additionally,
the Company owns and operates a nationwide data network, with 236 points of
presence ("POPs") over which the Company recently began providing wholesale
Internet access and enhanced network services to MindSpring Enterprises, Inc.
("MindSpring") and intends to offer similar services to other Internet service
providers ("ISPs") and telecommunications providers in the future.

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In developing its telecommunications service offerings, the Company
continues to invest significant resources to expand its network. This expansion
is being undertaken through a combination of constructing owned facilities,
entering into long-term agreements with other telecommunications carriers and
through mergers and acquisitions. See "-Recent Developments."

Recent Developments

Sale of Operations of NETCOM On-Line Communication Services, Inc. On
January 21, 1998, the Company acquired NETCOM On-Line Communication Services,
Inc., a Delaware corporation and provider of Internet connectivity and Web site
hosting services and other value-added services located in San Jose, California
("NETCOM") in a transaction accounted for as a pooling of interests for
approximately 10.2 million shares of common stock of ICG ("ICG Common Stock"),
valued at approximately $284.9 million on the date of the merger. On February
17, 1999, the Company sold certain of the operating assets and liabilities of
NETCOM to MindSpring, an ISP located in Atlanta, Georgia. Total proceeds from
the sale were $245.0 million, consisting of $215.0 million in cash and 376,116
shares of unregistered common stock of MindSpring, valued at approximately
$79.76 per share at the time of the transaction. Assets and liabilities sold to
MindSpring include those directly related to the domestic operations of NETCOM's
Internet dial-up, dedicated access and Web site hosting services. On March 16,
1999, the Company sold all of the capital stock of NETCOM's international
operations for total proceeds of approximately $41.1 million. MetroNET
Communications Corp. ("MetroNET"), a Canadian entity, and Providence Equity
Partners ("Providence"), located in Providence, Rhode Island, together purchased
the 80% interest in NETCOM Canada Inc. owned by NETCOM for approximately $28.9
million in cash. Additionally, Providence purchased all of the capital stock of
NETCOM Internet Access Services Limited, NETCOM's operations in the United
Kingdom, for approximately $12.2 million in cash. The Company expects to record
a combined gain on the NETCOM transactions of approximately $200 million, net of
income taxes of approximately $6.5 million, during the three months ended March
31, 1999.

In conjunction with the sale to MindSpring, the legal name of the NETCOM
subsidiary was changed to ICG PST, Inc. ("PST"). PST has retained the domestic
Internet backbone assets formerly owned by NETCOM which include 236 POPs serving
approximately 700 cities nationwide. PST intends to utilize the retained network
operating assets to provide wholesale Internet access and enhanced network
services to MindSpring and other ISPs and telecommunications providers. On
February 17, 1999, the Company entered into an agreement to lease to MindSpring
for a one-year period the capacity of certain network operating assets for a
minimum of $27.0 million, although subject to increase dependent upon network
usage. MindSpring will utilize the capacity to provide Internet access to the
dial-up services customers formerly owned by NETCOM. In addition, the Company
will receive for a one-year period 50% of the gross revenue earned by MindSpring
from the dedicated access customers formerly owned by NETCOM.

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Effective November 3, 1998, the Company's board of directors adopted the
formal plan to dispose of the operations of NETCOM and accordingly, the
Company's consolidated financial statements reflect the operations of NETCOM as
discontinued for all periods presented. For fiscal 1996, 1997 and 1998, NETCOM
reported revenue of $120.5 million, $160.7 million and $164.6 million,
respectively, and EBITDA (before nonrecurring charges) of $(31.0) million,
$(9.4) million and $(14.7) million, respectively.

Announcement of New Service Offerings. In August 1998, the Company began
offering enhanced telephony services via Internet protocol ("IP") technology.
The Company currently offers these services in 230 major cities in the United
States, covering more than 90% of the commercial long distance market. The
Company carries the IP traffic over its nationwide data network and terminates a
large portion of the traffic via its own POPs, thereby eliminating terminating
charges from the use of other carriers' network facilities. Calls that cannot be
terminated over the Company's own facilities are billed at higher per minute
rates to compensate for the charges associated with using other carriers'
facilities. The Company currently does not generate any significant revenue from
this service.

In December 1998, the Company announced its plans to offer three new
network services, to be available beginning in early 1999:

Modemless remote access service ("RAS") allows the Company to provide modem
access at its own switch location, rather than requiring ISPs to deploy modems
physically at each of their POPs. This service will enable the Company to act as
an aggregator for ISP traffic while limiting the ISP's capital deployment.
Through its strategic relationship with Lucent Technologies, Inc. ("Lucent"),
the Company is currently retrofitting all of its Lucent-5ESS switches with the
new Lucent product that allows for RAS functionality. This service eliminates
the need for ISPs to separately purchase modems and shifts the network
management responsibilities to the Company. The Company plans to be the first to
market RAS using Lucent's modem technology and expects the service will be
available to customers in the second quarter of 1999.

Through the same technology that allows it to provide RAS, the Company
plans to offer interLATA (local access and transport area) expanded originating
service ("EOS"), enabling regional or local ISPs to expand their geographical
footprint outside their current physical locations by carrying the ISP's
out-of-region traffic on the Company's own nationwide data network. The Company
will initially offer this service within its CLEC regional clusters during the
first quarter of 1999, and plans to expand EOS offerings to other areas as
demand warrants.

Through digital subscriber line ("DSL") technology, the Company plans to
provide high-speed data transmission services primarily to business end users
and, on a wholesale basis, to ISPs. DSL technology utilizes the existing ILEC
twisted copper pair connection to the customer, giving the customer
significantly greater bandwidth, and consequently speed, when connecting to the
Internet. The Company expects to offer DSL in over 400 central offices by the
end of 1999 through alliances with other companies focusing on DSL service. For
example, on February 18, 1999, the Company entered into a letter of intent with
NorthPoint Communications, Inc., a privately held data CLEC based in San
Francisco, California ("NorthPoint"). If this agreement is finalized, NorthPoint
will be designated as the Company's preferred DSL provider for a two-year period

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and the Company will purchase up to 75,000 DSL lines from NorthPoint over the
two-year term. This alliance will enable the Company to accelerate the expansion
of its DSL service offerings and allow NorthPoint to gain access to the
Company's collocation facilities in markets where NorthPoint currently has
limited or no operations. If the agreement is finalized, NorthPoint will
provision and manage all of the Company's DSL services offered under this
agreement. The Company expects to begin offering DSL services under this
agreement in the second quarter of 1999.

Acquisition of CSW/ICG ChoiceCom, L.P. In January 1997, the Company
announced a strategic alliance with Central and South West Corporation ("CSW")
formed for the purpose of developing and marketing telecommunications services
in certain cities in Texas. Based in Austin, Texas, the venture entity was a
limited partnership named CSW/ICG ChoiceCom, L.P. ("ChoiceCom"). On December 31,
1998, the Company purchased 100% of the partnership interests in ChoiceCom from
CSW for approximately $55.7 million in cash and the assumption of certain
liabilities of approximately $7.3 million. In addition, the Company converted
approximately $31.6 million of receivables from prior advances made to ChoiceCom
by the Company to its investment in ChoiceCom. The acquired company currently
provides local exchange and long distance services in Austin, Corpus Christi,
Dallas, Houston and San Antonio, Texas. For fiscal 1997 and 1998, ChoiceCom
reported revenue of $0.3 million and $5.8 million, respectively, and EBITDA
losses (before nonrecurring charges) of $(5.5) million and $(13.6) million,
respectively.

Acquisition of DataChoice Network Services, L.L.C. On July 27, 1998, the
Company acquired DataChoice Network Services, L.L.C., a Colorado limited
liability company providing point-to-point data transmission resale services
through its long-term agreements with multiple regional carriers and nationwide
providers ("DataChoice"). The Company paid total consideration of approximately
$5.9 million, consisting of 145,997 shares of ICG Common Stock and approximately
$1.1 million in cash. The historical results of operations of DataChoice are not
significant to the Company's consolidated results of operations.

Acquisition of NikoNET, Inc. The Company completed a series of transactions
on July 30, 1998 to acquire NikoNET, Inc., CompuFAX Acquisition Corp. and
Enhanced Messaging Services, Inc. (collectively, "NikoNET"). The Company paid
total consideration of approximately $13.8 million in cash, which included
dividends payable by NikoNET to its former owners and amounts to satisfy
NikoNET's former line of credit, assumed approximately $0.7 million in
liabilities and issued 356,318 shares of ICG Common Stock with a fair market
value of approximately $10.7 million on the date of the acquisition, for all the
capital stock of NikoNET. Located in Atlanta, Georgia, NikoNET provides
broadcast facsimile services and enhanced messaging services to financial
institutions, corporate investor and public relations departments and other
customers. The Company believes the acquisition of NikoNET enables the Company
to offer expanded services to its existing customers. The historical results of
operations of NikoNET are not significant to the Company's consolidated results
of operations.

Discontinuance of Operations of Zycom. Due primarily to the loss of a major
customer, which generated a significant obligation under a volume discount
agreement with its call transport provider, the board of directors of Zycom
Corporation, a 70%-owned subsidiary of the Company which operated an 800/888/900
number services bureau and switch platform ("Zycom"), approved a plan on August
25, 1998 to wind down and ultimately discontinue Zycom's operations. On October

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22, 1998, Zycom completed the transfer of all customer traffic to other
providers and on January 4, 1999, the Company completed the sale of the
remainder of Zycom's operating assets to an unrelated third party. For fiscal
1996, 1997 and 1998, Zycom reported revenue of $14.9 million, $28.3 million and
$17.0 million, respectively, and EBITDA (before nonrecurring charges) of $0.6
million, $(2.7) million and $(3.3) million, respectively. The Company's
consolidated financial statements reflect the operations of Zycom as
discontinued for all periods presented.

Sale of Satellite Services Operating Subsidiaries. On August 12 and
November 18, 1998, the Company completed the sales of the capital stock of
MarineSat Communications, Inc. ("MCN") and Nova-Net Communications, Inc.
("Nova-Net"), respectively, two wholly owned subsidiaries within the Company's
Satellite Services operations. MCN is a Florida-based provider of cellular and
satellite communications for commercial ships, private vessels and land-based
mobile units. Nova-Net provides private data networks utilizing very small
aperture terminals ("VSATs") and specializes in data collection and in
monitoring and control of customer production and transmission facilities in
various industries, including oil and gas, electric and water utilities and
environmental monitoring industries. The Company recorded a gain on the sale of
MCN of approximately $0.9 million and a loss on the sale of Nova-Net of
approximately $0.2 million in its consolidated statement of operations during
fiscal 1998. The Company believes that the dispositions of MCN and Nova-Net will
further management's ability to focus on the development and deployment of its
core Telecom Services. The combined historical results of operations of MCN and
Nova-Net are not significant to the Company's consolidated results of
operations. The Company's remaining Satellite Services operations consists
principally of the operations of Maritime Telecommunications Network, Inc.
("MTN"). See "-Satellite Services."

Financings. On February 12, 1998, ICG Services, Inc., a Delaware
corporation and newly formed wholly owned subsidiary of the Company ("ICG
Services"), completed a private placement of 10% Senior Discount Notes due 2008
(the "10% Notes") for gross proceeds of approximately $300.6 million. Net
proceeds from the offering, after underwriting and other offering costs of
approximately $9.7 million, were approximately $290.9 million. The 10% Notes are
unsecured senior obligations of ICG Services that mature on February 15, 2008,
at a maturity value of $490.0 million. Interest will accrue at 10% per annum,
beginning February 15, 2003, and is payable in cash each February 15 and August
15, commencing August 15, 2003. The 10% Notes have been registered under the
Securities Act of 1933, as amended (the "Securities Act").

On April 27, 1998, ICG Services completed a private placement of 9 7/8%
Senior Discount Notes due 2008 (the "9 7/8% Notes") for gross proceeds of
approximately $250.0 million. Net proceeds from the offering, after underwriting
and other offering costs of approximately $7.9 million, were approximately
$242.1 million. The 9 7/8% Notes are unsecured senior obligations of ICG
Services that mature on May 1, 2008, at a maturity value of $405.3 million.
Interest will accrue at 9 7/8% per annum, beginning May 1, 2003, and is payable
in cash each May 1 and November 1, commencing November 1, 2003. The 9 7/8% Notes
have been registered under the Securities Act.

ICG Equipment, Inc. In January 1998, the Company formed ICG Equipment,
Inc., a Colorado corporation and wholly owned subsidiary of ICG Services ("ICG
Equipment"), for the principal purpose of purchasing telecommunications
equipment, software, network capacity and related services for sale or lease to

9

other operating subsidiaries of ICG ("Holdings' Subsidiaries"). By purchasing
assets through ICG Equipment, the Company defers sales tax on asset purchases
over the term of the operating leases between ICG Equipment and Holdings'
Subsidiaries, which sales tax would otherwise be paid in full at the time of the
purchase. The equipment and services provided to Holdings' Subsidiaries are
utilized to upgrade and expand the Company's network infrastructure. All such
arrangements are intended to be conducted on the basis of fair market value and
on comparable terms that Holdings' Subsidiaries would be able to obtain from a
third party. As of December 31, 1998, approximately $195.0 million of
telecommunications equipment, software, network capacity and related services
were under lease to Holdings' Subsidiaries by ICG Equipment.

Telecom Services

The Company operates local exchange networks in the following markets
within its regional clusters: California (Sacramento, San Diego and portions of
the Los Angeles and San Francisco metropolitan areas); Colorado (Denver,
Colorado Springs and Boulder); Ohio (Akron, Cincinnati, Cleveland, Columbus, and
Dayton); the Southeast (Atlanta, Georgia; Birmingham, Alabama; Charlotte, North
Carolina; Louisville, Kentucky; and Nashville, Tennessee); and Texas (Austin,
Corpus Christi, Dallas, Houston and San Antonio). The Company will continue to
expand its network through construction, leased facilities and strategic
alliances and, potentially, through acquisitions. The Company's operating
regional fiber networks have grown from 2,143 fiber route miles at the end of
fiscal 1996 to 4,255 fiber route miles as of December 31, 1998. Telecom Services
revenue has increased from approximately $72.8 million for fiscal 1996 to
approximately $303.3 million for fiscal 1998. Since February 1999, the Company
also operates a nationwide data network with 236 POPs over which the Company
provides wholesale Internet access services to MindSpring and intends to provide
such services and enhanced network services to other ISPs and telecommunications
providers in the future.

Strategy

The Company's objective is to be a premier provider of high quality
communications services to its targeted business, ISP and carrier customers. The
key elements of this strategy are:

Increase Revenue and Margins through Bundled Services to Business End
Users. The Company believes that its commercial customers are increasingly
demanding a broad, full service approach to providing telecommunications
services. By offering integrated technology-based communications solutions,
management believes the Company will be better able to capture business from
telecommunications-intensive commercial accounts. To this end, the Company is
complementing its competitive local service offerings with long distance and
data service offerings, including its recently offered IP telephony services,
and marketing these combined products through ICG's direct sales force and sales
agents. Management believes a targeted business end user strategy can better
leverage ICG's network footprint and telecommunications investment.

Increase Revenue and Margins through New Wholesale Network Products Offered
to ISPs and Telecommunications Providers. The Company believes the Internet
business is one of the fastest growing segments of the telecommunications
service sector, thereby providing enormous growth opportunities for network

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service providers supporting the growing base of ISPs. The Company plans to take
advantage of these opportunities through the offering of wholesale Internet
access and other enhanced network services to ISPs and other telecommunications
providers, and expanding its current primary rate interface ("PRI") offerings
with RAS, EOS and DSL. See "-Recent Developments." Management believes these new
products will leverage the Company's relationships with ISPs and will position
the Company to lead in the provisioning of new services to this emerging
customer base.

Concentrate Networks in Regional Clusters. The Company believes that by
focusing on regional clusters it will be able to more effectively service its
customers' needs and efficiently market, operate and control its networks and
expanded service offerings. As a result, the Company has concentrated its fiber
networks in regional clusters serving major metropolitan areas in California,
Colorado, Ohio, the Southeast and Texas.

Networks

The Company's networks generally comprise fiber optic cables, switching
facilities, advanced electronics, transmission equipment and related wiring and
equipment. The Company typically designs a ring architecture with a view toward
making the network accessible to the largest concentration of
telecommunications-intensive businesses in a given market.

The Company's networks are generally configured in redundant synchronous
optical network ("SONET") rings that offer the advantage of uninterrupted
service in the event of a fiber cut or equipment failure, resulting in limited
outages and increased network reliability. The Company generally markets its
services at prices below those charged by the ILEC. Management believes these
factors combine to create a more reliable and cost effective alternative to ILEC
networks and services.

The Company's networks are constructed to access long distance carriers as
well as areas of significant end user telecommunications traffic in a cost
efficient manner. The construction period of a new network varies depending upon
the scope of the activities, such as the number of backbone route miles to be
installed, the initial number of buildings targeted for connection to the
network backbone and the general deployment of the network infrastructure.
Construction is planned to allow revenue-generating operations to commence prior
to the completion of the entire network backbone. When constructing and relying
principally on its own facilities, the Company has experienced a period of 12 to
18 months from initial design of a network to revenue generation from such
network. Based upon its experience of using ILEC facilities to provide initial
customer service and the Company's agreements to use utilities' existing fiber,
the Company has experienced revenue generation within nine months after
commencing network design. After installing the initial network backbone,
extensions to additional buildings and expansions to other regions of a
metropolitan area are evaluated, based on detailed assessments of market
potential. The Company is currently expanding all of its existing networks to
reduce its reliance on the ILECs and evaluating development of new networks both
inside and outside its existing regional clusters.

Switched services involve the transmission of voice, video or data to long
distance carrier-specified or end user-specified termination sites. The switch
is required in order for the Company to provide the full range of local
telephone services. By contrast, the special access services provided by the

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Company and other CLECs involve a fixed communications link or "pipe," usually
between an end user and a specific long distance carrier's POP. With a switch
and interconnection to various carriers' networks, it is possible for the
Company to direct a long distance carrier's traffic to any end user regardless
of whether the end user is physically connected to the Company's owned or leased
network. The Company is marketing and selling competitive local dial tone
services in California, Colorado, Ohio, the Southeast and Texas. See
"-Regulation - State Regulation."

The Company's network monitoring center in Denver, Colorado monitors and
manages the Company's regional fiber networks and provides high-level monitoring
of the Company's local exchange switches. Centralized electronic monitoring and
control of the Company's networks allows the Company to avoid duplication of
this function in each city, thereby reducing costs.

The Company owns and operates a nationwide data network consisting of 236
POPs and 13 hubs containing frame relay switches and high-performance routers
connecting a backbone of leased Asynchronous Transfer Mode ("ATM") switches and
leased high-speed dedicated data lines in the United States. The design and
architecture of the physical network permits the Company to offer highly
flexible, reliable high-speed services to its customers. The data network
infrastructure is monitored by a network operations center in San Jose,
California.

Services

The Company's competitive local exchange services include local dial tone,
long distance, enhanced telephony, data, special access and interstate and
intrastate switched access services. Competitive local dial tone services
consist of basic local exchange lines and trunks for business, related line
features (such as voice mail, Direct Inward Dialing (DID), hunting and custom
calling features), local calling, and intraLATA, also called local toll,
calling. The Company believes that having a full complement of communications
services, including local, long distance and data services, will strengthen its
overall market position and help the Company to better penetrate the local
exchange marketplace. The Company has also developed long distance services,
including calling and debit cards, to complement its local exchange services
family of products. The Company offers a bundled service of local, long distance
and data services, delivered over a T-1 connection in several markets and
intends to expand this bundled service offering to its remaining markets in the
future.

The Company offers long distance services to end user customers. Although
the Company carries some of its long distance traffic on its own switches, it
relies upon obtaining long distance transmission capacity from other carriers to
provide its services. Therefore, the Company has entered into transmission
agreements, which typically provide for transmission on a per minute basis, with
long distance carriers to fulfill such needs. To reduce its cost of services,
the Company leases point-to-point circuits on a monthly or longer term fixed
cost basis where it anticipates high traffic volume.

The Company also offers enhanced telephony services via IP technology in
230 major cities in the United States, covering more than 90% of the commercial
long distance market. The Company carries the IP traffic over its nationwide
data network and terminates a large portion of the traffic via its own POPs,
thereby eliminating terminating charges from the use of other carriers' network

12

facilities. Calls that cannot be terminated over the Company's own facilities
are billed at higher per minute rates to compensate for the charges associated
with using other carriers' facilities.

Private line services are generally used to connect the separate locations
of a single business outside of the local calling area or LATA. Special access
services are generally used to connect end user customers to a long distance
telephone carrier's facilities, to connect long distance carrier's facilities to
the local telephone company's central offices, and to connect different
facilities of the same long distance carrier or facilities of different long
distance carriers all within the same LATA. As part of its initial "carrier's
carrier" strategy, the Company targeted the transport between long distance
company facilities and the local telephone company central offices, and, for
high volume customers, between the long distance company and the end user
customer's office. In order to leverage its significant network investment, the
Company also markets these services directly to end user business customers.

The Company's interstate and intrastate switched access services include
the transport and switching of calls between the long distance carrier's
facilities and either the local telephone company's central offices or end
users. By performing the switching services, the Company can reduce the long
distance carriers' local access costs, which constitute their major operating
expense. Until recently, the Company experienced negative operating margins from
the provision of wholesale switched services because it relies on ILEC networks
to terminate and originate customers' switched traffic. The Company has raised
prices on its wholesale switched services product in order to improve margins
and has de-emphasized its wholesale switched services to focus on its higher
margin products.

The Company's Signaling System 7 ("SS7") services provide signaling
connections between long distance and local exchange carriers, and between long
distance carriers' networks. SS7, sometimes referred to as "look-ahead routing,"
is used by local exchange companies, long distance carriers, wireless carriers
and others to signal between network elements, creating faster call set-up and
resulting in more efficient use of network resources. SS7 is now the standard
method for telecommunications signaling worldwide. The Company has deployed
signal transfer points ("STPs") throughout its networks to efficiently route SS7
data across the United States. SS7 is also the enabling technology for advanced
intelligence network platforms, a set of services and signaling options that
carriers can use to create new services or customer options. Carriers purchase
connections into the Company's SS7 network, and also purchase connections to
other local and long distance carriers on a monthly recurring basis. The Company
has also developed a nationwide SS7 service with Southern New England
Telecommunications Corporation ("SNET"), a subsidiary of SBC Communications,
Inc. The Company believes that, together with SNET, it is one of the largest
independent suppliers of SS7 services. The Company's STPs are integrated with
two SNET "gateway" STPs in Connecticut.

Through NikoNET, the Company provides broadcast facsimile services and
enhanced messaging services to financial institutions, corporate investor and
public relations departments and other customers. NikoNET also provides
facsimile to e-mail and e-mail to facsimile translation services. This product
leverages the Company's network and creates high margin minutes of use.

13

As part of its new strategy to maximize the value of its nationwide data
network by including high-growth ISPs in its customer base, the Company is
currently offering Internet access services and recently announced its plans to
offer other new wholesale network services, including RAS, EOS and DSL, to ISPs,
to be available beginning in early 1999. See "-Recent Developments."

Industry

The Company operates in the local telephone services market as an ICP. The
Company is competing in the local, long distance, enhanced telephony and data
communications markets, to provide "full service" to its business, ISP and
carrier customers. The Company believes it can maximize revenue and profit
opportunities by leveraging its extensive network facilities in providing
multiple communications services to its customers.

Local telephone service competition was made possible by the
Telecommunications Act and by deregulatory actions at the state level. Prior to
passage of the Telecommunications Act, firms like the Company were generally
limited to providing private line and special access services. These firms,
including the Company, installed fiber optic cable connecting long distance
telephone carriers' POPs within a metropolitan area and, in some cases,
connecting end users (primarily large businesses and government entities) with
long distance carrier POPs. The greater capacity and economies of scale inherent
in fiber optic cable enabled competitive access providers to offer customers
less expensive services at higher quality than the ILECs.

The Telecommunications Act, subsequent Federal Communications Commission
("FCC") decisions and many state legislative and regulatory initiatives have
substantially changed the telecommunications regulatory environment in the
United States. Due to these regulatory changes, CLECs are now legally able to
offer many communications services, including local dial tone and all interstate
and intrastate switched services, effectively opening up the local telephone
market to full competition. Because of these changes in state and federal
regulations, CLECs have expanded their services from providing competitive
access and private line services to providing all local exchange services to
become true competitors to the ILECs. See "-Regulation."

Network Services

Through the Company's wholly owned subsidiary, ICG Fiber Optic
Technologies, Inc. ("FOTI"), the Company supplies information technology
services and selected networking products, focusing on network design,
installation, maintenance and support for a variety of end users, including
Fortune 1000 firms and other large businesses and telecommunications companies.
Revenue from Network Services was approximately $53.9 million for fiscal 1998.

The Company provides network infrastructure, systems and support services,
including the design, engineering and installation of local and wide area
networks ("LANs/WANs") for its customers. These networks (within end user
offices, buildings or campuses) may include fiber optic, twisted-pair, coaxial
and other network technologies. The Company specializes in turnkey network
installations including cabling and electronics that address specific
requirements. The Company also provides professional network support services.

14

These services include move, add and change services and ongoing maintenance and
support services. Network Services revenue is expected to constitute a smaller
percentage of the Company's future revenue as Telecom Services revenue
increases.

The Company offers these network integration and support services through
offices located within five regions. The regional headquarters are located in
Dallas, Denver, Portland (Oregon), Los Angeles and San Francisco.

Satellite Services

The Company's Satellite Services operations consist of satellite voice,
data and video services provided to major cruise lines, the U.S. Navy, the
offshore oil and gas industry and other ICPs. The Company also owns a teleport
facility which provides international voice and data transmission services.
Revenue from Satellite Services was approximately $40.5 million for fiscal 1998.

MTN. MTN provides digital wireless communications through satellites to the
maritime cruise industry, U.S. Navy vessels and offshore oil and gas platforms
utilizing an experimental radio frequency license and a grant of Special
Temporary Authority ("STA") issued by the FCC. MTN provides private
communications networks to various cruise lines allowing for the transmission of
data communications and allowing passengers to make calls from their cabins to
anywhere in the world. MTN additionally provides its communications services to
seismic vessels, to commercial shipping vessels and to the U.S. Navy in
conjunction with a major long distance provider, which serves as the long
distance carrier, while MTN provides the shipboard communications equipment. The
Company believes that the radio spectrum employed under an experimental license
and a grant of STA, which uses C-band radio frequencies, enables it to provide a
higher quality maritime service than is available through the radio frequencies
currently allocated to other maritime service providers.

In April 1996, the FCC issued a waiver allowing MTN to apply for a
permanent FCC license to utilize C-band frequencies authorized under a
previously issued experimental license. MTN's application is pending.
Additionally, in January 1997, the FCC granted the STA, which enables MTN to
conduct operations, for up to an initial six-month period, which period can be
renewed for six-month terms, while the FCC's review of the permanent license
application is pending. The most recent extension of the STA was received by MTN
on January 29, 1999. MTN's FCC experimental license allows it to operate its
shipboard earth stations on a fixed and mobile basis throughout domestic waters
on a non-interference basis using C-band frequencies. MTN filed an application
for renewal of the experimental authorization on January 22, 1999. MTN may
continue to operate under the terms of its experimental authorization pending
action on the renewal application. There can be no assurance that the Company
will be granted permanent licenses, that the experimental license and STA
currently being used will continue to be renewed for future terms or that any
license granted by the FCC will not require substantial payments from the
Company. See "-Regulation."

Teleport. The teleport in Holmdel, New Jersey, acquired as part of the
Company's acquisition of MTN, is located 20 miles south of Newark and
specializes in international digital voice and data communications services with

15

full fiber interconnect to the local telephone company facilities in New York
City. Teleport services are also provided to the maritime industry, including
support of the Company's cruise ship, U.S. Navy and offshore oil platform
telephone and data services business. In addition, the Company markets the
resale of services from the four teleports it sold in 1996.

Customers And Marketing

The Company's primary marketing strategies for Telecom Services are to
offer a broad range of local, long distance, enhanced telephony and data
services, to the Company's business and ISP customers at cost effective rates.
Wholesale customers typically re-market the Company's services to the retailer's
end user, under the retailer's brand name. The Company markets its services in
regional clusters, which it believes is the most effective and efficient way to
penetrate its markets.

The Company markets its Telecom Services products through direct sales to
end users and wholesale accounts, sales agents and direct mail, to a limited
extent. Telecom Services revenue from major long distance carriers and resellers
constituted approximately 83%, 76% and 34% of the Company's Telecom Services
revenue in fiscal 1996, 1997 and 1998, respectively. The balance of the
Company's Telecom Services revenue was derived from end users. The Company
anticipates revenue from business and ISP customers will increase in the future
as it continues to expand its bundled service offerings, increases its sales and
marketing teams and focuses more on these segments of the market. In support of
this strategy, the Company has substantially increased its direct sales and
marketing staff. Telecommunications service agreements with its customers
typically provide for terms of one to five years, fixed prices and early
termination penalties.

The Company has telecommunications sales offices in: Irvine, Los Angeles,
Oakland, Sacramento, San Diego, San Francisco and San Jose, California; Denver,
Colorado Springs and Boulder, Colorado; Akron, Columbus, Dayton, and
Independence, Ohio; Birmingham, Alabama; Atlanta, Georgia; Louisville, Kentucky;
Charlotte, North Carolina; and Nashville, Tennessee; and Austin, Corpus Christi,
Dallas, Houston and San Antonio, Texas. The Company's marketing staff is located
in Denver, Colorado.

The Company markets its network systems integration products and services
through a direct sales force located in the Rocky Mountains, Pacific Northwest,
Texas and California regions. The Company also has entered into resale
agreements with manufacturers of network integration products and services.

The Company offers satellite private line transmission services from its
teleport to business customers that can benefit from the Company's international
and domestic transmission capabilities. The Company also markets voice and data
communications to the maritime industry, including cruise ships, U.S. Navy
vessels, offshore oil and gas platforms and mobile land-based units.

The Company is currently utilizing its nationwide data network to provide
wholesale Internet access services to MindSpring for a one-year period. During
the term of this agreement, the Company plans to evaluate various strategies to
identify and market similar services and other enhanced network services to

16

primarily local and regional ISPs and other telecommunications providers.

Competition

The Company operates in an increasingly competitive environment dominated
by the ILECs, mainly the Regional Bell Operating Companies ("RBOCs") and GTE
which are among the Company's current competitors. Also included among the
Company's current competitors are other ILECs, other CLECs, other ICPs, network
systems integration service providers, microwave and satellite service
providers, teleport operators and private networks built by large end users.
Potential competitors (using similar or different technologies) include cable
television companies, utilities, ISPs, ILECs outside their current local service
areas, and the local access operations of long distance carriers. Consolidation
of telecommunications companies, including mergers between certain of the RBOCs,
between long distance companies and cable television companies and between long
distance companies and CLECs, and the formation of strategic alliances within
the telecommunications industry, as well as the development of new technologies,
could give rise to increased competition. One of the primary purposes of the
Telecommunications Act is to promote competition, particularly in the local
telephone market. Since the enactment of the Telecommunications Act, several
telecommunications companies have indicated their intention to aggressively
expand their ability to address many segments of the telecommunications
industry, including segments in which the Company participates and expects to
participate. This may result in more participants than can ultimately be
successful in a given market.

Telecom Services. The bases of competition in competitive local
telecommunications services are generally price, service, reliability,
transmission speed, technological innovation and availability. The Company
believes that its expertise in developing and operating highly reliable,
advanced digital networks which offer substantial transmission capacity at
competitive prices enables the Company to compete effectively against the ILECs,
other CLECs and others providing local and enhanced telephony services.

In every market in which the Company operates telecom service networks, the
ILECs (which are the historical monopoly providers of local telephone services)
are the primary competitors. The ILECs have long-standing relationships with
their customers and provide those customers with various transmission and
switching services. The ILECs also have the potential to subsidize access and
switched services with revenue from a variety of businesses and historically
have benefited from certain state and federal regulations that have favored the
ILECs over the Company. In certain markets where the Company operates, other
CLECs also operate or have announced plans to enter the market. Some of those
CLECs are affiliated with major long distance companies which have resources
available to sustain an initially capital-intensive business through the point
of profitability. Current competitors also include network systems integration
services providers, wireless telecommunications providers and private networks
built by large end users. Additional competition may emerge from cable
television operators and electric utilities. Many of the Company's actual and
potential competitors have greater financial, technical and marketing resources
than the Company.

17

In addition, the long distance and data transmission businesses are
extremely competitive and prices have declined substantially in recent years and
are expected to continue to decline.

As a recent entrant into the wholesale network services sector, the Company
faces competition from existing providers of the Company's planned services,
primarily UUNet Technologies, Inc., PSINet, Inc. and, ultimately, Level 3
Communications, Inc. and Qwest Communications International, Inc. once their
networks have been sufficiently developed. Other competitors also include GTE,
AT&T, Sprint Corporation and the RBOCs that currently offer similar wholesale
network service products to ISPs. While strong competition currently exists in
this sector, the Company believes that the recent growth in the Internet
industry provides expanded opportunity and demand for new providers such as the
Company, and that early participants in this growing sector have increased
opportunity for establishing and, once experienced, growing market share. There
can be no assurance that sufficient demand will exist for the Company's
wholesale network services in its selected markets, that market prices will not
dramatically decline or the Company will be successful in executing its strategy
in time to meet new competitors, or at all.

Network Services. The bases of competition in the network services market
are primarily technological capability and experience, value-added services and
price. In this market, the Company competes with a variety of local and regional
system integrators.

Satellite Services. In the delivery of domestic and international satellite
services, the Company competes with other full service teleports in the
northeast region of the United States. The bases of competition are primarily
reliability, price and transmission quality. Most of the Company's satellite
competitors focus on the domestic video market. Competition is expected
principally from a number of domestic and foreign telecommunications carriers,
many of which have substantially greater financial and other resources than the
Company. In the maritime telecommunications market, MTN competes primarily with
COMSAT Corporation ("COMSAT") in providing similar telecommunications services.
COMSAT has FCC licenses that are similar to MTN's and it is the sole point of
control in the United States for direct access to Intelsat satellites.

Regulation

The Company's services are subject to significant federal, state and local
regulation. The Company operates in an industry that is undergoing substantial
change as a result of the passage of the Telecommunications Act.

The Telecommunications Act opened the local and long distance markets to
additional competition and changed the division of oversight between federal and
state regulators. Under previous law, state regulators had authority over those
services that originated and terminated within the state ("intrastate") and
federal regulators had jurisdiction over services that originated within one
state and terminated in another state ("interstate"). State and federal
regulators now share responsibility to some extent for implementing and
enforcing the pro-competitive policies and the provisions for the
Telecommunications Act.

The Telecommunications Act generally requires ILECs to negotiate agreements
to provide interconnection and nondiscriminatory access to their networks on
more favorable terms than were previously available in the past. However, such

18

new agreements are subject to negotiations with each ILEC which may involve
considerable delays and may not necessarily be obtained on terms and conditions
that are desirable to the Company. In such instances, the Company may petition
the proper state regulatory agency to arbitrate disputed issues. Ultimately, the
terms of an arbitrated agreement are subject to review by the federal courts.
Additionally, the Company is in the process of renegotiating and extending the
terms of certain of the interconnection agreements executed by the Company.
There can be no assurance that the Company will be able to negotiate and/or
arbitrate acceptable new interconnection agreements.

On August 8, 1996, in two separate decisions, the FCC adopted rules and
policies implementing the local competition provisions of the Telecommunications
Act. The FCC, among other things, adopted national guidelines with respect to
the unbundling of ILECs' network elements, resale of ILEC services, the pricing
of interconnection services and unbundled elements, and other local competition
issues. Numerous parties appealed both of the FCC's orders to the Eighth Circuit
Court, and in 1997, the Eighth Circuit Court issued a decision which upheld
certain of the FCC's rules but reversed many of the FCC's rules on other issues,
including the pricing rules.

On January 25, 1999, the United States Supreme Court (the "Supreme Court")
largely reversed the Eighth Circuit Court's decision and reestablished the
validity of many of the FCC's interconnection rules including the FCC's
jurisdiction to adopt pricing guidelines under the Telecommunications Act. The
Supreme Court also upheld the FCC's "pick and choose" rules, which allow CLECs
to adopt individual rates, terms and conditions from agreements that an ILEC has
with other carriers. The Supreme Court did not, however, evaluate the specific
pricing methodologies adopted by the FCC, and the appellate court will further
consider those methodologies. Additionally, the Supreme Court vacated the FCC
rules defining what network elements must be unbundled and made available to the
CLECs by the ILECs. The Supreme Court held that the FCC must provide a stronger
rationale to support the degree of unbundling ordered. As a result, the FCC
likely will soon hold a rulemaking proceeding to revise its rules on unbundled
network elements. Management views the Supreme Court decision as a favorable
development for the CLEC industry, although the ultimate outcome of the further
FCC and court proceedings resulting from the decision cannot be predicted.

On December 31, 1997, the United States District Court for the Northern
District of Texas (the "District Court"), in a case brought by SBC
Communications, Inc., issued a decision holding that Sections 271 through 275 of
the Telecommunications Act are unconstitutional. The decision addressed the
restrictions contained in Sections 271 through 275 of the Telecommunications Act
on the lines of businesses in which the RBOCs may engage, including establishing
the conditions that the RBOCs must satisfy before they may provide interLATA
long distance telecommunications services in their local telephone service
areas. On September 4, 1998, the Fifth Circuit Court of Appeals reversed the
District Court decision and ruled that Sections 271 through 275 are not
unconstitutional. A separate decision by the D.C. Circuit Court of Appeals
issued in December 1998 also ruled that Section 271 is not unconstitutional.

The Company believes that it is entitled to receive reciprocal compensation
from ILECs for the transport and termination of Internet traffic from ILEC
customers as local traffic pursuant to various interconnection agreements. The
ILECs have not paid most of the bills they have received from the Company and

19

have disputed substantially all of these charges based on the argument that ISP
traffic is not local traffic as defined by the various interconnection
agreements and under state and federal laws and public policies. The resolution
of these disputes will be based on rulings by state public utility commissions
and/or by the FCC. See "-Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity - Transport and Termination
Charges."

Federal Regulation. The Company generally operates as a regulated carrier
with fewer regulatory obligations than the ILECs. The Company must comply with
the requirements of the Telecommunications Act, such as offering service on a
non-discriminatory basis at just and reasonable rates. The FCC treats the
Company as a non-dominant carrier. The FCC has established different levels of
regulation for dominant and non-dominant carriers. Of domestic common carriers,
only the ILECs are classified as dominant carriers for the provision of access
services, and all other providers of domestic common carrier services are
classified as non-dominant. Under the FCC's streamlined regulation of
non-dominant carriers, the Company must file tariffs with the FCC for domestic
and international long distance services on an ongoing basis. The Company's
provision of international long distance services requires prior authorization
by the FCC pursuant to Section 214 of the Telecommunications Act, which the
Company has obtained. The FCC recently eliminated the requirement that
non-dominant interstate access carriers must file tariffs. The Company is not
subject to price cap or rate of return regulation, nor is it currently required
to obtain FCC authorization for the installation or operation of its fiber optic
network facilities used for services in the United States. The Company may
install and operate non-radio facilities for the transmission of domestic
interstate communications without prior FCC authorization. The Company's use of
digital microwave radio frequencies and satellite earth stations in connection
with certain of its telecommunications services is subject to FCC radio
frequency licensing regulation. See "-Federal Regulation of Microwave and
Satellite Radio Frequencies."

State Regulation. In general, state regulatory agencies have regulatory
jurisdiction over the Company when Company facilities and services are used to
provide local and other intrastate services. Under the Telecommunications Act,
state commissions continue to set the requirements for providers of local and
intrastate services, including quality of services criteria. State regulators
also can regulate the rates charged by CLECs for intrastate and local services
and can set prices for interconnection by CLECs with the ILEC networks. The
Company's provision of local dial tone and intrastate switched and dedicated
services are classified as intrastate and therefore subject to state regulation.
The Company expects that it will offer more intrastate services as its business
and product lines expand. To provide intrastate service (particularly local dial
tone service), the Company generally must obtain a Certificate of Public
Convenience and Necessity ("CPCN") from the state regulatory agency prior to
offering service. In most states, the Company also is required to file tariffs
setting forth the terms, conditions and prices for services that are classified
as intrastate, and to update or amend its tariffs as rates change or new
products are added. The Company may also be subject to various reporting and
record-keeping requirements.

The Company currently holds CPCNs (or their equivalents) to provide
competitive local services in the following states: Alabama, California,
Colorado, Delaware, Florida, Georgia, Hawaii, Indiana, Kansas, Kentucky,
Massachusetts, Missouri, Montana, Nevada, New Hampshire, New Jersey, New York,
North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode
Island, South Carolina, Tennessee, Texas, Vermont, Virginia, Washington, West

20

Virginia, and Wisconsin. Additionally, the Company holds CPCNs (or their
equivalents) to provide intrastate long distance services in the following
states: Alabama, Arizona, Arkansas, California, Colorado, Connecticut, Delaware,
Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky,
Louisiana, Maine, Massachusetts, Michigan, Minnesota, Mississippi, Missouri,
Montana, Nebraska, Nevada, New Hampshire, New Jersey, New York, North Carolina,
North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South
Carolina, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, Washington,
West Virginia, Wisconsin and Wyoming.

Local Government Authorizations. Under the Telecommunications Act, local
authorities retain jurisdiction under applicable state law to control the
Company's access to municipally owned or controlled rights of way and to require
the Company to obtain street opening and construction permits to install and
expand its fiber optic network. In addition, many municipalities require the
Company to obtain licenses or franchises (which generally have terms of 10 to 20
years) and to pay license or franchise fees, often based on a percentage of
gross revenue, in order to provide telecommunications services, although in
certain states including California and Colorado, current state law prescribes
the amount of such fees. Certain municipalities in Colorado, however, are
continuing to charge franchise fees pending enforcement by the Colorado courts.
There is no assurance that certain cities that do not impose fees will not seek
to impose fees, nor is there any assurance that, following the expiration of
existing franchises, fees will remain at their current levels. In many markets,
the ILECs have been excused from paying such franchise fees or pay fees that are
materially lower than those required to be paid by the Company for access to
public rights of way. However, under the Telecommunications Act, while
municipalities may still regulate use of their streets and rights of way,
municipalities may not prohibit or effectively prohibit any entity from
providing any telecommunications services. In addition, the Telecommunications
Act requires that local governmental authorities treat telecommunications
carriers in a non-discriminatory and competitively neutral manner. If any of the
Company's existing franchise or license agreements are terminated prior to their
expiration dates or not renewed, and the Company is forced to remove its fiber
from the streets or abandon its network in place, such termination could have a
material adverse effect on the Company.

Federal Regulation of Microwave and Satellite Radio Frequencies. The FCC
continues to regulate radio frequency use by both private and common carriers
under the Telecommunications Act. Unlike common carriers, private carriers
contract with select customers to provide services tailored to the customer's
specific needs. The FCC does not currently regulate private carriers (other than
their use of radio frequencies) and has preempted the states from regulating
private carriers. The Company offers certain services as a private carrier.

The Company is required to obtain authorization from the FCC for its use of
radio frequencies to provide satellite and wireless services. The Company holds
a number of point-to-point microwave radio licenses that are used to provide
telecommunications services in California. Additionally, the Company holds a
number of satellite earth station licenses in connection with its operation of
satellite-based networks. The Company also provides maritime communications
services pursuant to an experimental license and a grant of STA. The Company's
experimental license has been renewed by the FCC on several occasions. On
January 22, 1999, the Company submitted an application for an additional
two-year renewal of the experimental license, which was due to expire in
February 1999. Under the FCC's procedures, the experimental license remains

21

valid pending FCC action on the renewal application. The STA was first granted
on January 30, 1997 and enables the Company to conduct operations pursuant to
the STA of the Company's application for a permanent license. The Company
applied for six-month extensions of the STA, most recently on January 29, 1999,
and received verbal grants by the FCC of each of the requested extensions. The
Company also filed 32 applications for permanent full-term FCC licenses to
operate shipboard earth stations in fixed ports. Those applications are pending.
There can be no assurance that the Company will be granted permanent licenses,
that the experimental license and STA currently being used will continue to be
renewed for future terms or that any license granted by the FCC will not require
substantial payments from the Company.

Employees

On December 31, 1998, the Company employed a total of 3,415 individuals on
a full time basis. There are 39 employees in the Company's Oregon and Washington
network systems integration services offices who are represented by collective
bargaining agreements. The collective bargaining agreement with certain IBEW
(International Brotherhood of Electrical Workers) employees in Oregon and
southern Washington expires on December 31, 2000. Additionally, several IBEW
employees in other areas of Washington are currently in negotiations for a new
collective bargaining agreement. The Company believes that its relations with
its employees are good.

ITEM 2. PROPERTIES

The Company's physical properties include owned and leased space for
offices, storage and equipment rooms and collocation sites. Additional space may
be purchased or leased by the Company as networks are expanded. The Company owns
a 30,000 square-foot building located in Englewood, Colorado which houses a
portion of the Company's Telecom Services business. Currently, the Company
leases approximately 324,000 square feet of office space for operations located
in the Denver metropolitan area and approximately 846,000 square feet in other
areas of the United States.

As of December 31, 1998, the Company's corporate headquarters building,
land and improvements were leased by the Company under an operating lease from
an unrelated third party. The Company has entered into a letter of intent to
purchase the approximately 265,000 square foot facility located in Englewood,
Colorado, as well as the other previously leased assets, and expects to complete
the purchase of those assets in early 1999.

ITEM 3. LEGAL PROCEEDINGS

On April 4, 1997, certain shareholders of Zycom filed a shareholder
derivative suit and class action complaint for unspecified damages, purportedly
on behalf of all of the minority shareholders of Zycom, in the District Court of
Harris County, Texas (Cause No. 97-17777) against the Company, Zycom and certain
of their subsidiaries. This complaint alleges that the Company and certain of
its subsidiaries breached certain duties owed to the plaintiffs. The plaintiffs
were denied class certification by the trial court and this decision has been
appealed. Trial has been tentatively set for August 1999. The Company is
vigorously defending the claims. While it is not possible to predict the outcome

22

of this litigation, management believes these proceedings will not have a
material adverse effect on the Company's financial condition, results of
operations or cash flows.

A putative class action lawsuit was filed on July 15, 1997 in Superior
Court of California, Orange County, alleging unfair business practices and
related causes of action against NETCOM in connection with its offers of free
trial periods and cancellation procedures and claiming damages of at least $10.0
million. Although the case is plead as a class action, the class has not been
certified. The parties are currently conducting discovery. Trial has been
tentatively set for June 1999. The Company believes it has meritorious defenses
to such claims and intends to vigorously defend the action.

The Company is a party to certain other litigation which has arisen in the
ordinary course of business. In the opinion of management, the ultimate
resolution of these matters will not have a material adverse effect on the
Company's financial condition, results of operations or cash flows.

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

None.

23

PART II

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

ICG Common Stock, $.01 par value per share, has been quoted on the Nasdaq
National Market ("Nasdaq") since March 25, 1997 under the symbol "ICGX" and was
previously listed on the American Stock Exchange ("AMEX"), from August 5, 1996
to March 24, 1997 under the symbol "ICG." Prior to August 5, 1996,
Holdings-Canada's common shares had been listed on the AMEX under the symbol
"ITR" from January 14, 1993 through February 28, 1996, and under the symbol
"ICG" thereafter through August 2, 1996. Holdings-Canada Class A Common Shares
(the "Class A Shares") ceased trading on the AMEX at the close of trading on
August 2, 1996. The Class A Shares, which were listed on the Vancouver Stock
Exchange ("VSE") under the symbol "IHC.A," ceased trading on the VSE at the
close of trading on March 12, 1997. During fiscal 1998, all of the remaining
Class A Shares outstanding held by third parties were exchanged into shares of
ICG Common Stock.

The following table sets forth, for the fiscal periods indicated, the high
and low sales prices of the ICG Common Stock as reported on the AMEX through
March 24, 1997 and on the Nasdaq from March 25, 1997 through the date indicated
below. The VSE reported no trading activity for the Class A Shares from January
1, 1997 through March 12, 1997, the date on which the Class A Shares ceased
trading on the VSE.

American Stock
Exchange/Nasdaq National Market
--------------------------------------
High Low
----------------- -----------------

Fiscal 1997:
First Quarter $ 18.13 $ 10.38
Second Quarter 21.13 8.63
Third Quarter 24.63 17.75
Fourth Quarter 28.63 19.75

Fiscal 1998:
First Quarter $ 44.25 $ 24.38
Second Quarter 38.88 28.50
Third Quarter 36.63 15.50
Fourth Quarter 26.56 11.13

Fiscal 1999:
Through March 29, 1999 $ 24.13 $ 15.25

See the cover page of this Annual Report for a recent bid price and related
number of shares outstanding of ICG Common Stock. On March 29, 1999, there were
281 holders of record.

The Company has never declared or paid dividends on the ICG Common Stock
and does not intend to pay cash dividends on the ICG Common Stock in the

24

foreseeable future. The Company intends to retain future earnings, if any, to
finance the development and expansion of its business. In addition, the payment
of any dividends on the ICG Common Stock is effectively prohibited by the
restrictions contained in the Company's indentures to the Company's senior
indebtedness and in the Second Amended and Restated Articles of Incorporation of
Holdings, which prohibits Holdings from making any material payment to the
Company. Certain of the Company's debt facilities contain covenants which also
may restrict the Company's ability to pay cash dividends.

In April 1998, ICG Services sold $405.3 million principal amount at
maturity ($250.0 million original issue price) of 9 7/8% Notes. Morgan Stanley &
Co. Incorporated acted as placement agent for the offering and received
placement fees of approximately $7.5 million. In February 1998, ICG Services
sold $490.0 million principal amount at maturity ($300.6 million original issue
price) of 10% Notes. Morgan Stanley & Co. Incorporated acted as placement agent
for the offering and received placement fees of approximately $9.0 million.

In September and October 1997, ICG Funding, LLC, a Delaware limited
liability company and wholly owned subsidiary of the Company ("ICG Funding"),
completed a private placement of $132.25 million of 6 3/4% Exchangeable Limited
Liability Company Preferred Securities Mandatorily Redeemable 2009 (the "6 3/4%
Preferred Securities"). The 6 3/4% Preferred Securities are mandatorily
redeemable November 15, 2009 at the liquidation preference of $50.00 per
security, plus accrued and unpaid dividends. Dividends on the 6 3/4% Preferred
Securities are cumulative at the rate of 6 3/4% per annum and are payable in
cash through November 15, 2000 and, thereafter, in cash or shares of ICG Common
Stock at the option of ICG Funding. The 6 3/4% Preferred Securities are
exchangeable, at the option of the holder, into ICG Common Stock at an exchange
price of $24.025 per share, subject to adjustment. ICG Funding may, at its
option, redeem the 6 3/4% Preferred Securities at any time on or after November
18, 2000. Prior to that time, ICG Funding may redeem the 6 3/4% Preferred
Securities if the current market value of ICG Common Stock equals or exceeds,
for at least 20 days of any consecutive 30-day trading period, 160% of the
exchange price through November 15, 1999, and 150% of the exchange price from
November 16, 1999 through November 15, 2000. Morgan Stanley & Co. Incorporated
and Deutsche Morgan Grenfell Inc. acted as placement agents for the offering and
received aggregate placement fees of approximately $4.0 million.

In March 1997, Holdings sold $176.0 million principal amount at maturity
($99.9 million original issue price) of 11 5/8% Senior Discount Notes due 2007
(the "11 5/8% Notes") and 100,000 shares of 14% Preferred Stock Mandatorily
Redeemable 2008 (the "14% Preferred Stock"), having a liquidation preference of
$1,000 per share. These securities are guaranteed by the Company on a full and
unconditional basis. Morgan Stanley & Co. Incorporated acted as placement agent
for the offering and received placement fees of approximately $7.5 million.

In April 1996, Holdings sold $550.3 million principal amount at maturity
($300.0 million original issue price) of 12 1/2% Senior Discount Notes due 2006
(the "12 1/2% Notes") and 150,000 shares of 14 1/4% Preferred Stock Mandatorily
Redeemable 2007 (the "14 1/4% Preferred Stock"), having a liquidation preference
of $1,000 per share. These securities are guaranteed by the Company on a full
and unconditional basis. Morgan Stanley & Co. Incorporated acted as placement
agent for the offering and received placement fees of approximately $16.5
million.

25

Each of the foregoing offerings were exempt from registration pursuant to
Rule 144A under the Securities Act. Sales were made only to "qualified
institutional buyers," as defined in Rule 144A under the Securities Act, and
other institutional accredited investors. The securities sold in each of the
foregoing offerings were subsequently registered under the Securities Act.

In October 1997, the Company issued 687,221 shares of Common Stock (the
"CBG Shares") to certain shareholders of CBG in connection with the acquisition
of CBG for a purchase price of approximately $16.0 million. The sale of the CBG
Shares was exempt from registration under Section 4(2) of the Securities Act
because the offers and sales were made to a limited number of investors in a
private transaction. Resale of the CBG Shares was subsequently registered on a
Form S-3 registration statement which was declared effective on October 31,
1997.

In July 1998, the Company issued 145,997 shares of ICG Common Stock in
connection with the acquisition of DataChoice, valued at approximately $32.88
per share on the date of the sale (the "DataChoice Shares"). The sale of the
DataChoice Shares was exempt from registration under Section 4(2) of the
Securities Act because the offers and sales were made to a limited number of
investors in a private transaction. The Company is required to register the
resale of the DataChoice Shares.

Also in July 1998, the Company issued 356,318 shares of ICG Common Stock in
connection with the acquisition of NikoNET, valued at approximately $30.03 per
share on the date of the sale (the "NikoNET Shares"). The sale of the NikoNET
Shares was exempt from registration under Section 4 (2) of the Securities Act
because the offer and sales were made to a limited number of investors in a
private transaction.

ITEM 6. SELECTED FINANCIAL DATA

The selected financial data for fiscal years ended September 30, 1994, 1995
and 1996, the three months ended December 31, 1996, and the fiscal years ended
December 31, 1997 and 1998 has been derived from the audited consolidated
financial statements of the Company. The information set forth below should be
read in conjunction with the Company's audited consolidated financial statements
and the notes thereto included elsewhere in this Annual Report. The Company's
development and expansion activities, including acquisitions, during the periods
shown below materially affect the comparability of this data from one period to
another. The Company's consolidated financial statements reflect the operations
of Zycom and NETCOM as discontinued for all periods presented. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

26

Three Months
Ended Fiscal Years Ended
Fiscal Years Ended September 30, December 31, December 31,
--------------------------------------- ---------------------------
1994 1995 1996 1996 1997 1998
----------- ----------- ---------- --------------- ---------- -------------
(in thousands, except per share amounts)

Statement of Operations Data:
Revenue (1) $ 59,112 110,188 154,143 49,477 245,022 397,619

Operating costs and expenses:
Operating costs 38,165 77,944 121,983 42,485 217,927 254,689
Selling, general and
administrative expenses 28,015 61,305 75,646 23,868 148,254 183,683
Depreciation and amortization 8,198 16,350 30,030 9,691 56,501 101,545
Provision for impairment of
long-lived assets - 7,000 9,994 - 9,261 -
Net loss (gain) on disposal
of long-lived assets - 241 5,128 (772) 243 4,055
Restructuring costs - - - - - 2,339
----------- ----------- ---------- --------------- ---------- -------------
Total operating costs and
expenses 74,378 162,840 242,781 75,272 432,186 546,311

Operating loss (15,266) (52,652) (88,638) (25,795) (187,164) (148,692)

Interest expense (8,481) (24,389) (85,714) (24,454) (117,520) (170,127)
Other income, net 925 3,141 15,585 5,898 21,549 23,762
----------- ----------- ---------- --------------- ---------- -------------
Loss from continuing operations
before income taxes, preferred
dividends, share of losses
and cumulative effect of change
in accounting (22,822) (73,900) (158,767) (44,351) (283,135) (295,057)
Income tax benefit (expense) - - 5,131 - - (90)
----------- ----------- ---------- --------------- ---------- -------------
Loss from continuing operations
before preferred dividends,
share of losses and cumulative
effect of change in accounting (22,822) (73,900) (153,636) (44,351) (283,135) (295,147)
Accretion and preferred dividends
on preferred securities of
subsidiaries, net of minority
interest in share of losses 435 (1,636) (25,409) (4,988) (38,117) (55,183)
Share of losses of joint venture (1,481) (741) (1,814) - - -
----------- ----------- ---------- --------------- ---------- -------------
Loss from continuing operations
before cumulative effect of
change in accounting (23,868) (76,277) (180,859) (49,339) (321,252) (350,330)
Loss from discontinued operations (100,000) (14,435) (44,060) (11,974) (39,483) (67,715)
Cumulative effect of change in
accounting (1) - - (3,453) - -
----------- ----------- ---------- --------------- ---------- -------------
Net loss $ (123,868) (90,712) (228,372) (61,313) (360,735) (418,045)
=========== =========== ========== =============== ========== =============
Loss per share from continuing
operations - basic and
diluted $ (1.17) (2.48) (4.90) (1.18) (7.56) (7.75)
=========== =========== ========== =============== ========== =============
Net loss per share -
basic and diluted $ (6.06) (2.94) (6.19) (1.47) (8.49) (9.25)
=========== =========== ========== =============== ========== =============
Weighted average number of
shares outstanding - basic
and diluted (2) 20,455 30,808 36,875 41,760 42,508 45,194
=========== =========== ========== =============== ========== =============

Other Data:
Net cash used by operating
activities of continuing
operations (7,532) (41,947) (39,099) (6,436) (117,191) (105,358)
Net cash used by investing
activities of continuing
operations (51,452) (65,772) (134,832) (82,342) (429,512) (349,082)
Net cash (used) provided
by financing activities
of continuing operations (49,428) 377,772 355,811 (1,886) 308,136 530,915
EBITDA (3) (7,068) (36,302) (58,608) (16,104) (130,663) (47,147)
EBITDA (before nonrecurring
charges) (3) (7,068) (29,061) (43,486) (16,876) (121,159) (40,753)
Capital expenditures of
continuing operations (4) 54,921 82,623 176,935 70,297 268,796 368,946
Capital expenditures of
discontinued operations (4) 11,143 49,714 54,364 8,554 18,055 25,981
(Continued)

27

At September 30, At December 31,
-------------------------------------- -------------------------------------------
1994 1995 1996 1996 1997 1998
----------- ----------- ------------ ------------ ------------ -------------
(in thousands)

Balance Sheet Data:
Cash, cash equivalents and short-term
investments available for sale $ 6,025 269,404 457,388 391,891 230,850 262,831
Net current assets (liabilities) of
discontinued operations (5) 15,551 131,571 54,226 54,481 38,331 (23,272)
Working capital 6,988 381,006 499,810 415,247 263,674 294,934
Property and equipment, net 118,875 201,038 334,646 402,251 631,454 934,134
Net non-current assets of discontinued
operations (5) 12,413 59,936 97,561 97,425 76,577 54,243
Total assets 229,955 767,072 1,081,896 1,086,734 1,217,440 1,615,425
Current portion of long-term debt and
capital lease obligations 23,118 23,487 8,282 25,500 7,421 5,132
Long-term debt and capital lease
obligations, less current portion 97,811 405,535 739,827 761,504 957,507 1,662,357
Redeemable preferred securities of
subsidiaries - 24,336 153,318 159,120 420,171 466,352
Common stock and additional paid-in
capital 129,483 420,516 504,851 508,182 534,290 578,404
Accumulated deficit (61,737) (152,487) (380,859) (430,682) (791,417) (1,209,462)
Stockholders' equity (deficit) 67,746 268,001 125,203 78,711 (256,983) (631,177)

(1) During fiscal 1996, the Company changed its method of accounting for
long-term telecom services contracts to recognize revenue as services are
provided. Other than the cumulative effect of adopting this new method of
accounting, the effect of this change in accounting for the periods
presented was not significant. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Accounting Change."

(2) Weighted average number of shares outstanding for fiscal years 1994 and
1995 represents Holdings-Canada common shares outstanding. Weighted average
number of shares outstanding for fiscal 1996, the three months ended
December 31, 1996, and fiscal 1997 and 1998 represents Holdings-Canada
common shares outstanding for the period October 1, 1995 through August 2,
1996, and represents ICG Common Stock and Class A Shares (not owned by ICG)
outstanding for the periods subsequent to August 5, 1996. During fiscal
1998, all of the remaining Class A Shares outstanding held by third parties
were exchanged into shares of ICG Common Stock.

(3) EBITDA consists of earnings (loss) from continuing operations before
interest, income taxes, depreciation and amortization, other expense, net
and accretion and preferred dividends on preferred securities of
subsidiaries, net of minority interest in share of losses, or simply,
operating loss plus depreciation and amortization. EBITDA (before
nonrecurring charges) represents EBITDA before certain nonrecurring charges
such as the net loss (gain) on disposal of long-lived assets, provision for
impairment of long-lived assets and restructuring costs. EBITDA and EBITDA
(before nonrecurring charges) are provided because they are measures
commonly used in the telecommunications industry. EBITDA and EBITDA (before
nonrecurring charges) are presented to enhance an understanding of the
Company's operating results and are not intended to represent cash flows or
results of operations in accordance with generally accepted accounting
principles ("GAAP") for the periods indicated. EBITDA and EBITDA (before
nonrecurring charges) are not measurements under GAAP and are not
necessarily comparable with similarly titled measures of other companies.
Net cash flows from operating, investing and financing activities of

28

continuing operations as determined using GAAP are also presented in Other
Data.

(4) Capital expenditures includes assets acquired under capital leases and
through the issuance of debt or warrants and excludes payments for
construction of the Company's corporate headquarters. Capital expenditures
of discontinued operations includes the capital expenditures of Zycom and
NETCOM combined for all periods presented.

(5) Net non-current assets of discontinued operations and net current assets
(liabilities) of discontinued operations represents the assets and
liabilities of Zycom and NETCOM combined for all periods presented.

29

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

The following discussion includes certain forward-looking statements which
are affected by important factors including, but not limited to, dependence on
increased traffic on the Company's facilities, the successful implementation of
the Company's strategy of offering an integrated telecommunications package of
local, long distance, enhanced telephony and wholesale and retail data services,
continued development of the Company's network infrastructure and actions of
competitors and regulatory authorities that could cause actual results to differ
materially from the forward-looking statements. The results for the 12 months
ended December 31, 1996 and for fiscal 1997 and 1998 have been derived from the
Company's audited consolidated financial statements included elsewhere herein
and the Company's unaudited consolidated financial statements included in the
Company's Forms 10-Q filed with the Securities and Exchange Commission. The
Company's consolidated financial statements reflect the operations of Zycom and
NETCOM as discontinued for all periods presented. The Company changed its fiscal
year end to December 31 from September 30, effective January 1, 1997. All dollar
amounts are in U.S. dollars.

Company Overview

The Company is one of the nation's leading competitive ICPs, based on
estimates of the industry's 1998 revenue. ICPs seek to provide an alternative to
ILECs, long distance carriers and other communications service providers for a
full range of communications services in the increasingly deregulated
telecommunications industry. The Company's Telecom Services primarily include
its CLEC operations, in which the Company operates fiber networks in regional
clusters covering major metropolitan statistical areas in California, Colorado,
Ohio, the Southeast and Texas, offering local, long distance, data and enhanced
telephony services to business end users and ISPs. Additionally, in February
1999, the Company began providing wholesale network services over its nationwide
data network. The Company also provides a wide range of network systems
integration services and maritime and international satellite transmission
services. Network Services consists of information technology services and
selected networking products, focusing on network design, installation,
maintenance and support. Satellite Services consists of satellite voice, data
and video services provided to major cruise lines, the U.S. Navy, the offshore
oil and gas industry and ICPs. As a leading participant in the rapidly growing
competitive local telecommunications industry, the Company has experienced
significant growth, with total revenue increasing from approximately $154.1
million for fiscal 1996 to approximately $397.6 million for fiscal 1998. The
Company's rapid growth is the result of the initial installation, acquisition
and subsequent expansion of its fiber optic networks and the expansion of its
communications service offerings.

The Telecommunications Act and pro-competitive state regulatory initiatives
have substantially changed the telecommunications regulatory environment in the
United States. Under the Telecommunications Act, the Company is permitted to
offer all interstate and intrastate telephone services, including competitive
local dial tone. In early 1997, the Company began marketing and selling local
dial tone services in major metropolitan areas in California, Colorado, Ohio and
the Southeast and, in December 1998, began offering services through an acquired
business. During fiscal 1997 and 1998, the Company sold 178,470 and 206,458

30

local access lines, respectively, net of cancellations, of which 354,482 were in
service at December 31, 1998. In addition, the Company's regional fiber networks
have grown from 2,143 fiber route miles at the end of fiscal 1996 to 4,255 fiber
route miles at December 31, 1998. The Company had 29 operating high capacity
digital voice switches and 16 data communications switches at December 31, 1998,
and plans to install additional switches as demand warrants. As a complement to
its local exchange services offered to business end users, the Company markets
bundled service offerings provided over its regional fiber network which include
long distance, enhanced telecommunications services and data services.
Additionally, the Company owns and operates a nationwide data network with 236
POPs over which the Company recently began providing wholesale Internet access
and enhanced network services to MindSpring and intends to offer similar
services to other ISPs and telecommunications providers in the future.

The Company will continue to expand its network through construction,
leased facilities, strategic alliances and mergers and acquisitions. For
example, on December 31, 1998, the Company purchased from CSW 100% of the
partnership interests in ChoiceCom, a strategic alliance with CSW formed for the
purpose of developing and marketing telecommunications services in certain
cities in Texas. ChoiceCom is based in Austin, Texas and currently provides
local exchange and long distance services in Austin, Corpus Christi, Dallas,
Houston, and San Antonio, Texas. For fiscal 1997 and 1998, ChoiceCom reported
revenue of $0.3 million and $5.8 million, respectively, and EBITDA losses
(before nonrecurring charges) of $(5.5) million and $(13.6) million,
respectively. Additionally, ChoiceCom has five operating high capacity digital
voice switches and two data communications switches as of December 31, 1998 and
has 19,569 access lines in service, including 15,282 access lines previously
sold by ICG on behalf of ChoiceCom.

To better focus its efforts on its core Telecom Services operations, the
Company progressed toward the disposal of certain assets which management
believes do not complement its overall business strategy. On August 12 and
November 18, 1998, the Company completed the sales of the capital stock of MCN
and Nova-Net, respectively, two wholly owned subsidiaries within the Company's
Satellite Services operations. The results of operations of MCN and Nova-Net,
which are not significant to the Company's consolidated results, have been
included in the Company's consolidated results of operations through the closing
date of each sale. Due primarily to the loss of a major customer, which
generated a significant obligation under a volume discount agreement with its
call transport provider, the board of directors of Zycom approved a plan on
August 25, 1998 to wind down and ultimately discontinue Zycom's operations. On
October 22, 1998, Zycom completed the transfer of all customer traffic to other
providers and on January 4, 1999, the Company completed the sale of the
remainder of Zycom's operating assets to an unrelated third party. Additionally,
effective November 3, 1998, the Company's board of directors adopted the formal
plan to dispose of the operations of NETCOM. On February 17, 1999, the Company
sold certain of the operating assets and liabilities of NETCOM to MindSpring for
total proceeds of $245.0 million, and on March 16, 1999, the Company sold all of
the capital stock of NETCOM's international operations in Canada and the United
Kingdom to other unrelated third parties for total proceeds of approximately
$41.1 million. Since the Company expects to record a gain on the disposition of
NETCOM, the Company has deferred the net operating losses of NETCOM from
November 3, 1998 through December 31, 1998 of approximately $10.8 million. The
Company expects to record a combined gain on the NETCOM transactions of
approximately $200 million, including the recognition of the deferred losses of
NETCOM from November 3, 1998 through the sale dates and net of income taxes of
31

approximately $6.5 million, during the three months ended March 31, 1999. Since
the operations sold were acquired by the Company in a transaction accounted for
as a pooling of interests, the gain on the NETCOM transaction will be classified
in the Company's consolidated statement of operations as an extraordinary item.
For fiscal 1996, 1997 and 1998, Zycom and NETCOM combined reported revenue of
$135.4 million, $189.0 million and $181.6 million, respectively, and EBITDA
losses (before nonrecurring charges) of $(30.4) million, $(12.1) million and
$(18.0) million, respectively. The Company's consolidated financial statements
reflect the operations of Zycom and NETCOM as discontinued for all periods
presented. The Company will from time to time evaluate all of its assets as to
their core need and, based on such analysis, may sell or otherwise dispose of
assets which do not complement its overall business strategy.

In conjunction with the sale to MindSpring, the legal name of the NETCOM
subsidiary was changed to ICG PST, Inc. ("PST"). PST has retained the domestic
Internet backbone assets formerly owned by NETCOM which include 236 POPs serving
approximately 700 cities nationwide. PST intends to utilize the retained network
operating assets to provide wholesale Internet access and enhanced network
services to MindSpring and other ISPs and telecommunications providers. On
February 17, 1999, the Company entered into an agreement to lease to MindSpring
for a one-year period the capacity of certain network operating assets for a
minimum of $27.0 million, although subject to increase dependent upon network
usage. MindSpring will utilize the capacity to provide Internet access to the
dial-up services customers formerly owned by NETCOM. In addition, the Company
will receive for a one-year period 50% of the gross revenue earned by MindSpring
from the dedicated access customers formerly owned by NETCOM.

In August 1998, the Company began offering enhanced telephony services via
IP technology. The Company currently offers these services in 230 major cities
in the United States, covering more than 90% of the commercial long distance
market. The Company carries the IP traffic over its nationwide data network and
terminates a large portion of the traffic via its own POPs, thereby eliminating
terminating charges from the use of other carriers' network facilities. Calls
that cannot be terminated over the Company's own facilities are billed at higher
per minute rates to compensate for the charges associated with using other
carriers' facilities. The Company currently does not generate any significant
revenue from this service.

In December 1998, the Company announced its plans to offer three new
network services (RAS, EOS and DSL), to be available beginning in 1999. RAS
allows the Company to provide modem access at its own switch location, rather
than requiring ISPs to deploy modems physically at each of their POPs. This
service will enable the Company to act as an aggregator for ISP traffic, while
limiting the ISP's capital deployment. Through its strategic relationship with
Lucent, the Company is currently retrofitting all of its Lucent-5ESS switches
with the new Lucent product that allows for RAS functionality. This service
eliminates the need for ISPs to separately purchase modems and shifts network
management responsibilities to the Company. The Company plans to be the first to
market RAS using Lucent's modem technology and expects the service will be
available to customers in the second quarter of 1999. Through the same
technology that allows it to provide RAS, the Company plans to offer EOS,
enabling regional or local ISPs to expand their geographical footprint outside
their current physical locations by carrying the ISP's out-of-region traffic on

32

the Company's own nationwide data network. The Company will initially offer this
service within its CLEC regional clusters during the first quarter of 1999, and
plans to expand EOS offerings to other areas as demand warrants. Through DSL
technology, the Company plans to provide high-speed data transmission services
primarily to business end users and, on a wholesale basis, to ISPs. DSL
technology utilizes the existing ILEC twisted copper pair connection to the
customer, giving the customer significantly greater bandwidth, and consequently
speed, when connecting to the Internet. The Company expects to offer DSL in over
400 central offices by the end of 1999 through alliances with other companies
focusing on DSL service. For example, on February 18, 1999, the Company entered
into a letter of intent with NorthPoint which, if the agreement is finalized,
will designate NorthPoint as the Company's preferred DSL provider for a two-year
period and the Company will purchase up to 75,000 DSL lines from NorthPoint over
the two-year term. This alliance will enable the Company to accelerate the
expansion of its DSL service offerings and allow NorthPoint to gain access to
the Company's collocation facilities in markets where NorthPoint currently has
limited or no operations. If the agreement is finalized, NorthPoint will
provision and manage all of the Company's DSL services offered under this
agreement. The Company expects to begin offering DSL services under this
agreement in the second quarter of 1999. The Company is not presently able to
determine the impact that the offerings of RAS, EOS and DSL will have on revenue
or EBITDA in 1999, 2000 or future years. These service offerings are dependent
upon demand from ISPs and, while the Company believes this market sector will
benefit from these new services, there is no assurance that the Company will be
able to successfully deploy and market these services efficiently, or at all, or
obtain and retain new customers in a competitive marketplace.

In conjunction with the increase in its service offerings, the Company has
and will continue to need to spend significant amounts on sales, marketing,
customer service, engineering and support personnel prior to the generation of
corresponding revenue. EBITDA, EBITDA (before nonrecurring charges), and
operating and net losses have generally increased immediately preceding and
during periods of relatively rapid network expansion and development of new
services. Since the quarter ended June 30, 1996, EBITDA losses (before
nonrecurring charges) have improved for each consecutive quarter, through and
including the quarter ended December 31, 1998 for which the Company reported
positive EBITDA (before nonrecurring charges) of $4.1 million. As the Company
provides a greater volume of higher margin services, principally local exchange
services, carries more traffic on its own facilities rather than ILEC facilities
and obtains the right to use unbundled ILEC facilities, while experiencing
decelerating increases in personnel and other selling, general and
administrative expenses supporting its operations, any or all of which may not
occur, the Company anticipates that EBITDA performance will continue to improve
in the near term.

Results of Operations

The following table provides a breakdown of revenue, operating costs and
selling, general and administrative expenses for Telecom Services, Network
Services and Satellite Services and certain other financial data for the Company
for the periods indicated. The table also shows certain revenue, expenses,
operating loss and EBITDA as a percentage of the Company's total revenue.

33

12 Months Ended Fiscal Years Ended December 31,
December 31, ----------------------------------------------
1996 (1) 1997 1998
-------------------- --------------------- ----------------------
$ % $ % $ %
----------- ------- ------------ ------ ------------ -------
(Dollars in thousands)

Statement of Operations Data:
Revenue:
Telecom services $ 87,379 52 149,358 61 303,317 76
Network services 60,380 36 65,678 27 53,851 14
Satellite services 21,317 12 29,986 12 40,451 10
----------- ------- ------------ ------ ------------ -------
Total revenue 169,076 100 245,022 100 397,619 100
Operating costs:
Telecom services 81,110 147,338 187,260
Network services 46,545 53,911 47,321
Satellite services 10,241 16,678 20,108
----------- ------- ------------ ------ ------------ -------
Total operating costs 137,896 82 217,927 89 254,689 64
Selling, general and
administrative:
Telecom services 32,633 94,037 137,207
Network services 15,841 13,136 12,275
Satellite services 13,152 13,234 13,255
Corporate services (2) 19,640 27,811 20,946
----------- ------- ------------ ------ ------------ -------
Total selling, general and
administrative 81,266 48 148,254 60 183,683 46
Depreciation and amortization 34,888 20 56,501 23 101,545 25
Provision for impairment of
long-lived assets 9,994 6 9,261 4 - -
Net loss on disposal of
long-lived assets 3,326 2 243 - 4,055 1
Restructuring costs - - - - 2,339 1
----------- ------- ------------ ------ ------------ -------
Operating loss (98,294) (58) (187,124) (76) (148,692) (37)

Other Data:
Net cash used by operating
activities of continuing
operations (40,829) (117,191) (105,358)
Net cash used by investing
activities of continuing
operations (191,932) (429,512) (349,082)
Net cash provided by financing
activities of continuing
operations 362,338 308,136 530,915
EBITDA (3) (63,406) (130,663) (47,147)
EBITDA (before nonrecurring
charges) (3) (50,086) (38) (121,159) (53) (40,753) (12)
Capital expenditures of
continuing operations 220,350 (30) 268,796 (49) 368,946 (10)
Capital expenditures of
discontinued operations 49,770 18,055 25,981

(1) The Company changed its fiscal year end to December 31 from September 30,
effective January 1, 1997. The results for the 12 months ended December 31,
1996 have been derived from the Company's unaudited consolidated financial
statements included in the Company's Forms 10-Q filed with the Securities
and Exchange Commission and reclassified to present such periods in
conformity with the fiscal 1998 presentation.

(2) Corporate Services consists of the operating activities of ICG
Communications, Inc., ICG Funding, LLC, ICG Canadian Acquisition, Inc., ICG
Holdings (Canada) Co., ICG Holdings, Inc., ICG Services, Inc. and ICG
Equipment, Inc., which primarily hold securities and provide certain legal,
accounting and finance, personnel and other administrative support services
to the business units.

34

(3) See note 3 under "Selected Financial Data" for the definitions of EBITDA
and EBITDA (before nonrecurring charges).

Fiscal 1998 Compared to Fiscal 1997

Revenue. Total revenue for fiscal 1998 increased $152.6 million, or 62%,
from fiscal 1997. Telecom Services revenue increased 103% to $303.3 million due
to an increase in revenue from local services (dial tone), long distance and
special access services, offset in part by a decline in average unit pricing and
in wholesale switched services revenue. Local services revenue increased from
$21.3 million (14% of Telecom Services revenue) for fiscal 1997 to $157.1
million (52% of Telecom Services revenue) for fiscal 1998, primarily due to an
increase in local access lines from 141,035 lines in service at December 31,
1997 to 354,482 lines in service at December 31, 1998. In addition, local access
revenue includes revenue of approximately $4.9 million and $58.3 million for
fiscal 1997 and 1998, respectively, for reciprocal compensation relating to the
transport and termination of local traffic to ISPs from customers of ILECs
pursuant to various interconnection agreements. These agreements are subject to
renegotiation over the next several months. While management believes that these
agreements will be replaced by agreements offering the Company some form of
compensation for ISP traffic, the renegotiated agreements may reflect rates for
reciprocal compensation which are lower than the rates under the current
contracts. See "Liquidity -Transport and Termination Charges." Revenue from long
distance services generated $22.7 million for fiscal 1998, compared to no
reported revenue for fiscal 1997. Special access revenue increased from $55.4
million (37% of Telecom Services revenue) for fiscal 1997 to $74.5 million (25%
of Telecom Services revenue) for 1998. Switched access (terminating long
distance) revenue decreased to approximately $49.0 million for fiscal 1998,
compared to $72.7 million for fiscal 1997. The Company has raised prices on its
wholesale switched services product in order to improve margins and has
de-emphasized its wholesale switched services to focus on its higher margin
products. Revenue from data services did not generate a material portion of
total revenue during either period.

Network Services revenue decreased 18% to $53.9 million for fiscal 1998
compared to $65.7 million for fiscal 1997. The decrease in Network Services
revenue is partially due to the decline in network integration services projects
from new and existing customers during fiscal 1998 and project delays by
customers from 1998 into 1999, offset slightly by increases in integrated
cabling services revenue. In addition, Network Services provides certain cabling
and other service installation on behalf of Telecom Services, as Telecom
Services provisions new customers and services. Due to the growth of Telecom
Services during fiscal 1998, Network Services has been and will continue to be
required to spend increasing management attention and resources on providing
cabling and other service installation for Telecom Services. Amounts received
from Telecom Services for work performed is eliminated in consolidation.

Satellite Services revenue increased $10.5 million, or 35%, to $40.5
million for fiscal 1998. This increase is due to the operations of MTN, which
comprised $30.0 million of total Satellite Services revenue for fiscal 1998,
compared to $19.0 million for fiscal 1997, offset by decreases in revenue of MCN
and Nova-Net, which the Company sold in August and November 1998, respectively.

35

MTN's C-band installations, which include both military and cruise vessels,
increased from 57 at December 31, 1997 to 76 at December 31, 1998, an increase
of 33%.

Operating costs. Total operating costs for fiscal 1998 increased $36.8
million, or 17%, from fiscal 1997. Telecom Services operating costs increased
from $147.3 million, or 99% of Telecom Services revenue, for fiscal 1997, to
$187.3 million, or 62% of Telecom Services revenue, for fiscal 1998. Telecom
Services operating costs consist of payments to ILECs for the use of network
facilities to support special and switched access services, network operating
costs, right of way fees and other costs. The increase in operating costs in
absolute dollars is attributable to the increase in volume of local and special
access services and the addition of network operating costs which include
engineering and operations personnel dedicated to the development and launch of
local exchange services. The decrease in operating costs as a percentage of
Telecom Services revenue is due primarily to a greater volume of higher margin
services, principally local exchange services. The Company expects the Telecom
Services ratio of operating costs to revenue will further improve as the Company
provides a greater margin of higher volume services, principally local exchange
services, carries more traffic on its own facilities rather than the ILEC
facilities and obtains the right to use unbundled ILEC facilities on
satisfactory terms, any or all of which may not occur.

Network Services operating costs decreased 12% to $47.3 million and
increased as a percentage of revenue from 82% for fiscal 1997 to 88% for fiscal
1998. The decrease in operating costs in absolute dollars is due to a decrease
in general business volume from external customers between the comparative
periods. Network Services operating costs increased as a percentage of Network
Services revenue due to cost overruns and the decline in higher margin network
integration services projects during fiscal 1998.

Satellite Services operating costs increased to $20.1 million for fiscal
1998, from $16.7 million for fiscal 1997. Satellite Services operating costs, as
a percentage of Satellite Services revenue, decreased from 56% for fiscal 1997
to 50% for fiscal 1998, due to the increase in revenue of MTN, which provides
relatively higher margins than other maritime services. Satellite Services
operating costs consist primarily of transponder lease costs and the cost of
equipment sold.

Selling, general and administrative expenses. Total selling, general and
administrative ("SG&A") expenses for fiscal 1998 increased $35.4 million, or
24%, compared to fiscal 1997, and decreased as a percentage of total revenue
from 61% for fiscal 1997 to 46% for fiscal 1998. Telecom Services SG&A expense
increased from $94.1 million, or 63% of Telecom Services revenue, for fiscal
1997, to $137.2 million, or 45% of Telecom Services revenue, for fiscal 1998.
The increase in absolute dollars is principally due to the continued rapid
expansion of the Company's Telecom Services networks and related significant
additions to the Company's management information systems, customer service,
marketing and sales staffs dedicated to the expansion of the Company's networks
and implementation of the Company's expanded services strategy, primarily the
development of local and long distance telephone services. As the Company begins
to benefit from the revenue generated by newly developed services requiring
substantial administrative, selling and marketing expense prior to initial
service offerings, Telecom Services has experienced and expects to continue to
experience declining SG&A expenses as a percentage of Telecom Services revenue.

36

Network Services SG&A expense decreased $0.9 million to $12.3 million for
fiscal 1998 compared to fiscal 1997. This decrease is primarily due to a
reduction in personnel as a result of the decentralization of Network Services
during fiscal 1998. In addition, certain long-term operating leases on field
offices expired during fiscal 1998.

Satellite Services SG&A expense was $13.2 million for both fiscal 1997 and
1998. SG&A expense decreased as a percentage of Satellite Services revenue from
44% for fiscal 1997 to 33% for fiscal 1998 due to the growth of MTN revenue,
without proportional increases in SG&A expenses, and the sales of MCN and
Nova-Net in August and November, 1998, respectively, which companies generated
higher SG&A expenses in relation to revenue than MTN.

Corporate Services SG&A expense decreased $6.9 million to $20.9 million for
fiscal 1998 compared to $27.8 million for fiscal 1997. This decrease is
primarily due to a change in the allocation of payroll costs associated with the
Company's information technology and human resources personnel, which costs were
allocated to Corporate Services for fiscal 1997 and to Telecom Services for
fiscal 1998.

Depreciation and amortization. Depreciation and amortization increased
$45.0 million, or 80%, for fiscal 1998 compared to fiscal 1997, primarily due to
increased investment in depreciable assets resulting from the continued
expansion of the Company's networks and services. Additionally, the Company
experienced increased amortization arising from goodwill recorded in conjunction
with the purchases of NikoNET and DataChoice during fiscal 1998 as well as the
full year impact of goodwill amortization from the purchase of Communications
Buying Group, Inc. in October 1997. The Company expects that depreciation and
amortization will continue to increase as the Company continues to invest in the
expansion and upgrade of its regional fiber and nationwide data networks and
begins amortization of the goodwill arising from the purchase of ChoiceCom on
December 31, 1998.

Provision for impairment of long-lived assets. For fiscal 1997, provision
for impairment of long-lived assets includes the write-down of the Company's
investment in StarCom International Optics Corporation, Inc. ("StarCom") ($5.2
million), MCN ($2.9 million) and Nova-Net ($0.9 million) as well as a write-down
of other operating assets ($0.3 million). Provision for impairment of long-lived
assets was recorded based on management's estimate of the net realizable value
of the Company's assets at December 31, 1997. No such provision for impairment
was recorded for fiscal 1998.

Net loss on disposal of long-lived assets. Net loss on disposal of
long-lived assets increased from $0.2 million for fiscal 1997 to $4.1 million
for fiscal 1998. Net loss on disposal of long-lived assets for fiscal 1997
primarily relates to losses recorded on the disposal of the Company's investment
in its Melbourne network. For fiscal 1998, net loss on disposal of long-lived
assets relates to the write-off of certain installation costs of disconnected
special access customers ($0.5 million), the write-off of certain costs
associated with an abandoned operating support system project ($0.8 million),
general disposal of furniture, fixtures and office equipment ($3.5 million) and
the loss on the sale of Nova-Net ($0.2 million), offset by the gain on the sale
of MCN ($0.9 million).

37

Restructuring costs. For fiscal 1998, restructuring costs of $2.3 million
include $0.2 million in costs, primarily severance costs, related to the
facility closure of a subsidiary of NikoNET, $0.6 million in costs, primarily
severance costs, related to the decentralization of the Company's Network
Services subsidiary and $1.5 million related to the combined restructuring of
Telecom Services and Corporate Services, designed to support the Company's
increased strategic focus on its ISP customer base, as well as to improve the
efficiency of operations and general and administrative support functions.
Restructuring costs under this plan include severance and other employee benefit
costs, of which $0.9 million has been paid as of December 31, 1998.

Interest expense. Interest expense increased $52.6 million, from $117.5
million for fiscal 1997, to $170.1 million for fiscal 1998, which includes
$158.2 million of non-cash interest. This increase was primarily attributable to
an increase in long-term debt, primarily the 10% Notes issued in February 1998
and the 9 7/8% Notes issued in April 1998. In addition, the Company's interest
expense increased, and will continue to increase, because the principal amount
of its indebtedness increases until the Company's senior indebtedness begins to
pay interest in cash.

Interest income. Interest income increased $6.5 million, from $21.9 million
for fiscal 1997 to $28.4 million for fiscal 1998. The increase is attributable
to the increase in cash and invested cash balances from the proceeds from the
issuances of the 10% Notes in February 1998 and the 9 7/8% Notes in April 1998.

Other expense, net. Other expense, net increased from $0.4 million net
expense for fiscal 1997 to $4.7 million net expense for fiscal 1998. Other
expense, net recorded in fiscal 1997 consists primarily of litigation settlement
costs and the loss on disposal of non-operating assets. For fiscal 1998, other
expense, net primarily includes $3.2 million in settlement costs paid to the
former minority shareholders and warrantholders of MTN, $1.1 million in
litigation settlement costs and a write-off of notes receivable of $0.4 million.

Income tax expense. Income tax expense of $0.1 million for fiscal 1998
relates to current state income taxes of NikoNET.

Accretion and preferred dividends on preferred securities of subsidiaries,
net of minority interest in share of losses. Accretion and preferred dividends
on preferred securities of subsidiaries, net of minority interest in share of
losses increased $17.1 million, from $38.1 million for fiscal 1997 to $55.2
million for fiscal 1998. The increase is due primarily to the issuances of the 6
3/4% Preferred Securities in September and October 1997. Accretion and preferred
dividends on preferred securities of subsidiaries, net of minority interest in
share of losses recorded during fiscal 1998 consists of the accretion of
issuance costs ($1.3 million) and the accrual of the preferred securities
dividends ($53.9 million) associated with the 6 3/4% Preferred Securities, the
14% Preferred Stock and the 14 1/4% Preferred Stock.

Loss from continuing operations. Loss from continuing operations increased
$29.1 million, or 9%, to $350.3 million due to the increases in operating costs,
SG&A expenses, depreciation and amortization, interest expense and accretion and
preferred dividends on preferred securities of subsidiaries, net of minority
interest in share of losses, offset by an increase in revenue, as noted above.

38

Loss from discontinued operations. For fiscal 1997 and 1998, loss from
discontinued operations was $39.5 million and $67.7 million, respectively, or
11% and 16%, respectively, of the Company's net loss. Loss from discontinued
operations consists of the combined net loss of Zycom and NETCOM for the
respective periods and, for fiscal 1998, includes $1.8 million for estimated
losses on the disposal of Zycom. The remaining increase in loss from
discontinued operations between the comparative periods is due to increases in
SG&A expenses and depreciation and amortization incurred by NETCOM and
approximately $9.4 million for merger costs incurred by NETCOM relating to
NETCOM's merger with ICG in January 1998. Loss from discontinued operations for
fiscal 1998 includes the net loss of NETCOM from January 1, 1998 through
November 2, 1998. Since the Company expects to record a gain on the disposition
of NETCOM, the Company has deferred the net operating losses of NETCOM from
November 3, 1998 through December 31, 1998, to be recognized as a component of
the gain on the disposition.

Fiscal 1997 Compared to 12 Months Ended December 31, 1996

Revenue. Total revenue for fiscal 1997 increased $75.9 million, or 45%,
from the 12 months ended December 31, 1996. Telecom Services revenue increased
71% to $149.4 million due to an increase in network usage for both switched and
special access services, offset in part by a decline in average unit pricing.
Local services revenue was $21.3 million (14% of Telecom Services revenue) for
fiscal 1997, but did not generate a material portion of total revenue for the 12
months ended December 31, 1996. Special access revenue increased from $39.3
million (45% of Telecom Services revenue) for the 12 months ended December 31,
1996 to $55.4 million (37% of Telecom Services revenue) for fiscal 1997.
Switched access (terminating long distance) revenue increased to approximately
$72.7 million for fiscal 1997, compared to $48.1 million for the 12 months ended
December 31, 1996. Revenue from long distance and data services did not generate
a material portion of total revenue during either period.

Network Services revenue increased 9% to $65.7 million for fiscal 1997
compared to $60.4 million for the 12 months ended December 31, 1996. The
increase in Network Services revenue is due to a single equipment sale during
fiscal 1997 for $3.2 million as well as general increases in business volume
from external customers.

Satellite Services revenue increased $8.7 million, or 41%, to $30.0 million
for fiscal 1997, compared to $21.3 million for the 12 months ended December 31,
1996. This increase is primarily due to the operations of MCN, which comprised
$6.3 million of total Satellite Services revenue for fiscal 1997 compared to
$1.8 million during the same 12-month period in 1996. The remaining increase can
be attributed to the general growth of MTN and its increased sales of C-Band
equipment to offshore oil and gas customers.

Operating costs. Total operating costs for fiscal 1997 increased $80.0
million, or 58%, from the 12 months ended December 31, 1996. Telecom Services
operating costs increased from $81.1 million, or 93% of Telecom Services
revenue, for the 12 months ended December 31, 1996 to $147.3 million, or 99% of
Telecom Services revenue, for fiscal 1997. The increase in operating costs in
absolute dollars is attributable to the increase in local and special access
services and the addition of network operating costs which include engineering
and operations personnel dedicated to the development and launch of local

39

exchange services. The increase in operating costs as a percentage of Telecom
Services revenue is due primarily to the increase in switched access services
revenue, and the investment in the development of local exchange services
without the benefit of substantial corresponding revenue in the same period.

Network Services operating costs increased 16% to $53.9 million and
increased as a percentage of Network Services revenue from 77% for the 12 months
ended December 31, 1996 to 82% for fiscal 1997. The increase is due to a
substantially lower margin earned on equipment sales (which constituted a larger
portion of 1997 revenue) relative to other services and certain indirect project
costs included in operating costs during fiscal 1997 which were treated as SG&A
expenses during the comparable 12-month period in 1996.

Satellite Services operating costs increased to $16.7 million for fiscal
1997, from $10.2 million for the 12 months ended December 31, 1996. Satellite
Services operating costs as a percentage of Satellite Services revenue also
increased from 48% for the 12 months ended December 31, 1996 to 56% for fiscal
1997. This increase is due to an increase in MCN's sales as well the increased
volume of equipment sales, both of which provide lower margins than other
maritime services.

Selling, general and administrative expenses. Total SG&A expenses for
fiscal 1997 increased $67.0 million, or 82%, compared to the 12 months ended
December 31, 1996. This increase was principally due to the continued rapid
expansion of the Company's Telecom Services networks and related significant
additions to the Company's management information systems, customer service,
marketing and sales staffs dedicated to the expansion of the Company's networks
and implementation of the Company's expanded services strategy, primarily the
development of local and long distance telephone services. Total SG&A expenses
as a percentage of total revenue increased from 48% for the 12 months ended
December 31, 1996 to 61% for fiscal 1997. There is typically a period of higher
administrative and marketing expense prior to the generation of appreciable
revenue from newly developed networks or services.

Depreciation and amortization. Depreciation and amortization increased
$21.6 million, or 62%, for fiscal 1997, compared to the 12 months ended December
31, 1996, due to increased investment in depreciable assets resulting from the
continued expansion of the Company's networks and services. The Company reports
high levels of depreciation expense relative to revenue during the early years
of operation of a new network because the full cost of a network is depreciated
using the straight-line method despite the low rate of capacity utilization in
the early stages of network operation.

Provision for impairment of long-lived assets. For the 12 months ended
December 31, 1996, provision for impairment of long-lived assets includes
valuation allowances for the amounts receivable for advances made to the
formerly owned Phoenix network joint venture included in long-term note
receivable ($5.8 million), the investments in the formerly owned Melbourne
network ($2.7 million) and the formerly owned Satellite Services Mexico
subsidiary ($0.1 million) and the note receivable from NovoComm, Inc. ($1.3
million). Provision for impairment of long-lived assets for fiscal 1997 includes
the write-down of the Company's investment in StarCom ($5.2 million), MCN ($2.9
million) and Nova-Net ($0.9 million) as well as a write-down of other operating

40

assets ($0.3 million). Provision for impairment of long-lived assets was
recorded based on management's estimate of the net realizable value of the
Company's assets at December 31, 1996 and 1997.

Net loss on disposal of long-lived assets. Net loss on disposal of
long-lived assets decreased from $3.3 million for the 12 months ended December
31, 1996 to $0.2 million for fiscal 1997. Net loss on disposal of long-lived
assets for the 12 months ended December 31, 1996 includes the loss recorded on
the sale of four of the Company's teleports used in its Satellite Services
operations ($1.1 million), the loss recorded on the disposal of other operating
assets ($2.7 million) and a write-off of an investment ($0.3 million), offset by
a gain on the sale of the Company's 50% interest in the Phoenix network joint
venture ($0.8 million). For fiscal 1997, net loss on disposal of long-lived
assets primarily relates to losses recorded on the disposal of the Company's
investment in its formerly owned Melbourne network.

Interest expense. Interest expense increased $22.6 million, from $95.0
million for the 12 months ended December 31, 1996, to $117.5 million for fiscal
1997, which includes $109.3 million of non-cash interest. This increase was
primarily attributable to an increase in long-term debt, primarily the 11 5/8%
Notes issued in March 1997. In addition, the Company's interest expense
increased, and will continue to increase, because the principal amount of its
indebtedness increases until the Company's senior indebtedness begins to pay
interest in cash.

Interest income. Interest income increased $0.5 million, from $21.4 million
for the 12 months ended December 31, 1996 to $21.9 million for fiscal 1997. The
increase is attributable to the increase in cash and invested cash balances from
the proceeds from the issuances of the 11 5/8% Notes and 14% Preferred Stock in
March 1997 and the 6 3/4% Preferred Securities in September and October 1997.

Other expense, net. Other expense, net decreased from $3.7 million net
expense for the 12 months ended December 31, 1996 to $0.4 million net expense
for fiscal 1997. Other expense, net recorded for the 12 months ended December
31, 1996 consists primarily of the write-off of deferred financing costs
associated with the conversion or repayment of debt and litigation settlement
costs. For fiscal 1997, other, net consists primarily of litigation settlement
costs and the loss on disposal of non operating assets.

Accretion and preferred dividends on preferred securities of subsidiaries,
net of minority interest in share of losses. Accretion and preferred dividends
on preferred securities of subsidiaries, net of minority interest in share of
losses increased $11.0 million, from $27.1 million for the 12 months ended
December 31, 1996 to $38.1 million for fiscal 1997. The increase is due
primarily to the issuances of the 14% Preferred Stock in March 1997 and the 6
3/4% Preferred Securities in September and October 1997. Offsetting this
increase is $12.3 million recorded during the 12 months ended December 31, 1996
for the excess of the redemption price over the carrying amount of the 12%
redeemable preferred stock of Holdings redeemed in April 1996. Accretion and
preferred dividends on preferred securities of subsidiaries, net of minority
interest in share of losses recorded during fiscal 1997 consists of the
accretion of issue costs ($0.9 million) and the accrual of the preferred
security dividends ($38.9 million) associated with the 6 3/4% Preferred
Securities, the 14% Preferred Stock and the 14 1/4% Exchangeable Preferred Stock
Mandatorily Redeemable 2007 (the "14 1/4% Preferred Stock"), offset by minority
interest in losses of subsidiaries of $1.7 million.

41

Share of losses of joint venture. Effective October 1, 1996, the Company
sold its 50% interest in the Phoenix network joint venture. As a result, no
share of losses in joint venture was recorded during fiscal 1997, as compared to
the $1.6 million loss recorded during the comparable 12-month period in 1996.

Loss from continuing operations. Loss from continuing operations increased
$122.2 million, or 61%, to $321.3 million due to the increases in operating
costs, SG&A expenses, depreciation and amortization, interest expense and
accretion and preferred dividends on preferred securities of subsidiaries, net
of minority interest in share of losses, offset by an increase in revenue, as
noted above.

Loss from discontinued operations. For the 12 months ended December 31,
1996 and fiscal 1997, loss from discontinued operations was $50.5 million and
$39.5 million, respectively, or 20% and 11%, respectively, of the Company's net
loss. Loss from discontinued operations consists of the combined net loss of
Zycom and NETCOM for the respective periods. The decrease in loss from
discontinued operations between the comparative periods is due to an increase in
revenue and a decrease in operating costs as a percentage of revenue incurred by
NETCOM.

Quarterly Results

The following table presents selected unaudited operating results for
three-month quarterly periods during fiscal 1997 and 1998. The Company believes
that all necessary adjustments have been included in the amounts stated below to
present fairly the quarterly results when read in conjunction with the Company's
consolidated financial statements and related notes included elsewhere in this
Annual Report. Results of operations for any particular quarter are not
necessarily indicative of results of operations for a full year or predictive of
future periods. ICG's development and expansion activities, including
acquisitions, during the periods shown below materially affect the comparability
of this data from one period to another.

42

Three Months Ended Three Months Ended
-----------------------------------------------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31,
1997 1997 1997 1997 1998 1998 1998 1998
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
(Dollars in thousands)

Statement of Operations Data:
Revenue $ 55,450 57,937 60,615 71,020 78,867 90,657 106,467 121,628
Operating loss (39,747) (45,515) (46,045) (55,857) (39,082) (39,649) (27,717) (42,244)
Loss from continuing
operations (66,039) (75,919) (79,372) (99,922) (81,564) (89,435) (80,082) (99,249)
Loss from discontinued
operations (9,953) (10,830) (7,502) (11,198) (20,191) (11,401) (16,582) (19,541)
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Net loss $ (75,992) (86,749) (86,874) (111,120) (101,755) (100,836) (96,664) (118,790)
=========== =========== =========== =========== =========== =========== =========== ===========
Loss per share from continuing
operations - basic and
diluted $ (1.57) (1.80) (1.87) (2.29) (1.84) (1.99) (1.76) (2.16)
=========== =========== =========== =========== =========== =========== =========== ===========
Weighted average number of
shares outstanding - basic
and diluted 42,003 42,122 42,359 43,553 44,311 44,865 45,588 46,010
=========== =========== =========== =========== =========== =========== =========== ===========

Other Data:
Net cash used by operating
activities of continuing
operations (13,089) (20,755) (30,823) (52,524) (6,539) (30,950) (13,941) (53,928)
Net cash (used) provided by
investing activities of
continuing operations (60,197) (50,554) (193,445) (125,316) 36,681 (70,471) (151,395) (163,897)
Net cash provided (used) by
financing activities of
continuing operations 172,689 (4,418) 110,288 29,577 294,197 238,628 (7,432) 5,522
EBITDA (1) (29,000) (32,581) (32,528) (36,554) (25,479) (16,814) (2,834) (2,020)
EBITDA (before nonrecurring
charges) (1) (29,319) (32,581) (31,174) (28,085) (24,974) (16,268) (3,648) 4,137
Capital expenditures of
continuing operations (2) (58,556) (64,233) (64,347) (81,660) (65,748) (87,166) (107,108) (108,924)
Capital expenditures of
discontinued operations (5,303) (5,771) (3,259) (3,722) (6,511) (8,696) (5,021) (5,753)

Statistical Data (3):
Full time employees 2,347 2,623 2,861 3,032 3,050 3,089 3,251 3,415
Telecom services:
Access lines in service (4) 5,371 20,108 50,551 141,035 186,156 237,458 290,983 354,482
Buildings connected (5):
On-net 545 560 590 626 637 665 684 777
Hybrid (6) 1,550 1,704 1,726 2,527 3,294 3,733 4,217 4,620
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total buildings
connected 2,095 2,264 2,316 3,153 3,931 4,398 4,901 5,397
Operational switches:
Voice 16 17 18 19 20 20 21 29
Data 10 15 15 15 15 15 15 16
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total operational
switches 26 32 33 34 35 35 36 45
Fiber route miles (7) :
Operational 2,483 2,898 3,021 3,043 3,194 3,812 3,995 4,255
Under construction - - - - - - - 625
Fiber strand miles (8) :
Operational 83,334 101,788 109,510 111,435 118,074 124,642 127,756 134,152
Under construction - - - - - - - 15,284
Satellite services:
C-Band installations (9) 57 57 54 57 59 66 69 76

(1) EBITDA consists of earnings (loss) from continuing operations before
interest, income taxes, depreciation and amortization, other expense, net
and accretion and preferred dividends on preferred securities of
subsidiaries, net of minority interest in share of losses, or simply,
operating loss plus depreciation and amortization. EBITDA (before
nonrecurring charges) represents EBITDA before certain nonrecurring charges
such as the net loss (gain) on disposal of long-lived assets, provision for
impairment of long-lived assets and restructuring costs. EBITDA and EBITDA
(before nonrecurring charges) are provided because they are measures

43

commonly used in the telecommunications industry. EBITDA and EBITDA (before
nonrecurring charges) are presented to enhance an understanding of the
Company's operating results and are not intended to represent cash flows or
results of operations in accordance with GAAP for the periods indicated.
EBITDA and EBITDA (before nonrecurring charges) are not measurements under
GAAP and are not necessarily comparable with similarly titled measures of
other companies. Net cash flows from operating, investing and financing
activities of continuing operations as determined using GAAP are also
presented in Other Data.

(2) Capital expenditures includes assets acquired under capital leases and
excludes payments for construction of the Company's corporate headquarters.
Capital expenditures of discontinued operations includes the capital
expenditures of Zycom and NETCOM combined for all periods presented.

(3) Amounts presented are for three-month periods ended, or as of the end of,
the period presented.

(4) Access lines in service at December 31, 1998 includes 271,928 lines which
are provisioned through the Company's switch and 82,554 lines which are
provisioned through resale and other agreements with various local exchange
carriers. Resale lines typically generate lower margins and are used
primarily to obtain customers. Although the Company plans to migrate lines
from resale to higher margin on-switch lines, there is no assurance that it
will be successful in executing this strategy.

(5) Prior to the fourth quarter of 1997, buildings connected includes only
special access buildings connected. Beginning December 31, 1997, buildings
connected includes both dial tone and special access buildings connected.

(6) Hybrid buildings connected represent buildings connected to the Company's
network via another carrier's facilities.

(7) Fiber route miles refers to the number of miles of fiber optic cable,
including leased fiber. As of December 31, 1998, the Company had 4,255
fiber route miles, of which 47 fiber route miles were leased under
operating leases. Fiber route miles under construction represents fiber
under construction which is expected to be operational within six months.

(8) Fiber strand miles refers to the number of fiber route miles, including
leased fiber, along a telecommunications path multiplied by the number of
fiber strands along that path. As of December 31, 1998, the Company had
134,152 fiber strand miles, of which 1,595 fiber strand miles were leased
under operating leases. Fiber strand miles under construction represents
fiber under construction which is expected to be operational within six
months.

(9) C-Band installations service cruise ships, U.S. Navy vessels and offshore
oil platform installations.

The Company's consolidated revenue has increased every quarter since the
first fiscal quarter of 1992, primarily due to the installation and acquisition
of new networks, the expansion of existing networks and increased services
provided over existing networks. EBITDA, EBITDA (before nonrecurring charges),
and operating and net losses have generally increased immediately preceding and
during periods of relatively rapid network expansion and development of new
services. Since the quarter ended June 30, 1996, EBITDA losses (before
nonrecurring charges) have improved for each consecutive quarter, through and
including the quarter ended December 31, 1998 for which the Company reported

44

positive EBITDA (before nonrecurring charges) of $4.1 million. As the Company
provides a greater volume of higher margin services, principally local exchange
services, carries more traffic on its own facilities rather than ILEC facilities
and obtains the right to use unbundled ILEC facilities, while experiencing
decelerating increases in personnel and other SG&A expenses supporting its
operations, any or all of which may not occur, the Company anticipates that
EBITDA performance will continue to improve in the near term.

Individual operating units may experience variability in quarter to quarter
revenue due to (i) the type and mix of services available to customers, (ii) the
timing and size of contract orders, (iii) the timing of price changes and
associated impact on volume, and (iv) customer usage patterns.

Net Operating Loss Carryforwards

As of December 31, 1998, the Company had federal and foreign net operating
loss carryforwards ("NOLs") of approximately $617.8 million and $35.0 million,
respectively, which expire at various times in varying amounts through 2019.
However, due to the provisions of Section 382, regulations issued under Section
1502 and certain other provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), the utilization of a portion of the NOLs may be limited.
In addition, the Company is also subject to certain state income tax laws which
may also limit the utilization of NOLs for state income tax purposes.

Section 382 of the Code limits the use of NOLs, as well as other tax
attributes, following significant changes in ownership of a corporation's stock,
as defined in the Code. The limitation is expressed as the amount of NOL or
other tax attributes arising during a period prior to the change in ownership
that may be used by the Company in any tax year subsequent to the change in
ownership. Other factors may act to increase or decrease the annual limitation
for any year subsequent to a change in ownership. Future events beyond the
control of the Company could reduce or eliminate the Company's ability to
utilize its NOLs. Future ownership changes under Section 382 will require a new
Section 382 computation which could further restrict the use of the NOLs. In
addition, the Section 382 limitation could be reduced to zero if the Company
fails to satisfy the continuity of business enterprise requirement for the
two-year period following an ownership change.

Liquidity and Capital Resources

The Company's growth has been funded through a combination of equity, debt
and lease financing. As of December 31, 1998, the Company had current assets of
$422.8 million, including $262.8 million of cash, cash equivalents and
short-term investments available for sale which exceeded current liabilities of
$127.9 million, providing working capital of $294.9 million. In addition, during
the first quarter of 1999, the Company completed the sales of NETCOM's
operations for total proceeds of $286.1 million. The Company invests excess
funds in short-term, interest-bearing investment-grade securities until such
funds are used to fund the capital investments and operating needs of the
Company's business. The Company's short term investment objectives are safety,
liquidity and yield, in that order.

45

Net Cash Used By Operating Activities of Continuing Operations

The Company's operating activities of continuing operations used $39.1
million in fiscal 1996, $4.7 million and $6.4 million for the three months ended
December 31, 1995 and 1996, respectively, and $117.2 million and $105.4 million
for fiscal 1997 and 1998, respectively. Net cash used by operating activities of
continuing operations is primarily due to net losses from continuing operations
and increases in receivables, which are partially offset by changes in other
working capital items and non-cash expenses, such as depreciation and
amortization expense, deferred interest expense, accretion and preferred
dividends on subsidiary preferred securities.

The Company does not anticipate that cash provided by operations will be
sufficient to fund operating activities, the future expansion of existing
networks or the construction and acquisition of new networks in the near term.
As the Company provides a greater volume of higher margin services, principally
local exchange services, carries more traffic on its own facilities rather than
ILEC facilities and obtains the right to use unbundled ILEC facilities, while
experiencing decelerating increases in personnel and other SG&A expenses
supporting its operations, any or all of which may not occur, the Company
anticipates that net cash used by operating activities of continuing operations
will continue to improve in the near term.

Net Cash Used By Investing Activities of Continuing Operations

Investing activities of continuing operations used $134.8 million (net of
$21.6 million received in connection with the sale of certain satellite
equipment, including four teleports) in fiscal 1996, $25.2 million (net of $21.1
million received in connection with the aforementioned equipment sale) and $82.3
million for the three months ended December 31, 1995 and 1996, respectively, and
$429.5 million and $349.1 million for fiscal 1997 and 1998, respectively. Net
cash used by investing activities of continuing operations includes cash
expended for the acquisition of property, equipment and other assets of $121.9
million for fiscal 1996, $26.8 million and $50.8 million for the three months
ended December 31, 1995 and 1996, respectively, and $268.8 million and $367.5
million for fiscal 1997 and 1998, respectively. Additionally, net cash used by
investing activities of continuing operations includes payments for construction
of the Company's corporate headquarters of $1.5 million for fiscal 1996, $7.9
million for the three months ended December 31, 1996, and $29.4 million and $4.9
million for fiscal 1997 and 1998, respectively. The Company used $45.9 million
in fiscal 1997 to acquire CBG and $67.8 million in fiscal 1998 for the
acquisitions of ChoiceCom, NikoNET and DataChoice combined. During fiscal 1998,
the Company used $9.5 million to purchase the minority interest of two of the
Company's operating subsidiaries. Offsetting the expenditures for investing
activities of continuing operations for fiscal 1998 are the proceeds from the
sale of the Company's corporate headquarters of $30.3 million and the sale of
short-term investments of $60.3 million. The Company will continue to use cash
in 1999 and subsequent periods for the construction of new networks, the
expansion of existing networks and, potentially, for acquisitions. The Company
acquired assets under capital leases and through the issuance of debt or
warrants of $55.0 million in fiscal 1996, $0.1 million and $19.5 million for the
three months ended December 31, 1995 and 1996, respectively, and $1.4 million
for fiscal 1998.

46

Net Cash Provided (Used) By Financing Activities of Continuing Operations

Financing activities of continuing operations provided $355.8 million in
fiscal 1996, used $8.4 million and $1.9 million in the three months ended
December 31, 1995 and 1996, respectively, and provided $308.1 million and $530.9
million in fiscal 1997 and 1998, respectively. Net cash provided by financing
activities of continuing operations for these periods includes cash received in
connection with the private placement of the 11 5/8% Notes and the 14% Preferred
Stock in March 1997, the 6 3/4% Preferred Securities in September and October
1997 and the 10% Notes and the 9 7/8% Notes in February and April 1998,
respectively. Historically, the funds to finance the Company's business
acquisitions, capital expenditures, working capital requirements and operating
losses have been obtained through public and private offerings of ICG and
Holdings-Canada common shares, convertible subordinated notes, convertible
preferred shares of Holdings-Canada, capital lease financings and various
working capital sources, including credit facilities, in addition to the private
placement of the securities previously mentioned and other securities offerings.

On February 12, 1998, ICG Services completed a private placement of 10%
Notes, with a maturity value of approximately $490.0 million for net proceeds,
after underwriting and other offering costs, of approximately $290.9 million.
Interest will accrue at 10% per annum, beginning February 15, 2003, and is
payable in cash each February 15 and August 15, commencing August 15, 2003. The
10% Notes will be redeemable at the option of ICG Services, in whole or in part,
on or after February 15, 2003.

On April 27, 1998, ICG Services completed a private placement of 9 7/8%
Notes, with a maturity value of approximately $405.3 million, for net proceeds,
after underwriting and other offering costs, of approximately $242.1 million.
Interest will accrue at 9 7/8% per annum, beginning May 1, 2003, and is payable
in cash each May 1 and November 1, commencing November 1, 2003. The 9 7/8% Notes
will be redeemable at the option of ICG Services, in whole or in part, on or
after May 1, 2003.

As of December 31, 1998, the Company had an aggregate of approximately
$68.4 million of capital lease obligations of continuing operations and an
aggregate accreted value of approximately $1.6 billion was outstanding under the
13 1/2% Senior Discount Notes due 2005 (the "13 1/2% Notes"), the 12 1/2% Notes,
the 11 5/8% Notes, the 10% Notes and the 9 7/8% Notes. The 13 1/2% Notes require
payments of interest to be made in cash commencing March 15, 2001 and mature on
September 15, 2005. The 12 1/2% Notes require payments of interest to be made in
cash commencing November 1, 2001 and mature on May 1, 2006. The 11 5/8% Notes
require payments of interest to be made in cash commencing September 15, 2002
and mature on March 15, 2007. The 10% Notes require payments of interest in cash
commencing August 15, 2003 and mature February 15, 2008. The 9 7/8% Notes
require payments of interest in cash commencing November 1, 2003 and mature May
1, 2008. The 6 3/4% Preferred Securities require payments of dividends to be
made in cash through November 15, 2000. In addition, the 14% Preferred Stock and
the 14 1/4% Preferred Stock require payments of dividends to be made in cash
commencing June 15, 2002 and August 1, 2001, respectively. As of December 31,
1998, the Company had $1.1 million of other indebtedness outstanding. With
respect to indebtedness outstanding on December 31, 1998, the Company has cash
interest payment obligations of approximately $113.3 million in 2001, $158.0

47

million in 2002 and $212.6 million in 2003. With respect to preferred securities
currently outstanding, the Company has cash dividend obligations of
approximately $6.7 million remaining in 1999 and $8.9 million in 2000, for which
the Company has restricted cash balances available for such dividend payments,
$21.5 million in 2001, $57.0 million in 2002 and $70.9 million in 2003.
Accordingly, the Company may have to refinance a substantial amount of
indebtedness and obtain substantial additional funds prior to March 2001. The
Company's ability to do so will depend on, among other things, its financial
condition at the time, restrictions in the instruments governing its
indebtedness, and other factors, including market conditions, beyond the control
of the Company. There can be no assurance that the Company will be able to
refinance such indebtedness, including such capital leases, or obtain such
additional funds, and if the Company is unable to effect such refinancings or
obtain additional funds, the Company's ability to make principal and interest
payments on its indebtedness or make payments of cash dividends on, or the
mandatory redemption of, its preferred securities, would be adversely affected.

Capital Expenditures

The Company's capital expenditures of continuing operations (including
assets acquired under capital leases and excluding payments for construction of
the Company's corporate headquarters) were $176.9 million for fiscal 1996, $26.9
million and $70.3 million for the three months ended December 31, 1995 and 1996,
respectively, and $268.8 million and $368.9 million for fiscal 1997 and 1998,
respectively. The Company anticipates that the expansion of existing networks,
construction of new networks and further development of the Company's products
and services will require capital expenditures of approximately $380.0 million
during 1999. To facilitate the expansion of its services and networks, the
Company has entered into equipment purchase agreements with various vendors
under which the Company has committed to purchase a substantial amount of
equipment and other assets, including a full range of switching systems, fiber
optic cable, network electronics, software and services. If the Company fails to
meet the minimum purchase level in any given year, the vendor may discontinue
certain discounts, allowances and incentives otherwise provided to the Company.
Actual capital expenditures will depend on numerous factors, including certain
factors beyond the Company's control. These factors include the nature of future
expansion and acquisition opportunities, economic conditions, competition,
regulatory developments and the availability of equity, debt and lease
financing.

Other Cash Commitments and Capital Requirements

The Company's operations have required and will continue to require
significant capital expenditures for development, construction, expansion and
acquisition of telecommunications assets. Significant amounts of capital are
required to be invested before revenue is generated, which results in initial
negative cash flows. In addition to the Company's planned capital expenditures,
it has other cash commitments as described in the footnotes to the Company's
audited consolidated financial statements for the fiscal year ended December 31,
1998 included elsewhere herein.

In view of the continuing development of the Company's products and
services, the expansion of existing networks and the construction, leasing and
licensing of new networks, the Company will require additional amounts of cash
in the future from outside sources. Management believes that the Company's cash
on hand and amounts expected to be available through asset sales, including the

48

proceeds from the sales of the operations of NETCOM, cash flows from operations,
including collection of receivables from transport and termination charges,
vendor financing arrangements and credit facilities will provide sufficient
funds necessary for the Company to expand its business as currently planned and
to fund its operations through 2000. Additional sources of cash may include
public and private equity and debt financings, sales of non-strategic assets,
capital leases and other financing arrangements. In the past, the Company has
been able to secure sufficient amounts of financing to meet its capital needs.
There can be no assurance that additional financing will be available to the
Company or, if available, that it can be obtained on terms acceptable to the
Company.

The failure to obtain sufficient amounts of financing could result in the
delay or abandonment of some or all of the Company's development and expansion
plans, which could have a material adverse effect on the Company's business. In
addition, the inability to fund operating deficits with the proceeds of
financings and sales of non-strategic assets until the Company establishes a
sufficient revenue-generating customer base could have a material adverse effect
on the Company's liquidity.

Transport and Termination Charges

The Company has recorded revenue of approximately $4.9 million and $58.3
million for fiscal 1997 and 1998, respectively, for reciprocal compensation
relating to the transport and termination of local traffic to ISPs from
customers of ILECs pursuant to various interconnection agreements. The ILECs
have not paid most of the bills they have received from the Company and have
disputed substantially all of these charges based on the belief that such calls
are not local traffic as defined by the various agreements and under state and
federal laws and public policies. As a result, the Company expects receivables
from transport and termination charges will continue to increase until these
disputes have been resolved.

The resolution of these disputes will be based on rulings by state public
utility commissions and/or by the FCC. To date, there have been favorable final
rulings from 29 states that ISP traffic is subject to the payment of reciprocal
compensation under interconnection agreements. On February 25, 1999, the FCC
issued a decision that ISP-bound traffic is largely jurisdictionally interstate
traffic. The decision relies on the long-standing federal policy that ISP
traffic, although jurisdictionally interstate, is treated as though it is local
traffic for pricing purposes. The decision also emphasizes that because there
are no federal rules governing intercarrier compensation for ISP traffic, the
determination as to whether such traffic is subject to reciprocal compensation
under the terms of interconnection agreements properly is made by the state
commissions and that carriers are bound by their interconnection agreements and
state commission decisions regarding the payment of reciprocal compensation for
ISP traffic. The FCC has initiated a rulemaking proceeding regarding the
adoption of prospective federal rules for intercarrier compensation for ISP
traffic. In its notice of rulemaking, the FCC expresses its preference that
compensation rates for this traffic continue to be set by negotiations between
carriers, with disputes resolved by arbitrations conducted by state commissions,
pursuant to the Telecommunications Act.

On March 4, 1999, the Alabama Public Service Commission (the "Alabama PSC")
issued a decision that found that reciprocal compensation is owed for Internet
traffic under four CLEC interconnection agreements with BellSouth Corporation

49

("BellSouth"), which agreements were at issue in the proceeding. With respect to
the Company's interconnection agreement, which also was at issue, the state
commission interpreted certain language in the Company's agreement to exempt
ISP-bound traffic from reciprocal compensation under certain conditions. The
Company believes that the Alabama PSC failed to consider the intent of the
parties in negotiating and executing the Company's interconnection agreement,
the specific language of the Company's interconnection agreement and the impact
of Alabama PSC and FCC policies, and thereby misinterpreted the agreement. The
Company intends to file a request with the Alabama PSC by April 1, 1999 seeking
determination that the ruling with respect to the Company's agreement be
reconsidered, and that the Company should be treated the same as the other CLECs
that participated in the proceeding and for which the Alabama PSC ordered the
payment of reciprocal compensation. While the Company intends to pursue
vigorously a petition for reconsideration with the Alabama PSC, and if the
Company deems it necessary, judicial review, the Company cannot predict the
final outcome of this issue.

The Company has also recorded revenue of approximately $19.1 million for
fiscal 1998, related to other transport and termination charges to the ILECs,
pursuant to the Company's interconnection agreements with these ILECs. Included
in the Company's trade receivables at December 31, 1997 and 1998 are $4.3
million and $72.8 million, respectively, for all receivables related to
transport and termination charges. The receivables balance at December 31, 1998
is net of an allowance of $5.6 million for disputed amounts.

Although the Company's interconnection agreement with BellSouth has
expired, the Company has received written notification from BellSouth that the
Company may continue billing BellSouth under the pricing terms within the
expired interconnection agreement, until such agreement is renegotiated or
arbitrated by the relevant state commissions. The Company's remaining
interconnection agreements expire in 1999 and 2000. While the Company believes
that all revenue recorded through December 31, 1998 is collectible and that
future revenue from transport and termination charges billed under the Company's
current interconnection agreements will be realized, there can be no assurance
that future regulatory and judicial rulings will be favorable to the Company,
that the Alabama PSC will reconsider its ruling, or that different pricing plans
for transport and termination charges between carriers will not be adopted when
the Company's interconnection agreements are renegotiated or as a result of the
FCC's rulemaking proceeding on future compensation methods. In fact, the Company
believes that different pricing plans will be considered and adopted and
although the Company expects that revenue from transport and termination charges
likely will decrease as a percentage of total revenue from local services in
periods subject to future interconnection agreements, the Company's local
termination services still will be required by the ILECs and must be provided
under the Telecommunications Act, and likely will result in increasing volume in
minutes due to the growth of the Internet and related services markets. The
Company expects to negotiate reasonable compensation and collection terms for
local termination services, although there is no assurance that such
compensation will remain consistent with current levels. Additionally, the
Company expects to supplement its current operations with revenue, and
ultimately EBITDA, from new services offerings such as RAS, EOS and DSL,
however, the Company may or may not be successful in its efforts to deploy such
services profitably.

50

Year 2000 Compliance

Importance

Many computer systems, software applications and other electronics
currently in use worldwide are programmed to accept only two digits in the
portion of the date field which designates the year. The "Year 2000 problem"
arises because these systems and products cannot properly distinguish between a
year that begins with "20" and the familiar "19." If these systems and products
are not modified or replaced, many will fail, create erroneous results and/or
may cause interfacing systems to fail.

Year 2000 compliance issues are of particular importance to the Company
since its operations rely heavily upon computer systems, software applications
and other electronics containing date-sensitive embedded technology. Some of
these technologies were internally developed and others are standard purchased
systems which may or may not have been customized for the Company's particular
application. The Company also relies heavily upon various vendors and suppliers
that are themselves very reliant on computer systems, software applications and
other electronics containing date-sensitive embedded technology. These vendors
and suppliers include: (i) ILECs and other local and long distance carriers with
which the Company has interconnection or resale agreements; (ii) manufacturers
of the hardware and related operating systems that the Company uses directly in
its operations; (iii) providers that create custom software applications that
the Company uses directly in its operations; and (iv) providers that sell
standard or custom equipment or software which allow the Company to provide
administrative support to its operations.

Strategy

The Company's approach to addressing the potential impact of Year 2000
compliance issues is focused upon ensuring, to the extent reasonably possible,
the continued, normal operation of its business and supporting systems.
Accordingly, the Company has developed a four-phase plan which it is applying to
each functional category of the Company's computer systems and components. Each
of the Company's computer systems, software applications and other electronics
containing date-sensitive embedded technology is included within one of the
following four functional categories:

o Networks and Products, which consists of all components whether
hardware, software or embedded technology used directly in the
Company's operations, including components used by the Company's voice
and data switches and collocations and telecommunications products;

o IT Systems, which consists of all components used to support the
Company's operations, including provisioning and billing systems;

o Building and Facilities, which consists of all components with
embedded technology used at the Company's headquarters building and
other leased facilities, including security systems, elevators and
internal use telephone systems;

51

o Office Equipment, which consists of all office equipment with
date-sensitive embedded technology.

For each of the categories described above, the Company will apply the
following four-phase approach to identifying and addressing the potential impact
of Year 2000 compliance issues:

o Phase I - Assessment
During this phase, the Company's technology staff will perform an
inventory of all components currently in use by the Company. Based
upon this inventory, the Company's business executives and technology
staff will jointly classify each component as a "high," "medium" or
"low" priority item, determined primarily by the relative importance
that the particular component has to the Company's normal business
operations, the number of people internally and externally which would
be affected by any failure of such component and the interdependence
of such component with other components used by the Company that may
be of higher or lower priority.

Based upon such classifications, the Company's business executives and
information technology staff will jointly set desired levels of Year
2000 readiness for each component inventoried, using the following
criteria, as defined by the Company:

- Capable, meaning that such computer system or component will be
capable of managing and expressing calendar years in four digits;

- Compliant, meaning that the Company will be able to use such
component for the purpose for which the Company intended it by
adapting to its ability to manage and express calendar years in
only two digits;

- Certified, meaning that the Company has received testing results
to demonstrate, or the vendor or supplier is subject to
contractual terms which requires, that such component requires no
Year 2000 modifications to manage and express calendar years in
four digits; or

- Non-critical, meaning that the Company expects to be able to
continue to use such component unmodified or has determined that
the estimated costs of modification exceed the estimated costs
associated with its failure.

o Phase II - Remediation
During this phase, the Company will develop and execute a remediation
plan for each component based upon the priorities set in Phase I.
Remediation may include component upgrade, reprogramming, replacement,
receipt of vendor and supplier certification or other actions as
deemed necessary or appropriate.

o Phase III - Testing
During this phase, the Company will perform testing sufficient to
confirm that the component meets the desired state of Year 2000
readiness. This phase will consist of: (i) testing the component in
isolation, or unit testing; (ii) testing the component jointly with

52

other components, or system testing; and (iii) testing interdependent
systems, or environment testing.

o Phase IV - Implementation
During the last phase, the Company will implement each act of
remediation developed and tested for each component, as well as
implement adequate controls to ensure that future upgrades and changes
to the Company's computer systems, for operational reasons other than
Year 2000 compliance, do not alter the Company's Year 2000 state of
readiness.

Current State of Readiness

The Company has commenced certain of the phases within its Year 2000
compliance strategy for each of its functional system categories, as shown by
the table set forth below. The Company does not intend to wait until the
completion of a phase for all functional category components together before
commencing the next phase. Accordingly, the information set forth below
represents only a general description of the phase status for each functional
category.

- ------------------------------- ----------------------------------------------------------------------------------------------
Phase
- ------------------------------- ----------------------------------------------------------------------------------------------
I II III IV
System and Level of Priority Assessment Remediation Testing Implementation
- ------------------------------- ---------------------- ----------------------- ----------------------- -----------------------
Networks and Products
- ------------------------------- ---------------------- ----------------------- ----------------------- -----------------------

High Complete In progress In progress To begin Q2 1999
To complete Q2 1999 To complete Q2 1999 To complete Q3 1999
- ------------------------------- ---------------------- ----------------------- ----------------------- -----------------------
Medium Complete In progress To begin Q2 1999 To begin Q2 1999
To complete Q2 1999 To complete Q3 1999 To complete Q3 1999
- ------------------------------- ---------------------- ----------------------- ----------------------- -----------------------
Low Complete Complete Complete Complete
- ------------------------------- ---------------------- ----------------------- ----------------------- -----------------------
IT Systems
- ------------------------------- ---------------------- ----------------------- ----------------------- -----------------------
High Complete In progress In progress In progress
To complete Q2 1999 To complete Q2 1999 To complete Q3 1999
- ------------------------------- ---------------------- ----------------------- ----------------------- -----------------------
Medium Complete In progress In progress In progress
To complete Q2 1999 To complete Q2 1999 To complete Q3 1999
- ------------------------------- ---------------------- ----------------------- -----------------------------------------------
Low Complete In progress To be determined based on the results of
To complete Q2 1999 Phase II
- ------------------------------- ---------------------- ----------------------- ----------------------- -----------------------
Building and Facilities
- ------------------------------- ---------------------- ----------------------- -----------------------------------------------
High In progress In progress To be determined based on the results of
To complete Q2 1999 To complete Q2 1999 Phase II
- ------------------------------- ---------------------- -----------------------------------------------------------------------
Medium In progress To be determined based on the results of Phase I
To complete Q2 1999
- ------------------------------- ---------------------- -----------------------------------------------------------------------
Low To begin Q2 1999 To be determined based on the results of Phase I
To complete Q3 1999
- ------------------------------- ----------------------------------------------------------------------------------------------
Office Equipment
- ------------------------------- ---------------------- ----------------------- ----------------------- -----------------------
High Complete In progress To begin Q2 1999 To begin Q2 1999
To complete Q2 1999 To complete Q2 1999 To complete Q3 1999
- ------------------------------- ---------------------- ----------------------- ----------------------- -----------------------
Medium Complete In progress To begin Q2 1999 To begin Q2 1999
To complete Q2 1999 To complete Q3 1999 To complete Q4 1999
- ------------------------------- ---------------------- ----------------------- -----------------------------------------------
Low Complete In progress To be determined based on the results of
To complete Q2 1999 Phase II
- ------------------------------- ---------------------- ----------------------- -----------------------------------------------

Separately, the Company is in the process of reviewing the Company's
material contracts with contractors and vendors/suppliers and considering the
necessity of renegotiating certain existing contracts, to the extent that the
contracts fail to address the allocation of potential Year 2000 liabilities

53

between parties. Prior to entering into any new material contracts, the Company
will seek to address the allocation of potential Year 2000 liabilities as part
of the initial negotiation.

Costs

The Company expenses all incremental costs to the Company associated with
Year 2000 compliance issues as incurred. Through December 31, 1998, such costs
incurred were approximately $0.5 million, consisting of approximately $0.4
million of replacement hardware and software and approximately $0.1 million of
consulting fees and other miscellaneous costs of Year 2000 compliance reference
and planning materials. The Company has also incurred certain internal costs,
including salaries and benefits for employees dedicating various portions of
their time to Year 2000 compliance issues, of which costs the Company believes
has not exceeded $0.5 million through December 31, 1998. The Company expects
that total future incremental costs of Year 2000 compliance efforts will be
approximately $3.8 million, consisting of $2.3 million in consulting fees, $1.5
million in replacement hardware and software and other miscellaneous costs.
These anticipated costs have been included in the Company's fiscal 1999 budget
and represent approximately 4% of the Company's budgeted expenses for
information technology through fiscal 1999. Such cost estimates are based upon
presently available information and may change as the Company continues with its
Year 2000 compliance plan. The Company intends to use cash on hand for Year 2000
compliance costs, as necessary.

Risk, Contingency Planning and Reasonably Likely Worst Case Scenario

While the Company is heavily reliant upon its computer systems, software
applications and other electronics containing date-sensitive embedded technology
as part of its business operations, such components upon which the Company
primarily relies were developed with current state-of-the-art technology and,
accordingly, the Company has reasonably assumed that its four-phase approach
will demonstrate that many of its high-priority systems do not present material
Year 2000 compliance issues. For computer systems, software applications and
other electronics containing date-sensitive embedded technology that have met
the Company's desired level of Year 2000 readiness, the Company will use its
existing contingency plans to mitigate or eliminate problems it may experience
if an unanticipated system failure were to occur. For components that have not
met the Company's desired level of readiness, the Company will develop a
specific contingency plan to determine the actions the Company would take if
such component failed.

At the present time, the Company is unable to develop a most reasonably
likely worst case scenario for failure to achieve adequate Year 2000 compliance.
The Company will be better able to develop such a scenario once the status of
Year 2000 compliance of the Company's material vendors and suppliers is
complete. The Company will monitor its vendors and suppliers, particularly the
other telecommunications companies upon which the Company relies, to determine
whether they are performing and implementing an adequate Year 2000 compliance
plan in a timely manner.

The Company acknowledges the possibility that the Company may become
subject to potential claims by customers if the Company's operations are
interrupted for an extended period of time. However, it is not possible to
predict either the probability of such potential litigation, the amount that

54

could be in controversy or upon which party a court would place ultimate
responsibility for any such interruption.

The Company views Year 2000 compliance as a process that is inherently
dynamic and will change in response to changing circumstances. While the Company
believes that through execution and satisfactory completion of its Year 2000
compliance strategy its computer systems, software applications and electronics
will be Year 2000 compliant, there can be no assurance until the Year 2000
occurs that all systems and all interfacing technology when running jointly will
function adequately. Additionally, there can be no assurance that the
assumptions made by the Company within its Year 2000 compliance strategy will
prove to be correct, that the strategy will succeed or that the remedial actions
being implemented will be able to be completed by the time necessary to avoid
system or component failures. In addition, disruptions with respect to the
computer systems of vendors or customers, which systems are outside the control
of the Company, could impair the Company's ability to obtain necessary products
or services to sell to its customers. Disruptions of the Company's computer
systems, or the computer systems of the Company's vendors or customers, as well
as the cost of avoiding such disruption, could have a material adverse effect on
the Company's financial condition and results of operations.

Accounting Change

During fiscal 1996, the Company changed its method of accounting for
long-term telecom services contracts. Under the new method, the Company
recognizes revenue as services are provided and continues to charge direct
selling expenses to operations as incurred. The Company had previously
recognized revenue in an amount equal to the noncancelable portion of the
contract, which is a minimum of one year on a three-year or longer contract, at
the inception of the contract and upon activation of service to the customer, to
the extent of direct installation and selling expense incurred in obtaining
customers during the period in which such revenue was recognized. Revenue
recognized in excess of normal monthly billings during the year was limited to
an amount which did not exceed such installation and selling expense. The
remaining revenue from the contract had been recognized ratably over the
remaining noncancelable portion of the contract. The Company believes the new
method is preferable because it provides a better matching of revenue and
related operating expenses and is more consistent with accounting practices
within the telecommunications industry.

As required by generally accepted accounting principles, the Company has
reflected the effects of the change in accounting as if such change had been
adopted as of October 1, 1995. The Company's results for fiscal 1996 include a
charge of $3.5 million ($0.13 per share) relating to the cumulative effect of
this change in accounting as of October 1, 1995. The effect of this change in
accounting was not significant for fiscal 1996. If the new revenue recognition
method had been applied retroactively, Telecom Services revenue would have
decreased by $0.5 million and $0.7 million for fiscal 1994 and 1995,
respectively. See the Company's Consolidated Financial Statements and the
related notes thereto contained elsewhere in this Annual Report.

55

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company's financial position and cash flows are subject to a variety of
risks in the normal course of business, which include market risks associated
with movements in interest rates and, subsequent to February 17, 1999, equity
prices. The Company routinely assesses these risks and has established policies
and business practices to protect against the adverse effects of these and other
potential exposures. The Company does not, in the normal course of business, use
derivative financial instruments for trading or speculative purposes.

Interest Rate Risk

The Company's exposure to market risk associated with changes in interest
rates relates primarily to the Company's investments in marketable securities
and its senior indebtedness.

The Company invests primarily in high grade short-term investments which
consist of money market instruments, commercial paper, certificates of deposit,
government obligations and corporate bonds, all of which are considered to be
available for sale and generally have maturities of one year or less. The
Company's short-term investment objectives are safety, liquidity and yield, in
that order. As of December 31, 1998, the Company had approximately $262.8
million in cash and cash equivalents and short-term investments available for
sale, at a weighted average fixed interest rate of 5.12%. A hypothetical 10%
fluctuation in market rates of interest would cause a change in the fair value
of the Company's investment in marketable securities at December 31, 1998 of
approximately $0.7 million, and accordingly, would not cause a material impact
on the Company's financial position, results of operations or cash flows.

At December 31, 1998, the Company's outstanding indebtedness includes $1.6
billion under the 13 1/2 % Notes, 12 1/2% Notes, 11 5/8% Notes, 10% Notes and 9
7/8% Notes and $466.4 million under the 14 1/4% Preferred Stock, 14% Preferred
Stock and 6 3/4% Preferred Securities. These instruments contain fixed annual
interest and dividend rates, respectively, and accordingly, any change in market
interest rates would have no impact on the Company's financial position, results
of operations or cash flows. Future increases in interest rates could increase
the cost of any new borrowings by the Company. The Company does not hedge
against future changes in market rates of interest.

Equity Price Risk

On February 17, 1999, the Company completed the sale of the domestic
operations of NETCOM to MindSpring, in exchange for a combination of cash and
376,116 shares of unregistered common stock of MindSpring, valued at
approximately $79.76 per share at the time of the transaction. Currently, the
Company bears some risk of market price fluctuations in its investment in
MindSpring. The common stock of MindSpring is traded on the Nasdaq National
Market and has, at March 29, 1999, a fair market value of $92.50 per share.
Although changes in the fair market value of MindSpring common stock may affect
the fair market value of the Company's investment and cause unrealized gains or
losses, such gains or losses will not be realized until the securities are sold.
In order to mitigate the risk associated with a decrease in the market value of

56

the Company's investment in MindSpring, the Company has entered into a hedging
contract. During the term of the hedging contract, a hypothetical 10%
fluctuation in the fair value of the common stock of MindSpring would not cause
a material impact on the Company's financial position, results of operations or
cash flows. The Company intends to liquidate its investment in MindSpring upon
the effectiveness of the registration of common stock of MindSpring with the
Securities and Exchange Commission, which is expected to occur in the near
future.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The consolidated financial statements of the Company appear on page F-1 of
this Annual Report. The financial statement schedule required under Regulation
S-X is filed pursuant to Item 14 of this Annual Report, and appears on page S-1
of this Annual Report.

Selected quarterly financial data required under this Item is included
under Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations.

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

None.

57

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANTS

The information required under Item 10 with respect to the Company is
incorporated by reference from the definitive Proxy Statement for the 1999
Annual Meeting of Stockholders of ICG Communications, Inc. to be filed with the
Securities and Exchange Commission not later than April 30, 1999. The Directors
and executive officers of each of Holdings-Canada and Holdings are set forth
below.

Holdings-Canada

The Directors of Holdings-Canada are:

Harry R. Herbst
H. Don Teague

The executive officers of Holdings-Canada are:

J. Shelby Bryan - President and Chief Executive Officer
Harry R. Herbst - Executive Vice President and Chief Financial Officer
H. Don Teague - Executive Vice President, General Counsel and Secretary

Holdings

The Directors of Holdings are:

J. Shelby Bryan (Chairman)
Douglas I. Falk
Harry R. Herbst
H. Don Teague

The executive officers of Holdings are:

J. Shelby Bryan - President and Chief Executive Officer
Douglas I. Falk - Executive Vice President - Telecom
Harry R. Herbst - Executive Vice President and Chief Financial Officer
H. Don Teague - Executive Vice President, General Counsel and Secretary

J. Shelby Bryan, 53, was appointed President and Chief Executive Officer of
Holdings-Canada and Holdings in May 1995. He has 19 years of experience in the
telecommunications industry, primarily in the cellular business. He co-founded
Millicom International Cellular S.A., a publicly owned corporation providing
cellular service internationally, served as its President and Chief Executive
Officer from 1985 to 1994 and has served as a Director through the present.

Douglas I. Falk, 49, has been Executive Vice President-Telecom and Director of

58

Holdings since September 1998 and was President of ICG Satellite Services, Inc.
from August 1996 to May 1998. Prior to joining the Company, Mr. Falk held
several positions in the cruise line industry, including President of Norwegian
Cruise Line, Senior Vice President - Marketing and Sales with Holland America
Lines/Westours and Executive Vice President of Royal Viking Line. Prior to his
work in the cruise line industry, Mr. Falk held executive positions with MTI
Vacations, Brown and Williamson Tobacco, Pepsico International, Glendenning
Associates and The Procter and Gamble Company.

Harry R. Herbst, 47, was appointed Executive Vice President, Chief Financial
Officer and Director of Holdings-Canada and Holdings in August 1998 and has been
a member of the Board of Directors of Holdings-Canada and Holdings since October
1995. Prior to joining the Company, Mr. Herbst was Vice President of Finance and
Strategic Planning for Gulf Canada Resources Ltd. from November 1995 to June
1998 and Vice President and Treasurer of Gulf Canada Resources Ltd. from January
to November 1995. Previously, Mr. Herbst was Vice President of Taxation for
Torch Energy Advisors Inc. from 1991 to 1994, and tax manager for Apache Corp.
from 1987 to 1990. Mr. Herbst is a certified public accountant, formerly with
Coopers & Lybrand.

H. Don Teague, 56, joined the Company as Executive Vice President, General
Counsel, Secretary and Director of Holdings-Canada and Holdings in May 1997.
Prior to this position, Mr. Teague was Senior Vice President, Administration and
Legal with Falcon Seaboard Holdings, L.P. and its predecessors from April 1994
through April 1997. From 1974 to April 1994, Mr. Teague was a partner in the law
firm of Vinson & Elkins L.L.P.

ITEM 11. EXECUTIVE COMPENSATION

The information required under Item 11 is incorporated by reference from
the definitive Proxy Statement for the 1999 Annual Meeting of Stockholders of
ICG Communications, Inc. to be filed with the Securities and Exchange Commission
not later than April 30, 1999. Neither Holdings-Canada nor Holdings pays any
form of compensation to any of their respective Directors or executive officers.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required under Item 12 is incorporated by reference from
the definitive Proxy Statement for the 1999 Annual Meeting of Stockholders of
ICG Communications, Inc. to be filed with the Securities and Exchange Commission
not later than April 30, 1999.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

None.

59

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORT ON FORM 8-K

(A) (1) Financial Statements. The following financial statements are included
in Item 8 of Part II:
Page

Independent Auditors' Report - Report of KPMG LLP . . . . . . . F-2
Independent Auditors' Report - Report of Ernst & Young LLP, as
of December 31, 1996 and 1997 and for each of the Two Years
in the Period Ended December 31, 1997 . . . . . . . . . . . . F-4
Independent Auditors' Report - Report of Ernst & Young LLP, as
of December 31, 1996 and for the Three Months Then Ended. . . F-5
Consolidated Balance Sheets, December 31, 1997 and 1998 . . . . F-6
Consolidated Statements of Operations, Fiscal Year Ended
September 30, 1996, the Three Months Ended December 31, 1995
(unaudited) and 1996, and Fiscal Years Ended December 31,
1997 and 1998 . . . . . . . . . . . . . . . . . . . . . . . . F-8
Consolidated Statements of Stockholders' Equity (Deficit),
Fiscal Year Ended September 30, 1996, the Three Months Ended
December 31, 1996, and Fiscal Years Ended December 31, 1997
and 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . F-10
Consolidated Statements of Cash Flows, Fiscal Year Ended
September 30, 1996, the Three Months Ended December 31, 1995
(unaudited) and 1996, and Fiscal Years Ended December 31,
1997 and 1998 . . . . . . . . . . . . . . . . . . . . . . . . F-11
Notes to Consolidated Financial Statements, December 31,
1997 and 1998 . . . . . . . . . . . . . . . . . . . . . . . . F-14

(2) Financial Statement Schedule. The following Financial Statement
Schedule is submitted herewith:

Independent Auditors' Report . . . . . . . . . . . . . . . . . . S-1
Schedule II: Valuation and Qualifying Accounts . . . . . . . . . S-2

(3) List of Exhibits.

(2) Plan of Acquisition, Reorganization, Arrangement, Liquidation
or Succession.

2.1: Plan of Arrangement under Section 192 of the Canada Business
Corporations Act. [Incorporated by reference to Exhibit 2.1
to Registration Statement on Form S-4 of ICG Communications,
Inc. (Commission File No. 333-4226)].

60

(3) Corporate Organization.

3.1: Certificate of Incorporation of ICG Communications, Inc.
dated April 11, 1996. [Incorporated by reference to Exhibit
3.1 to Registration Statement on Form S-4 of ICG
Communications, Inc., File No. 333-4226].
3.2: By-laws of ICG Communications, Inc. [Incorporated by
reference to Exhibit 3.2 to Registration Statement on Form
S-4 of ICG Communications, Inc., File No. 333-4226].
3.3: Agreement and Plan of Reorganization by and among ICG
Communications, Inc., ICG Canadian Acquisition, Inc., ICG
Holdings (Canada), Inc. and ICG Holdings (Canada) Co., dated
November 4, 1998.
3.4: Order of Amalgamation between ICG Holdings (Canada), Inc.
and ICG Holdings (Canada) Co., dated December 22, 1998.
3.5: Memorandum and Articles of Association of ICG Holdings
(Canada) Co. filed with the Registrar of Joint Stock
Companies, Halifax, Nova Scotia.

(4) Instruments Defining the Rights of Security Holders, Including
Indentures.

4.1: Note Purchase Agreement, dated as of July 14, 1995, among
the Registrant, IntelCom Group (U.S.A.), Inc., Morgan
Stanley Group Inc., Princes Gate Investors, L.P., Acorn
Partnership I, L.P., PGI Investments Limited, PGI
Investments Limited, PGI Sweden AB, and Gregor von Opel and
Morgan Stanley Group, Inc., as Agent for the Purchasers
[Incorporated by reference to Exhibit 4.1 to Form 8-K of
IntelCom Group Inc., dated July 18, 1995].
4.2: Warrant Agreement, dated as of July 14, 1995, among the
Registrant, the Committed Purchasers, and IntelCom Group
(U.S.A.), Inc., as Warrant Agent [Incorporated by reference
to Exhibit 4.2 to Form 8-K of IntelCom Group Inc., dated
July 18, 1995].
4.3: First Amended and Restated Articles of Incorporation of ICG
Holdings, Inc. [Incorporated by reference to Exhibit 3.1 to
Registration Statement on Form S-4 of IntelCom Group
(U.S.A.), Inc., File No. 333-04569].
4.4: Indenture, dated August 8, 1995, among IntelCom Group
(U.S.A.) Inc., IntelCom Group Inc. and Norwest Bank
Colorado, National Association [Incorporated by reference to
Exhibit 4.6 to Registration Statement on Form S-4 of
IntelCom Group (U.S.A.) Inc., File Number 33-96540].
4.5: Indenture, dated April 30, 1996, among IntelCom Group
(U.S.A.) Inc., IntelCom Group Inc. and Norwest Bank

61

Colorado, National Association [Incorporated by reference to
Exhibit 4.14 to Registration Statement on Form S-4 of
IntelCom Group (U.S.A.) Inc., File No. 333-04569].
4.6: Indenture, dated March 11, 1997, among ICG Holdings, Inc.,
ICG Communications, Inc. and Norwest Bank Colorado, National
Association [Incorporated by reference to Exhibit 4.15 to
Registration Statement on Form S-4 of ICG Communications,
Inc., File No. 333-24359].
4.7: Written Action of the Manager of ICG Funding, LLC, dated as
of September 24, 1997, with respect to the terms of the 6
3/4% Exchangeable Limited Liability Company Preferred
Securities [Incorporated by reference to Exhibit 4.8 to
Registration Statement on Form S-3 of ICG Funding, LLC, File
No. 333-40495].
4.8: Amended and Restated Limited Liability Company Agreement of
ICG Funding, LLC, dated as of September 23, 1997
[Incorporated by reference to Exhibit 4.4 to Registration
Statement on Form S-3 of ICG Funding, LLC, File No.
333-40495].
4.9: Indenture, between ICG Services, Inc. and Norwest Bank
Colorado, National Association, dated as of February 12,
1998 [Incorporated by reference to Exhibit 4.4 to ICG
Services, Inc. Registration Statement on Form S-4 File No.
333-51037].
4.10:Indenture, between ICG Services, Inc. and Norwest Bank
Colorado, National Association, dated as of April 27, 1998
[Incorporated by reference to Exhibit 4.4 to ICG Services,
Inc. Registration Statement on Form S-4 File No. 333-60653,
as amended].
4.11:Second Amended and Restated Articles of Incorporation of
ICG Holdings, Inc., dated March 10, 1997.

(9) Voting Trust Agreement.
None.

(10) Material Contracts.

10.1:Arrangement and Support Agreement dated June 27, 1996
between ICG Communications, Inc. and IntelCom Group Inc.
[Incorporated by reference to Exhibit 2.1 to Registration
Statement on Form S-4 of ICG Communications, Inc.
(Commission File No. 333-4226)].
10.2:Incentive Stock Option Plan #2 [Incorporated by reference
to Exhibit 4.1 to the Registration Statement on Form S-8 of
IntelCom Group Inc., File No. 33-86346, filed November 14,
1994].
10.3:Form of Stock Option Agreement for Incentive Stock Option
Plan #2 [Incorporated by reference to Exhibit 4.2 to the
Registration Statement on Form S-8 of IntelCom Group Inc.,
File No. 33-86346, filed November 14, 1994].
10.4:Incentive Stock Option Plan #3 [Incorporated by reference
to Exhibit 4.3 to the Registration Statement on Form S-8 of
IntelCom Group Inc., File No. 33-86346, filed November 14,
1994].

62

10.5:Form of Stock Option Agreement for Incentive Stock Option
Plan #3 [Incorporated by reference to Exhibit 4.4 to the
Registration Statement on Form S-8 of IntelCom Group Inc.,
File No. 33-86346, filed November 14, 1994].
10.6:1994 Employee Stock Option Plan [Incorporated by reference
to Exhibit 4.5 to the Registration Statement on Form S-8 of
IntelCom Group Inc., File No. 33-86346, filed November 14,
1994].
10.7:Form of Stock Option Agreement for 1994 Employee Stock
Option Plan [Incorporated by reference to Exhibit 4.6 to the
Registration Statement on Form S-8 of IntelCom Group Inc.,
File No. 33-86346, filed November 14, 1994].
10.8:Employment Agreement, dated as of May 30, 1995, between
IntelCom Group Inc. and J. Shelby Bryan [Incorporated by
reference to Exhibit 10.5 to Form 8-K of IntelCom Group
Inc., as filed on August 2, 1995].
10.9:Stock Option Agreement, dated as of May 30, 1995, between
IntelCom Group Inc. and J. Shelby Bryan [Incorporated by
reference to Exhibit 10.6 to Form 8-K of IntelCom Group
Inc., as filed on August 2, 1995].
10.10: Indemnification Agreement, dated as of May 30, 1995,
between IntelCom Group Inc. and J. Shelby Bryan
[Incorporated by reference to Exhibit 10.7 to Form 8-K of
IntelCom Group Inc., as filed on August 2, 1995].
10.11: Placement Agreement, dated as of August 3, 1995, among
IntelCom Group Inc., IntelCom Group (U.S.A.), Inc., certain
subsidiaries of IntelCom Group (U.S.A.), Inc. and Morgan
Stanley & Co. Incorporated [Incorporated by reference to
Exhibit 10.1 to Form 8-K of IntelCom Group Inc., as filed on
August 9, 1995].
10.12: Employment Agreement between IntelCom Group Inc. and James
D. Grenfell, dated November 1, 1995. [Incorporated by
reference to Exhibit 10.38 to IntelCom Group Inc.'s Annual
Report on Form 10-K/A for the fiscal year ended September
30, 1995].
10.13: Purchase and Sale Agreement, dated as of October 19, 1995,
by and among ICG Wireless Services, Inc., IntelCom Group
(U.S.A.), Inc., UpSouth Corporation and Vyvx, Inc.
[Incorporated by reference to Exhibit 10.40 to IntelCom
Group Inc.'s Annual Report on Form 10-K for the fiscal year
ended September 30, 1995].
10.14: ICG Communications, Inc., 401(k) Wrap Around Deferred
Compensation Plan. [Incorporated by reference to Exhibit
10.42 to ICG Communications, Inc.'s Annual Report on Form
10-K/A for the fiscal year ended September 30, 1996.]
10.15: ICG Communications, Inc. 1996 Employee Stock Purchase
Plan. [Incorporated by reference to the Registration
Statement on Form S-8 of ICG Communications, Inc., File No.
33-14127, filed on October 14, 1996].

10.16: Consulting Services Agreement, by and between IntelCom

63

Group Inc. and International Communications Consulting,
Inc., effective January 1, 1996 [Incorporated by reference
to Exhibit 10.44 to ICG Communications, Inc.'s Transition
Report on Form 10-K/A for the three months ended December
31, 1996].
10.17: Confidential General Release and Covenant Not to Sue, by
and between ICG Communications, Inc. and John D. Field,
dated November 5, 1996 [Incorporated by reference to Exhibit
10.45 to ICG Communications, Inc.'s Transition Report on
Form 10-K/A for the three months ended December 31, 1996].
10.18: Amendment, dated as of March 26, 1997, between ICG
Communications, Inc. and J. Shelby Bryan, to Employment
Agreement, dated as of May 30, 1995, between IntelCom Group
Inc. and J. Shelby Bryan [Incorporated by reference to
Exhibit 10 to ICG Communications, Inc.'s Quarterly Report on
Form 10-Q for the quarterly period ended March 31, 1997].
10.19: 1996 Stock Option Plan [Incorporated by reference to
Exhibit 4.6 to the Registration Statement on Form S-8 of ICG
Communications, Inc., File No. 333-25957, filed on April 28,
1997].
10.20: Amendment No. 1 to the ICG Communications, Inc. 1996 Stock
Option Plan.
10.21: Employment Agreement, dated as of April 22, 1997, between
ICG Communications, Inc. and Don Teague [Incorporated by
reference to Exhibit 10.2 to ICG Communications, Inc.'s
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1997].
10.22: Amendment No. 2 to the ICG Communications, Inc. 1996 Stock
Option Plan [Incorporated by reference to Exhibit 10.1 to
ICG Communications, Inc.'s Quarterly Report on Form 10-Q for
the quarterly period ended September 30, 1997].
10.23a: Purchase Agreement between ICG Holdings, Inc. and TriNet
Corporate Realty Trust, Inc., dated December 9, 1997.
10.23a: First Amendment to Purchase Agreement, by and between ICG
Holdings, Inc. and TriNet Essential Facilities X, Inc.,
dated January 15, 1998.
10.23c: Assignment of Purchase Agreement, by and between TriNet
Corporate Realty Trust, Inc., dated January 15, 1998.
10.23c: Commercial Lease - Net between TriNet Essential
Facilities X, Inc. and ICG Holdings, Inc., dated January 15,
1998.
10.23e: Continuing Lease Guaranty, by ICG Communications, Inc. to
TriNet Essential Facilities X, Inc., dated January 20, 1998.
10.23f: Continuing Lease Guaranty, by ICG Holdings (Canada), Inc.
to TriNet Essential Facilities X, Inc., dated January 20,
1998.
10.24: Agreement and Plan of Merger, dated October 12, 1997, by
and among ICG Communications, Inc., ICG Acquisition, Inc.
and NETCOM On-Line Communication Services, Inc.
[Incorporated by reference to Exhibit 2.1 to Form 8-K, dated
January 21, 1998].
10.25: Amendment to Agreement and Plan of Merger, dated December

64

15, 1997, by and among ICG Communications, Inc., ICG
Acquisition, Inc. and NETCOM On-Line Communication Services,
Inc. [Incorporated by reference to Exhibit 2.2 to Form 8-K,
dated January 21, 1998].
10.26: Employment Agreement, dated July 1, 1998, between ICG
Communications, Inc. and Harry R. Herbst [Incorporated by
reference to Exhibit 10.1 to ICG Communications, Inc.'s
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1998].
10.27: Employment Agreement, dated September 23, 1998, between
ICG Communications, Inc. and Douglas I. Falk [Incorporated
by reference to Exhibit 10.1 to ICG Communications, Inc.'s
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1998].
10.28: Asset Purchase Agreement by and between MindSpring
Enterprises, Inc. and NETCOM On-Line Communication Services,
Inc., dated as of January 5, 1999 [Incorporated by reference
to Exhibit 10.1 to ICG Communications, Inc.'s Current Report
on Form 8-K, dated March 4, 1999].
10.29: ICG Communications, Inc. 1998 Stock Option Plan.
10.30: Form of Stock Option Agreement for 1998 Stock Option Plan.
10.31: Amendment No. 1 to the ICG Communications, Inc. 1998 Stock
Option Plan, dated December 15, 1998.
10.32: Form of Agreement regarding Gross-Up Payments, by and
between ICG Communications, Inc. and each of J. Shelby
Bryan, Harry R. Herbst, Douglas I. Falk and H. Don Teague,
dated December 16, 1998.

(11) Statement re Computation of per Share Earnings.
Not Applicable

(12) Statement re Computation of Ratios.
Not Applicable

(13) Annual Report to Security Holders.
Not Applicable

(21) Subsidiaries of the Registrant.

21.1: Subsidiaries of the Registrant.

(22) Published Report re Matters Submitted to Vote of Security Holders
Not Applicable

(23) Consents.

23.1: Consent of KPMG LLP.
23.2: Consent of Ernst & Young LLP.

65

(24) Power of Attorney.
Not Applicable

(27) Financial Data Schedule.

27.1:Financial Data Schedule of ICG Communications, Inc. for the
Fiscal Year Ended December 31, 1998.

(B) Report on Form 8-K. The following report on Form 8-K was filed by the
Registrants during the fiscal quarter ended December 31, 1998:

ICG Communications, Inc. (i) Current Report on Form 8-K dated
ICG Holdings (Canada), Inc. November 4, 1998, regarding the
ICG Holdings, Inc.: announcement of the Company's earnings
information and results of operations for
the quarterended September 30, 1998.

(C) Exhibits. The exhibits required by this Item are listed under Item 14(A)(3).

(D) Financial Statement Schedule. The financial statement schedule required
by this Item is listed under Item 14(A)(2).

66

FINANCIAL STATEMENTS

Page
Independent Auditors' Report - Report of KPMG LLP . . . . . . . . . . . F-2

Independent Auditors' Report - Report of Ernst & Young LLP, as of
December 31, 1996 and 1997 and for each of the Two Years in the
Period Ended December 31, 1997 . . . . . . . . . . . . . . . . . . . . F-4

Independent Auditors' Report - Report of Ernst & Young LLP, as of
December 31, 1996 and for the Three Months Then Ended. . . . . . . . . F-5

Consolidated Balance Sheets, December 31, 1997 and 1998 . . . . . . . . F-6

Consolidated Statements of Operations, Fiscal Year Ended September 30,
1996, the Three Months Ended December 31, 1995 (unaudited) and 1996,
and Fiscal Years Ended December 31, 1997 and 1998. . . . . . . . . . . F-8

Consolidated Statements of Stockholders' Equity (Deficit), Fiscal Year
Ended September 30, 1996, the Three Months Ended December 31, 1996,
and Fiscal Years Ended December 31, 1997 and 1998 . . . . . . . . . . F-10

Consolidated Statements of Cash Flows, Fiscal Year Ended September 30,
1996, the Three Months Ended December 31, 1995 (unaudited) and 1996,
and Fiscal Years Ended December 31, 1997 and 1998 . . . . . . . . . . F-11

Notes to Consolidated Financial Statements, December 31, 1997 and 1998 . F-14

F-1

Independent Auditors' Report - Report of KPMG LLP

The Board of Directors and Stockholders
ICG Communications, Inc.:

We have audited the accompanying consolidated balance sheets of ICG
Communications, Inc. and subsidiaries (the "Company") as of December 31, 1997
and 1998 and the related consolidated statements of operations, stockholders'
equity (deficit), and cash flows for the fiscal year ended September 30, 1996,
the three-month period ended December 31, 1996, and the fiscal years ended
December 31, 1997 and 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We did
not audit the consolidated financial statements of NETCOM On-Line Communication
Services, Inc. ("NETCOM"), a discontinued wholly owned subsidiary of the
Company, as of December 31, 1997 or for the fiscal year ended December 31, 1996,
the three-month period ended December 31, 1996, or the fiscal year ended
December 31, 1997, whose total assets constitute 11.7 percent at December 31,
1997, and whose loss from operations constitutes 100.5 percent in fiscal 1996,
96.0 percent in the three months ended December 31, 1996, and 83.8 percent in
fiscal 1997 of the consolidated loss from discontinued operations. Those
consolidated financial statements were audited by other auditors whose reports
have been furnished to us, and our opinion, insofar as it relates to the amounts
included for NETCOM, is based solely on the reports of the other auditors.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reports of the other auditors provide a
reasonable basis for our opinion.

In our opinion, based on our audits and the reports of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of ICG Communications, Inc. and
subsidiaries as of December 31, 1997 and 1998, and the results of their
operations and their cash flows for the fiscal year ended September 30, 1996,
the three-month period ended December 31, 1996, and the fiscal years ended
December 31, 1997 and 1998, in conformity with generally accepted accounting
principles.

F-2

As explained in note 2 to the consolidated financial statements, during fiscal
year ended September 30, 1996, the Company changed its method of accounting for
long-term telecom services contracts.

KPMG LLP

Denver, Colorado
February 15, 1999

F-3

Independent Auditors' Report - Report of Ernst & Young LLP

The Board of Directors and Stockholders
NETCOM On-Line Communication Services, Inc.

We have audited the consolidated balance sheet of NETCOM On-Line Communication
Services, Inc. as of December 31, 1997, and the related consolidated statements
of operations, stockholders' equity and cash flows for each of the two years in
the period ended December 31, 1997 (not presented separately herein). These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of NETCOM
On-Line Communication Services, Inc. at December 31, 1997 and the consolidated
results of its operations and its cash flows for each of the two years in the
period ended December 31, 1997, in conformity with generally accepted accounting
principles.

Ernst & Young LLP

San Jose, California
February 13, 1998

F-4

Independent Auditors' Report - Report of Ernst & Young LLP

The Board of Directors and Stockholders
NETCOM On-Line Communication Services, Inc.

We have audited the consolidated balance sheet of NETCOM On-Line
Communication Services, Inc. as of December 31, 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the three months then ended (not presented separately herein). These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
NETCOM On-Line Communication Services, Inc. at December 31, 1996 and the
consolidated results of its operations and its cash flows for the three months
then ended, in conformity with generally accepted accounting principles.

Ernst & Young LLP

San Jose, California
April 16, 1998

F-5

ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

Consolidated Balance Sheets
December 31, 1997 and 1998

- ------------------------------------------------------------------------------

December 31,
------------------------------------------------
Assets 1997 1998
- ------ ------------------------ ----------------------
(in thousands)

Current assets:
Cash and cash equivalents $ 118,569 210,831
Short-term investments available for sale (note 6) 112,281 52,000
Receivables:
Trade, net of allowance of $5,254 and $15,473 at
December 31, 1997 and 1998, respectively (note 14) 57,163 132,920
Revenue earned, but unbilled 8,599 11,063
Due from affiliate (note 13) 9,384 -
Other (note 13) 1,696 1,156
------------------------ ----------------------
76,842 145,139
------------------------ ----------------------

Inventory 3,901 2,821
Prepaid expenses and deposits 10,495 12,036
Net current assets of discontinued operations (note 3) 38,331 -
------------------------ ----------------------

Total current assets 360,419 422,827
------------------------ ----------------------

Property and equipment (notes 7, 9 and 10) 737,424 1,112,067
Less accumulated depreciation (105,970) (177,933)
------------------------ ----------------------
Net property and equipment 631,454 934,134
------------------------ ----------------------

Long-term notes receivable from affiliate and others, net (note 13) 10,375 -
Restricted cash (note 11) 24,649 16,912
Other assets, net of accumulated amortization:
Goodwill (note 4) 75,673 130,503
Deferred financing costs (note 10) 23,196 35,958
Transmission and other licenses 6,031 5,659
Deposits and other (note 8) 9,066 25,189
------------------------ ----------------------
113,966 197,309
------------------------ ----------------------

Net non-current assets of discontinued operations (note 3) 76,577 54,243
------------------------ ----------------------

Total assets (note 15) $ 1,217,440 1,625,425
======================== ======================
(Continued)

F-6

ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

Consolidated Balance Sheets, Continued

- ------------------------------------------------------------------------------

December 31,
----------------------------------------------
Liabilities and Stockholders' Deficit 1997 1998
- ------------------------------------- ------------------------ ---------------------
(in thousands)

Current liabilities:
Accounts payable $ 27,458 33,781
Accrued liabilities 56,817 55,816
Deferred revenue 5,049 9,892
Current portion of capital lease obligations (notes 9 and 14) 5,637 5,086
Current portion of long-term debt (note 10) 1,784 46
Net current liabilities of discontinued operations
(note 3) - 23,272
------------------------ ---------------------
Total current liabilities 96,745 127,893
------------------------ ---------------------

Capital lease obligations, less current portion (notes 9 and 14) 66,939 63,359
Long-term debt, net of discount, less current portion (note 10) 890,568 1,598,998
------------------------ ---------------------

Total liabilities 1,054,252 1,790,250
------------------------ ---------------------

Redeemable preferred stock of subsidiary ($301.2 million and
$346.2 million liquidation value at December 31, 1997 and 1998,
respectively) (note 11) 292,442 338,310

Company-obligated mandatorily redeemable preferred securities
of subsidiary limited liability company which holds solely
Company preferred stock ($133.4 million liquidation value at
December 31, 1997 and 1998) (note 11) 127,729 128,042

Stockholders' deficit (note 12):
Common stock, $.01 par value, 100,000,000 shares authorized;
43,974,659 and 46,360,185 shares issued and outstanding at
December 31, 1997 and 1998, respectively (notes 1 and 12) 749 584
Additional paid-in capital 533,541 577,820
Accumulated deficit (791,417) (1,209,462)
Accumulated other comprehensive income (loss) 144 (119)
------------------------ ---------------------
Total stockholders' deficit (256,983) (631,177)
------------------------ ---------------------

Commitments and contingencies (notes 10, 11, 13 and 14)

Total liabilities and stockholders' deficit $ 1,217,440 1,625,425
======================== =====================

See accompanying notes to consolidated financial statements.

F-7

ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

Consolidated Statements of Operations
Fiscal Year Ended September 30, 1996,
the Three Months Ended December 31, 1995 (unaudited) and 1996,
and Fiscal Years Ended December 31, 1997 and 1998

- ------------------------------------------------------------------------------

Fiscal year
ended Three months ended Fiscal years ended
September 30, December 31, December 31,
-------------------------------- ------------------------------
1996 1995 1996 1997 1998
-------------- --------------- ---------------- ---------------- -------------
(unaudited)
(in thousands, except per share data)

Revenue (notes 2, 14 and 15) $ 154,143 34,544 49,477 245,022 397,619

Operating costs and expenses:
Operating costs 121,983 26,572 42,485 217,927 254,689
Selling, general and administrative expenses 75,646 18,248 23,868 148,254 183,683
Depreciation and amortization (notes 7 and
15) 30,030 4,833 9,691 56,501 101,545
Provision for impairment of long-lived
assets (note 16) 9,994 - - 9,261 -
Net loss (gain) on disposal of long-lived
assets note 5) 5,128 1,030 (772) 243 4,055
Restructuring costs (note 17) - - - - 2,339
-------------- --------------- ---------------- ---------------- -------------
Total operating costs and expenses 242,781 50,683 75,272 432,186 546,311
-------------- --------------- ---------------- ---------------- -------------

Operating loss (88,638) (16,139) (25,795) (187,164) (148,692)

Other income (expense):
Interest expense (notes 10 and 15) (85,714) (15,215) (24,454) (117,520) (170,127)
Interest income 19,212 3,750 5,962 21,907 28,414
Other (expense) income, net (3,627) 7 (64) (358) (4,652)
-------------- --------------- ---------------- ---------------- -------------
(70,129) (11,458) (18,556) (95,971) (146,365)
-------------- --------------- ---------------- ---------------- -------------
Loss from continuing operations before income
taxes, preferred dividends, share of losses
and cumulative effect of change in accounting (158,767) (27,597) (44,351) (283,135) (295,057)
Income tax benefit (expense) (note 18) 5,131 - - - (90)
-------------- --------------- ---------------- ---------------- -------------
Loss from continuing operations before preferred
dividends, share of losses and cumulative
effect of change in accounting (153,636) (27,597) (44,351) (283,135) (295,147)
Accretion and preferred dividends on preferred
securities of subsidiaries, net of minority
interest in share of losses (note 11) (25,409) (3,294) (4,988) (38,117) (55,183)
Share of losses of joint venture (1,814) (228) - - -
-------------- --------------- ---------------- ---------------- -------------
Loss from continuing operations before
cumulative effect of change in accounting $ (180,859) (31,119) (49,339) (321,252) (350,330)
-------------- --------------- ---------------- ---------------- -------------
(Continued)

F-8

ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

Consolidated Statements of Operations, Continued

- ------------------------------------------------------------------------------

Fiscal year Three months ended Fiscal years ended
ended December 31, December 31,
September 30, -------------------------------- --------------------------------
1996 1995 1996 1997 1998
---------------- --------------- ---------------- ---------------- ---------------
(unaudited)
(in thousands, except per share data)

Discontinued operations (notes 1 and 3):
Loss from discontinued operations $ (44,060) (5,516) (11,974) (39,483) (65,938)
Loss on disposal of discontinued operations - - - - (1,777)
---------------- --------------- ---------------- ---------------- ---------------
(44,060) (5,516) (11,974) (39,483) (67,715)
---------------- --------------- ---------------- ---------------- ---------------
Loss before cumulative effect of change in
accounting (224,919) (36,635) (61,313) (360,735) (418,045)
---------------- --------------- ---------------- ---------------- ---------------
Cumulative effect of change in accounting
(note 2) (3,453) (3,453) - - -
---------------- --------------- ---------------- ---------------- ---------------

Net loss $ (228,372) (40,088) (61,313) (360,735) (418,045)
================ =============== ================ ================ ===============

Other comprehensive income (loss):
Foreign currency translation adjustment 699 (28) 544 (527) (263)
Unrealized gain (loss) on short-term
investments available for sale (note 6) 540 - 540 (540) -
---------------- --------------- ---------------- ---------------- ---------------
Other comprehensive income (loss) 1,239 (28) 1,084 (1,067) (263)
---------------- --------------- ---------------- ---------------- ---------------

Comprehensive loss $ (227,133) (40,116) (60,229) (361,802) (418,308)
================ =============== ================ ================ ===============

Loss per share - basic and diluted:
Continuing operations before cumulative
effect of change in accounting $ (4.90) (0.96) (1.18) (7.56) (7.75)
Discontinued operations (1.20) (0.17) (0.29) (0.93) (1.50)
Cumulative effect of change in accounting (0.09) (0.11) - - -
---------------- --------------- ---------------- ---------------- ---------------

Net loss per share - basic and diluted $ (6.19) (1.24) (1.47) (8.49) (9.25)
================ =============== ================ ================ ===============

Weighted average number of shares
outstanding - basic and diluted 36,875 32,343 41,760 42,508 45,194
================ =============== ================ ================ ===============

See accompanying notes to consolidated financial statements.

F-9

ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

Consolidated Statements of Stockholders' Equity (Deficit)
Fiscal Year Ended September 30, 1996, the Three Months Ended December 31, 1996,
and Fiscal Years Ended December 31, 1997 and 1998

- -------------------------------------------------------------------------------

Accumulated Total
Common stock Additional other stockholders'
---------------------------- paid-in Accumulated comprehensive equity
Shares Amount capital deficit (loss) income (deficit)
-------------- -------------- ------------ ------------- --------------- --------------
(in thousands)

Balances at October 1, 1995 34,565 $ 190,849 229,667 (152,487) (28) 268,001
Shares issued for cash in connection
with the exercise of options and
warrants (note 12) 1,983 1,747 2,498 - - 4,245
Shares issued as repayment of debt
and related accrued interest 130 687 - - - 687
Shares issued in connection with
business combinations (note 4) 64 749 - - - 749
Conversion of ICG Holdings (Canada),
Inc. preferred shares 496 3,780 - - - 3,780
Shares issued as contribution to
401(k) plan (note 19) 87 856 300 - - 1,156
Shares issued upon conversion of
subordinated notes 4,413 76,336 - - - 76,336
Repurchase of warrants - - (2,671) - - (2,671)
Compensation expense related to
issuance of common stock options - - 53 - - 53
Exchange of ICG Holdings (Canada),
Inc. common shares for ICG common
stock - (248,682) 248,682 - - -
Unrealized gains on short-term
investmentsavailable for sale - - - - 540 540
Cumulative foreign currency
translation adjustment - - - - 699 699
Net loss - - - (228,372) - (228,372)
-------------- -------------- ------------ ------------- --------------- --------------
Balances at September 30, 1996 41,738 26,322 478,529 (380,859) 1,211 125,203
Shares issued for cash in connection
with the exercise of options
and warrants (note 12) 132 1,800 284 - - 2,084
Shares issued in connection with
business combination (note 4) 18 - 350 - - 350
Shares issued as contribution to
401(k) plan (note 19) 19 - 480 - - 480
Shares issued upon conversion of
subordinated notes 23 417 - - - 417
Exchange of ICG Holdings (Canada),
Inc. common shares for ICG common
stock - (20,350) 20,350 - - -
Net loss - - - (61,313) - (61,313)
Net loss of NETCOM for the three
months ended December 31, 1996 (note 2) - - - 11,490 - 11,490
------------- -------------- -------------- ------------- --------------- --------------
Balances at December 31, 1996 41,930 8,189 499,993 (430,682) 1,211 78,711
Shares issued for cash in connection
with the exercise of options
and warrants (note 12) 938 5 4,111 - - 4,116
Shares issued in connection with
business combination (note 4) 687 7 15,953 - - 15,960
Shares issued for cash in connection
with employee stock purchase
plan (note 12) 240 2 3,020 - - 3,022
Shares issued as contribution to
401(k) plan (note 19) 179 2 3,008 - - 3,010
Exchange of ICG Holdings (Canada),
Inc. common shares for ICG common
stock - (7,456) 7,456 - - -
Reversal of unrealized gains on
short-term investments available for
sale - - - - (540) (540)
Cumulative foreign currency translation
adjustment - - - - (527) (527)
Net loss - - - (360,735) - (360,735)
------------- ------------- ------------- -------------- --------------- --------------
Balances at December 31, 1997 43,974 749 533,541 (791,417) 144 (256,983)
Shares issued for cash by subsidiary,
net of selling costs 127 1 3,384 - - 3,385
Shares issued for cash in connection
with the exercise of options
and warrants (note 12) 1,519 15 19,268 - - 19,283
Shares issued in connection with
business combinations (note 4) 502 5 15,527 - - 15,532
Shares issued for cash in connection
with the employee stock
purchase plan (note 12) 111 1 2,249 - - 2,250
Shares issued as contribution to
401(k) plan (note 19) 127 2 3,662 - - 3,664
Exchange of ICG Holdings (Canada),
Inc. common shares for ICG common
stock - (189) 189 - - -
Cumulative foreign currency
translation adjustment - - - - (263) (263)
Net loss - - - (418,045) - (418,045)
------------- ------------- ------------- -------------- --------------- --------------
Balances at December 31, 1998 46,360 $ 584 577,820 (1,209,462) (119) (631,177)
============= ============= ============= ============== =============== ==============

See accompanying notes to consolidated financial statements.

F-10

ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

Consolidated Statements of Cash Flows
Fiscal Year Ended September 30, 1996,
the Three Months Ended December 31, 1995 (unaudited) and 1996,
and Fiscal Years Ended December 31, 1997 and 1998

- ------------------------------------------------------------------------------

Fiscal year Three months ended Fiscal years ended
ended December 31, December 31,
September 30, ---------------------------- ----------------------------
1996 1995 1996 1997 1998
--------------- ------------- ------------- ------------- --------------
(unaudited)
(in thousands)

Cash flows from operating activities:
Net loss $ (228,372) (40,088) (61,313) (360,735) (418,045)
Loss from discontinued operations 44,060 5,516 11,974 39,483 67,715
Adjustments to reconcile net loss to net cash used by
operating activities of continuing operations:
Cumulative effect of change in accounting 3,453 3,453 - - -
Share of losses of joint venture 1,814 228 - - -
Accretion and preferred dividends on preferred
securities of subsidiaries, net of minority
interest in share of losses 24,383 2,268 4,988 37,002 55,183
Depreciation and amortization 30,030 4,833 9,691 56,501 101,545
Provision for uncollectible accounts 1,531 977 914 3,985 12,031
Compensation expense related to issuance of common
stock options 53 14 - - -
Interest expense deferred and included in long-term
debt, net of amounts capitalized on assets
under construction 63,951 12,004 22,087 102,947 152,601
Interest expense deferred and included in capital
lease obligations 4,416 - 1,716 6,345 5,637
Amortization of deferred financing costs included
in interest expense 2,573 527 612 2,514 4,478
Write-off of non-operating assets 2,650 - - 200 250
Contribution to 401(k) plan through issuance of
common shares 1,156 405 480 3,010 3,664
Deferred income tax benefit (5,329) - - - -
Provision for impairment of long-lived assets 9,994 - - 9,261 -
Net loss (gain) on disposal of long-lived assets 5,128 1,030 (772) 243 4,055
Change in operating assets and liabilities,
excluding the effects of business
combinations, dispositions and non-cash
transactions:
Receivables (14,150) (3,865) (8,632) (28,891) (96,659)
Inventory (1,200) (272) 361 (2,822) 1,198
Prepaid expenses and deposits (2,938) (459) (901) (5,405) (1,492)
Accounts payable and accrued liabilities 16,244 7,944 9,784 19,541 (2,452)
Deferred revenue 1,454 779 2,575 (370) 4,933
--------------- ------------- ------------- ------------- --------------
Net cash used by operating activities of
continuing operations $ (39,099) (4,706) (6,436) (117,191) (105,358)
--------------- ------------- ------------- ------------- --------------
(Continued)

F-11

ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

Consolidated Statements of Cash Flows, Continued

- ------------------------------------------------------------------------------

Fiscal year Three months ended Fiscal years ended
ended December 31, December 31,
September 30, --------------------------- --------------------------
1996 1995 1996 1997 1998
--------------- ------------ ------------ ------------ ------------
(unaudited)
(in thousands)

Cash flows from investing activities:
Decrease (increase) in notes receivable from affiliate
and others $ 4 (1,263) 133 (9,552) (4,880)
Advances to affiliates (109) (15) - - -
Investment in and advances to joint venture (4,308) - - - -
Payments for business acquisitions, net of cash acquired (8,441) - - (45,861) (67,841)
Acquisition of property, equipment and other assets (121,905) (26,798) (50,818) (268,796) (367,519)
Payments for construction of corporate headquarters (1,501) - (7,945) (29,432) (4,944)
Proceeds from disposition of property, equipment and
other assets 21,593 21,146 2,057 15,125 386
Proceeds from sale of subsidiary, net of selling costs
and cash included in sale - - - - 6,874
Proceeds from sale of corporate headquarters, net of
selling and other costs - - - - 30,283
(Purchase) sale of short-term investments available for
sale (6,832) (4,979) (25,769) (65,580) 60,281
(Increase) decrease in restricted cash (13,333) (13,333) - (25,416) 7,737
Purchase of minority interest in subsidiaries - - - - (9,459)
--------------- ------------ ------------ ------------ ------------
Net cash used by investing activities of continuing
operations (134,832) (25,242) (82,342) (429,512) (349,082)
--------------- ------------ ------------ ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of common stock:
Sale by subsidiary - - - - 3,385
Business combination - - - 15,960 -
Exercise of options and warrants 1,894 101 2,084 4,116 19,283
Employee stock purchase plan - - - 1,319 2,250
Proceeds from issuance of redeemable preferred
securities of subsidiaries, net of issuance costs 144,000 - - 223,628 -
Payments of preferred dividends - - - (1,240) (8,927)
Redemption of preferred shares (5,570) (5,570) - - -
Repurchase of redeemable preferred stock of subsidiary
and payment of accrued dividend (32,629) - - - -
Repurchase of redeemable warrants (2,671) - - - -
Proceeds from issuance of short-term debt 17,500 17,500 - - -
Principal payments on short-term debt (21,192) (3,692) - - -
Proceeds from issuance of long-term debt 300,034 - - 99,908 550,574
Deferred long-term debt issuance costs (11,915) - - (3,554) (17,591)
Principal payments on capital lease obligations (16,720) (2,991) (3,691) (30,403) (11,195)
Principal payments on long-term debt (16,920) (13,761) (279) (1,598) (6,864)
--------------- ------------ ------------ ------------ ------------
Net cash provided (used) by financing activities of
continuing operations 355,811 (8,413) (1,886) 308,136 530,915
--------------- ------------ ------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents
of continuing operations 181,880 (38,361) (90,664) (238,567) 76,475
Net cash (used) provided by discontinued operations (728) (359) (602) (2,154) 15,787
Cash and cash equivalents, beginning of period 269,404 269,404 450,556 359,290 118,569
--------------- ------------ ------------ ------------ ------------
Cash and cash equivalents, end of period $ 450,556 230,684 359,290 118,569 210,831
=============== ============ ============ ============ ============
(Continued)

F-12

ICG COMMUNICATIONS, INC.
ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

Consolidated Statements of Cash Flows, Continued

- ------------------------------------------------------------------------------

Fiscal year Three months ended Fiscal years ended
ended December 31, December 31,
September 30, -------------------------- --------------------------
1996 1995 1996 1997 1998
----------------- ------------ ------------ ------------ -----------
(unaudited)
(in thousands)

Supplemental disclosure of cash flows information
of continuing operations:
Cash paid for interest $ 14,774 2,684 39 5,714 7,411
================= ============ ============ ============ ==========
Cash paid for income taxes $ - - - - 90
================= ============ ============ ============ ==========

Supplemental schedule of non-cash investing and
financing activities of continuing operations:
Common stock issued in connection with business
combinations, repayment of debt or conversion of
liabilities to equity $ 77,772 - 350 - 15,532
================= ============ ============ ============ ==========
Assets acquired under capital leases $ 55,030 84 19,479 - 1,427
================= ============ ============ ============ ==========

See accompanying notes to consolidated financial statements.

F-13

ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements
December 31, 1997 and 1998
- --------------------------------------------------------------------==--------

(1) Organization and Nature of Business

ICG Communications, Inc., a Delaware corporation ("ICG"), was incorporated
on April 11, 1996, for the purpose of becoming the new publicly-traded U.S.
parent company of ICG Holdings (Canada), Inc., a Canadian federal
corporation ("Holdings-Canada"), ICG Holdings, Inc., a Colorado corporation
("Holdings"), and its subsidiaries. On September 17, 1997, ICG formed a new
special purpose entity, ICG Funding, LLC, a Delaware limited liability
company and wholly owned subsidiary of ICG ("ICG Funding").

On January 21, 1998, ICG completed a merger with NETCOM On-Line
Communication Services, Inc. ("NETCOM"). At the effective time of the
merger, each outstanding share of NETCOM common stock, $.01 par value, was
automatically converted into shares of ICG common stock, $.01 par value
("ICG Common Stock"), at an exchange ratio of 0.8628 shares of ICG Common
Stock per NETCOM common share. The Company issued approximately 10.2
million shares of ICG Common Stock in connection with the merger, valued at
approximately $284.9 million on the date of the merger. The business
combination was accounted for as a pooling of interests. Effective November
3, 1998, the Company's board of directors adopted a formal plan to dispose
of the operations of NETCOM (see note 3) and, accordingly, the Company's
consolidated financial statements reflect the operations and net assets of
NETCOM as discontinued for all periods presented. The Company completed the
sales of the operations of NETCOM on February 17 and March 16, 1999. In
conjunction with the sales, the legal name of the NETCOM subsidiary was
changed to ICG PST, Inc. ("PST").

On January 23, 1998, ICG formed ICG Services, Inc., a Delaware corporation
and wholly owned subsidiary of ICG ("ICG Services"). ICG Services is the
parent company of PST (formerly NETCOM) and ICG Equipment, Inc., a Colorado
corporation formed on January 23, 1998 to purchase or lease
telecommunications equipment, software, network capacity and related
services, and in turn, lease such assets to Holdings' subsidiaries. ICG and
its subsidiaries, including ICG Services and its subsidiaries, are
collectively referred to as the "Company."

Pursuant to a Plan of Arrangement (the "Arrangement"), which was approved
by Holdings-Canada shareholders on July 30, 1996, and by the Ontario Court
of Justice on August 2, 1996, each shareholder of Holdings-Canada exchanged
their common shares on a one-for-one basis for either (i) shares of ICG
Common Stock, or (ii) Class A common shares of Holdings-Canada (the "Class
A Shares"), which were exchangeable,

F-14

ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements
- ------------------------------------------------------------------------------

(1) Organization and Nature of Business (continued)

prior to January 1, 1999, at any time on a one-for-one basis into shares of
ICG Common Stock. On August 2, 1996, 28,795,132, or approximately 98%, of
the total issued and outstanding common shares of Holdings-Canada were
exchanged for an equal number of shares of Common Stock of ICG. In
accordance with generally accepted accounting principles, the Arrangement
was accounted for in a manner similar to a pooling of interests since ICG
and Holdings-Canada had common shareholders, and the number of shares
outstanding and the weighted average number of shares outstanding reflected
the equivalent shares outstanding for the combined companies. On November
25, 1998, the shareholders of Holdings-Canada approved the Plan of
Reorganization (the "Reorganization") among ICG, Holdings-Canada, ICG
Canadian Acquisition, Inc., a newly formed Delaware corporation and wholly
owned subsidiary of ICG ("ICG Acquisition"), and ICG Holdings (Canada) Co.,
a newly formed Nova Scotia unlimited liability company and wholly owned
subsidiary of ICG Acquisition. Pursuant to the Reorganization, on December
1, 1998, ICG Acquisition acquired 100% of the issued and outstanding Class
A Shares of Holdings-Canada, including those Holdings-Canada common shares
owned by ICG, in exchange solely for voting common stock of ICG Acquisition
which was contributed to ICG Acquisition as part of the Reorganization. On
January 1, 1999, Holdings-Canada merged with and into ICG Holdings (Canada)
Co. The merger and Reorganization was accounted for in a manner similar to
a pooling of interests since the transactions involved entities under
common control.

The Company's principal business activity is telecommunications services,
including Telecom Services, Network Services and Satellite Services.
Telecom Services consists primarily of the Company's competitive local
exchange carrier operations which provide services to business end users,
Internet service providers ("ISPs") and long distance carriers and
resellers. Network Services supplies information technology services and
selected networking products, focusing on network design, installation,
maintenance and support for a variety of end users, including Fortune 1000
firms and other large businesses and telecommunications companies.
Satellite Services consists of satellite voice, data and video services
provided to major cruise ship lines, the U.S. Navy, the offshore oil and
gas industry and integrated communications providers.

F-15

ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued
- -------------------------------------------------------------------------------

(2) Summary of Significant Accounting Policies

(a) Basis of Presentation

The accompanying consolidated financial statements give retroactive
effect to the merger of ICG and NETCOM on January 21, 1998, which was
accounted for as a pooling of interests, and include the accounts of
NETCOM and its subsidiaries as of the end of and for the periods
presented. Effective November 3, 1998, the Company's board of
directors adopted a formal plan to dispose of the operations of NETCOM
(see note 3) and, accordingly, the accompanying consolidated financial
statements reflect the operations of NETCOM as discontinued for all
periods presented. Financial information prior to the completion of
the Arrangement on August 2, 1996 represents the combined financial
position and results of operations of NETCOM as well as
Holdings-Canada and Holdings, which are considered to be predecessor
entities to ICG.

All significant intercompany accounts and transactions have been
eliminated in consolidation.

(b) Fiscal Year Ends of ICG and NETCOM

The Company changed its fiscal year end to December 31 from September
30, effective January 1, 1997. References to fiscal 1996, 1997 and
1998 relate to the years ended September 30, 1996 and December 31,
1997 and 1998, respectively.

Unaudited consolidated statements of operations and cash flows for the
three months ended December 31, 1995 have been included in the
accompanying consolidated financial statements for comparative
purposes.

Prior to the merger, NETCOM's consolidated financial statements were
prepared using a year end of December 31. Accordingly, the
consolidated statements of operations for fiscal 1996 reflect the
combination of NETCOM's results of operations for the year ended
December 31, 1996 with ICG's results of operations for the year ended
September 30, 1996. Consequently, NETCOM's results of operations for
the three months ended December 31, 1996 have been combined with ICG's
results of operations for the same period in the accompanying
consolidated statement of operations, although they have been
presented as discontinued (see note 3). The

F-16

ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------

(2) Summary of Significant Accounting Policies (continued)

net loss of NETCOM for the three months ended December 31, 1996 has
been eliminated in the consolidated statement of stockholders' equity
(deficit).

(c) Cash Equivalents and Short-term Investments Available for Sale

The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. The Company
invests primarily in high grade short-term investments which consist
of money market instruments, commercial paper, certificates of
deposit, government obligations and corporate bonds, all of which are
considered to be available for sale and generally have maturities of
one year or less. The Company's short-term investment objectives are
safety, liquidity and yield, in that order. The Company carries all
cash equivalents at cost, which approximates fair value. Short-term
investments available for sale are carried at amortized cost, which
approximates fair market value, with unrealized gains and losses, net
of tax, reported as a separate component of stockholders' equity
(deficit). Realized gains and losses and declines in value judged to
be other than temporary are included in the statement of operations.

(d) Inventory

Inventory, consisting of satellite systems equipment and equipment to
be utilized in the installation of communications systems, services
and networks for customers, is recorded at the lower of cost or
market, using the first-in, first-out method of accounting for cost.

(e) Investments

Investments representing an interest of 20% or more, but less than 50%
are accounted for using the equity method of accounting, under which
the Company's share of earnings or losses are reflected in operations
and dividends are credited against the investment when received.
Losses recognized in excess of the Company's investment due to
additional investment or financing requirements, or guarantees, are
recorded as a liability in the consolidated financial statements.
Investments of less than a 20% equity interest are accounted for using
the cost method, unless the Company exercises significant influence
and/or control over the operations of the

F-17

ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------

(2) Summary of Significant Accounting Policies (continued)

investee company, in which case the equity method is used. As of
December 31, 1998, the Company held no equity interests in investee
companies of 50% or less.

(f) Property and Equipment

Property and equipment are stated at cost. Costs of construction are
capitalized, including interest costs related to construction.
Equipment held under capital leases is stated at the lower of the fair
value of the asset or the net present value of the minimum lease
payments at the inception of the lease. For equipment held under
capital leases, depreciation is provided using the straight-line
method over the estimated useful lives of the assets owned, or the
related lease term, whichever is shorter.

Estimated useful lives of major categories of property and equipment
are as follows:

Furniture, fixtures and office equipment 3 to 7 years
Machinery and equipment 3 to 8 years
Fiber optic equipment 8 years
Switch equipment 10 years
Fiber optic network 20 years
Buildings and improvements 31.5 years

(g) Capitalized Labor Costs

Also included in property and equipment are capitalized labor and
other costs associated with network development, service installation
and internal-use software development.

The Company capitalizes costs of direct labor and other employee
benefits associated with the development, installation and expansion
of the Company's networks. Depreciation begins in the period the
network is substantially complete and available for use and is
recorded on a straight-line basis over the estimated useful life of
the equipment or network, ranging from 8 to 20 years.

F-18

ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------

(2) Summary of Significant Accounting Policies (continued)

The Company capitalizes costs of direct labor and other employee
benefits associated with installing and provisioning local access
lines for new customers and providing new services to existing
customers, since these costs are directly associated with
multi-period, contractual, revenue-producing activities. Direct labor
costs are capitalized only when directly related to the provisioning
of customer services with multi-period contracts. Capitalization
begins upon the acceptance of the customer order and continues until
the installation is complete and the service is operational.
Capitalized service installation costs are depreciated on a
straight-line basis over 2 years, the average customer contract term.

The Company capitalizes costs of direct labor and other employee
benefits associated with the development of internal-use computer
software in accordance with Statement of Position 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for Internal
Use." Internal-use software costs are depreciated over the estimated
useful life of the software, typically 2 to 5 years, beginning in the
period when the software is substantially complete and ready for use.

(h) Other Assets

Amounts related to the acquisition of transmission and other licenses
are recorded at cost and amortized over 20 years using the
straight-line method. Goodwill results from the application of the
purchase method of accounting for business combinations and is
amortized over a maximum of 20 years using the straight-line method.

Rights of way, minutes of use, and non-compete agreements are recorded
at cost, and amortized using the straight-line method over the terms
of the agreements, ranging from 2 to 12 years.

Amortization of deferred financing costs is provided over the life of
the related financing agreement, the maximum term of which is 10
years.

(i) Foreign Currency Translation Adjustments

The functional currency for all foreign operations of NETCOM, which
were sold subsequent to December 31, 1998, is the local currency. As
such, all assets and liabilities denominated in foreign currencies are
translated at the exchange rate on

F-19

ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------

(2) Summary of Significant Accounting Policies (continued)

the balance sheet date. Revenue and costs and expenses are translated
at weighted average rates of exchange prevailing during the period.
Translation adjustments are included in other comprehensive income
(loss), which is a separate component of stockholders' equity
(deficit). Gains and losses resulting from foreign currency
transactions are included in discontinued operations and are not
significant for the periods presented.

(j) Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenue and expenses during the reporting periods. Actual results
could differ from those estimates.

(k) Revenue Recognition

The Company recognizes Telecom Services and Satellite Services revenue
as services are provided and charges direct selling expenses to
operations as incurred. Revenue from Network Services contracts for
the design and installation of communications systems and networks,
which are generally short-term in duration, is recognized using the
percentage of completion method of accounting. Maintenance revenue is
recognized as services are provided. Uncollectible trade receivables
are accounted for using the allowance method.

Revenue which has been earned under the percentage of completion
method, but has not been billed to the customer, is included in
revenue earned, but unbilled in the consolidated financial statements.
Deferred revenue includes monthly advance billings to customers for
certain services provided by the Company's Telecom Services and
Satellite Services, as well as Network Services revenue which has been
billed to the customer in compliance with contract terms, but not yet
earned under the percentage of completion method.

F-20

ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------

(2) Summary of Significant Accounting Policies (continued)

NETCOM recognizes revenue and operating costs on the same basis as
Telecom Services and Satellite Services, although such amounts are
included in loss from discontinued operations for all periods
presented.

Prior to January 1, 1996, the Company recognized Telecom Services
revenue in an amount equal to the non-cancelable portion of the
contract, which is a minimum of one year on a three-year or longer
contract, at the inception of the contract and upon activation of
service to the customer to the extent of direct installation and
selling expenses incurred in obtaining customers during the period in
which such revenue was recognized. Revenue recognized in excess of
normal monthly billings during the year was limited to an amount which
did not exceed such installation and selling expense. The remaining
revenue from the contract was recognized ratably over the remaining
non-cancelable portion of the contract. The Company believes the new
method is preferable because it provides a better matching of revenue
and related operating expenses and is more consistent with accounting
practices within the telecommunications industry. As required by
generally accepted accounting principles, the Company has reflected
the effects of the change in accounting as if such change had been
adopted as of October 1, 1995, and has included in the results of
operations for fiscal 1996 a charge of approximately $3.5 million
relating to the cumulative effect of this change in accounting. Other
than the cumulative effect of adopting this new method of accounting,
the effect of this change in accounting for the periods presented was
not significant.

(l) Income Taxes

The Company accounts for income taxes under the provisions of
Statement of Financial Accounting Standards No. 109, Accounting for
Income Taxes ("SFAS 109"). Under the asset and liability method of
SFAS 109, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. Under SFAS 109, the effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.

F-21

ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------

(2) Summary of Significant Accounting Policies (continued)

(m) Net Loss Per Share

Net loss per share is calculated by dividing the net loss by the
weighted average number of shares outstanding. Weighted average number
of shares outstanding for the three months ended December 31, 1995
represents outstanding Holdings-Canada common shares and ICG Common
Stock resulting from the exchange of NETCOM common shares. Weighted
average number of shares outstanding for fiscal 1996, the three months
ended December 31, 1996, and fiscal 1997 and 1998 represents
Holdings-Canada common shares outstanding for the period from October
1, 1995 through August 2, 1996, and combined ICG Common Stock and
Holdings-Canada Class A common shares outstanding for the periods
presented subsequent to August 5, 1996.

Net loss per share is determined in accordance with Financial
Accounting Standards Board Statement No. 128, Earnings Per Share
("SFAS 128"), which revises the calculation and presentation
provisions of Accounting Principles Board Opinion No. 15 and related
interpretations. Under SFAS 128, basic loss per share is computed on
the basis of weighted average common shares outstanding. Diluted loss
per share considers potential common stock instruments in the
calculation of weighted average common shares outstanding. Potential
common stock instruments, which include options, warrants and
convertible subordinated notes and preferred securities, are not
included in the net loss per share calculation as their effect is
anti-dilutive.

(n) Stock-Based Compensation

The Company accounts for its stock-based employee and non-employee
director compensation plans using the intrinsic value based method
prescribed by Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, and related Interpretations ("APB 25").
The Company has provided pro forma disclosures of net loss and net
loss per share as if the fair value based method of accounting for
these plans, as prescribed by Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation ("SFAS
123"), had been applied. Pro forma disclosures include the effects of
employee and non-employee director stock options granted during fiscal
1996, the three months ended December 31, 1996, and fiscal 1997 and
1998.

F-22

ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------

(2) Summary of Significant Accounting Policies (continued)

(o) Impairment of Long-Lived Assets

The Company provides for the impairment of long-lived assets,
including goodwill, pursuant to Statement of Financial Accounting
Standards No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of ("SFAS 121"), which
requires that long-lived assets and certain identifiable intangibles
held and used by an entity be reviewed for impairment whenever events
or changes in circumstances indicate that the carrying value of an
asset may not be recoverable. An impairment loss is recognized when
estimated undiscounted future cash flows expected to be generated by
the asset are less than its carrying value. Measurement of the
impairment loss is based on the estimated fair value of the asset,
which is generally determined using valuation techniques such as the
discounted present value of expected future cash flows.

(p) Reclassifications

Certain prior period amounts have been reclassified to conform with
the current period's presentation.

(3) Discontinued Operations

Loss from discontinued operations consists of the following:

Three months ended Fiscal years ended
Fiscal year ended December 31, December 31,
September 30, ------------------------------- ----------------------------
1996 1995 1996 1997 1998
------------------- --------------- -------------- ------------ --------------
(unaudited)
(in thousands)

Zycom (a) $ 205 (70) (484) (6,391) (4,848)
NETCOM (b) (44,265) (5,446) (11,490) (33,092) (61,090)
------------------- ---------------- ------------- ------------ --------------
Loss from discontinued
operations $ (44,060) (5,516) (11,974) (39,483) (65,938)
=================== ================ ============= ============ ==============

F-23

ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------

(3) Discontinued Operations (continued)

(a) Zycom

The Company owns a 70% interest in Zycom Corporation ("Zycom") which,
through its wholly owned subsidiary, Zycom Network Services, Inc.
("ZNSI"), operated an 800/888/900 number services bureau and a switch
platform in the United States and supplied information providers and
commercial accounts with audiotext and customer support services. In
June 1998, Zycom was notified by its largest customer of the
customer's intent to transfer its call traffic to another service
bureau. In order to minimize the obligation that this loss in call
traffic would generate under Zycom's volume discount agreements with
AT&T Corp. ("AT&T"), its call transport provider, ZNSI entered into an
agreement on July 1, 1998 with an unaffiliated entity, ICN Limited
("ICN"), whereby ZNSI assigned the traffic of its largest audiotext
customer and its other 900-number customers to ICN, effective October
1, 1998. As part of this agreement, ICN assumed all minimum call
traffic volume obligations to AT&T.

The call traffic assigned to ICN represents approximately 86% of
Zycom's revenue for the year ended December 31, 1997. The loss of this
significant portion of Zycom's business, despite management's best
efforts to secure other sources of revenue, raised substantial doubt
as to Zycom's ability to operate in a manner which would benefit
Zycom's or the Company's shareholders. Accordingly, on August 25,
1998, Zycom's board of directors approved a plan to wind down and
ultimately discontinue Zycom's operations. On October 22, 1998, Zycom
completed the transfer of all customer traffic to other providers and
Zycom anticipates that the disposition of its remaining assets and the
discharge of its remaining liabilities will be completed in 1999.

The Company's consolidated financial statements reflect the operations
of Zycom as discontinued for all periods presented. Zycom incurred net
losses from operations of approximately $1.2 million for the period
from August 25, 1998 to December 31, 1998. Included in net current
assets (liabilities) and net non-current assets of discontinued
operations in the Company's consolidated balance sheets are the
following accounts of Zycom:

F-24

ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------

(3) Discontinued Operations (continued)

December 31,
-------------------------------------------
1997 1998
------------------- --------------------
(in thousands)

Cash and cash equivalents $ 265 47
Receivables 1,879 90
Prepaid expenses and deposits 48 11
Accounts payable and accrued liabilities (2,559) (1,092)
------------------- --------------------

Net current liabilities of Zycom $ (367) (944)
=================== ====================

Property and equipment, net $ 1,050 220
Other assets, net 1,890 -
------------------- --------------------

Net non-current assets of Zycom $ 2,940 220
=================== ====================

On January 4, 1999, the Company completed the sale of the remainder of
Zycom's operating assets to an unrelated third party for total
proceeds of $0.2 million. As Zycom's assets were recorded at estimated
fair market value at December 31, 1998, no gain or loss was recorded
on the sale.

(b) NETCOM

Effective November 3, 1998, the Company's board of directors adopted
the formal plan to dispose of the operations of NETCOM and,
accordingly, the Company's consolidated financial statements reflect
the operations of NETCOM as discontinued for all periods presented.
Since the Company expects to record a gain on the disposition of
NETCOM, the Company has deferred the net operating losses of NETCOM
from November 3, 1998 through December 31, 1998, to be recognized as a
component of the gain on the disposition. Included in net current
assets (liabilities) and net non-current assets of discontinued
operations in the Company's consolidated balance sheets are the
following accounts of NETCOM:

F-25

ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------

(3) Discontinued Operations (continued)

December 31,
-------------------------------------------
1997 1998
------------------- --------------------
(in thousands)

Cash and cash equivalents $ 63,368 -
Receivables 2,397 3,936
Inventory 341 423
Prepaid expenses and deposits 3,554 2,436
Deferred losses of NETCOM - 10,847
Accounts payable and accrued liabilities (28,471) (37,009)
Current portion of capital lease obligations (2,491) (2,961)
------------------- --------------------

Net current assets (liabilities) of NETCOM $ 38,698 (22,328)
=================== ====================

Property and equipment, net $ 72,945 50,394
Other assets, net 4,242 5,703
Capital lease obligations, less current portion (3,550) (2,074)
------------------- --------------------

Net non-current assets of NETCOM $ 73,637 54,023
=================== ====================

On February 17, 1999, the Company sold certain of the operating assets
and liabilities of NETCOM to MindSpring Enterprises, Inc., an Internet
service provider ("ISP") located in Atlanta, Georgia ("MindSpring").
Total proceeds from the sale were $245.0 million, consisting of $215.0
million in cash and 376,116 shares of unregistered common stock of
MindSpring, valued at approximately $79.76 per share at the time of
the transaction. Assets and liabilities sold to MindSpring include
those directly related to the domestic operations of NETCOM's Internet
dial-up, dedicated access and Web site hosting services. On March 16,
1999, the Company sold all of the capital stock of NETCOM's
international operations for total proceeds of approximately $41.1
million. MetroNET Communications Corp. ("MetroNET"), a Canadian
entity, and Providence Equity Partners ("Providence"), located in
Providence, Rhode Island, together purchased the 80% interest in
NETCOM Canada Inc. owned by NETCOM for approximately $28.9 million in
cash. Additionally, Providence purchased all of the capital stock of
NETCOM Internet Access Services Limited, NETCOM's operations in the
United Kingdom, for approximately $12.2 million in cash. The Company
expects to record a combined gain on the NETCOM

F-26

ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------

(3) Discontinued Operations (continued)

transactions of approximately $200 million, net of income taxes of
approximately $6.5 million, during the three months ended March 31,
1999. Since the operations sold were acquired by the Company in a
transaction accounted for as a pooling of interests, the gain on the
NETCOM transactions will be classified in the Company's consolidated
statement of operations as an extraordinary item.

In conjunction with the sale to MindSpring, the Company entered into
an agreement to lease to MindSpring for a one-year period the capacity
of certain network operating assets formerly owned by NETCOM and
retained by the Company for a minimum of $27.0 million, although
subject to increase dependent upon network usage. MindSpring will
utilize the capacity to provide Internet access to the dial-up
services customers formerly owned by NETCOM. In addition, the Company
will receive for a one-year period 50% of the gross revenue earned by
MindSpring from the dedicated access customers formerly owned by
NETCOM. The Company intends to utilize the retained network operating
assets to provide similar wholesale capacity and other enhanced
network services to MindSpring and other ISPs and telecommunications
providers, beginning in 1999.

(4) Purchase Acquisitions and Investments

The acquisitions described below have been accounted for using the purchase
method of accounting and, accordingly, the net assets and results of
operations of the acquired businesses are included in the Company's
consolidated financial statements from the respective dates of acquisition.
Revenue, net loss and net loss per share on a pro forma basis, assuming the
acquisitions were completed at the beginning of the periods presented, are
not significantly different from the Company's historical results for the
periods presented herein.

(a) Fiscal 1998

On July 27, 1998, the Company acquired DataChoice Network Services,
L.L.C. ("DataChoice") for total consideration of $5.9 million,
consisting of 145,997 shares of ICG Common Stock and approximately
$1.1 million in cash. The excess of the purchase price over the fair
value of the net identifiable assets acquired of $5.7 million has been
recorded as goodwill and is being amortized on a straight-line basis

F-27

ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------

(4) Purchase Acquisitions and Investments (continued)

over five years. DataChoice, a Colorado limited liability company,
provides point-to-point data transmission resale services through its
long-term agreements with multiple regional carriers and nationwide
providers.

The Company completed a series of transactions on July 30, 1998 to
acquire NikoNET, Inc., CompuFAX Acquisition Corp. and Enhanced
Messaging Services, Inc. (collectively, "NikoNET"). The Company paid
approximately $13.8 million in cash, which included dividends payable
by NikoNET to its former owners and amounts to satisfy NikoNET's
former line of credit, assumed approximately $0.7 million in
liabilities and issued 356,318 shares of ICG Common Stock with a fair
market value of approximately $10.7 million on the date of the
acquisition, for all the capital stock of NikoNET. The excess of the
purchase price over the fair value of the net identifiable assets
acquired of $22.6 million has been recorded as goodwill and is being
amortized on a straight-line basis over five years. Located in
Atlanta, Georgia, NikoNET provides broadcast facsimile services and
enhanced messaging services to financial institutions, corporate
investor and public relations departments and other customers. The
Company believes the acquisition of NikoNET enables the Company to
offer expanded services to its Telecom Services customers.

On August 27, 1998, the Company purchased, for $9.0 million in cash,
the remaining 20% equity interest in ICG Ohio LINX, Inc. ("ICG Ohio
LINX") which it did not already own. ICG Ohio LINX is a
facilities-based competitive local exchange carrier which operates a
fiber optic telecommunications network in Cleveland and Dayton, Ohio.
The Company's additional investment in ICG Ohio LINX, including
incremental costs of obtaining that investment of $0.1 million, is
included in goodwill in the accompanying consolidated balance sheet at
December 31, 1998.

In January 1997, the Company announced a strategic alliance with
Central and South West Corporation ("CSW") formed for the purpose of
developing and marketing telecommunications services in certain cities
in Texas. Based in Austin, Texas, the venture entity was a limited
partnership named CSW/ICG ChoiceCom, L.P ("ChoiceCom"). On December
31, 1998, the Company purchased 100% of the partnership interests in
ChoiceCom from CSW for approximately $55.7 million in cash and the
assumption of certain liabilities of approximately $7.3 million. In

F-28

ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------

(4) Purchase Acquisitions and Investments (continued)

addition, the Company converted approximately $31.6 million of
receivables from prior advances made to ChoiceCom by the Company to
its investment in ChoiceCom. The excess of the purchase price over the
fair value of the net identifiable assets acquired of $28.9 million
has been recorded as goodwill and is being amortized on a
straight-line basis over 10 years. The acquired company currently
provides local exchange and long distance services in Austin, Corpus
Christi, Dallas, Houston and San Antonio, Texas.

(b) Fiscal 1997

On October 17, 1997, the Company purchased approximately 91% of the
outstanding capital stock of Communications Buying Group, Inc.
("CBG"), an Ohio based local exchange and Centrex reseller. The
Company paid total consideration of approximately $46.5 million, plus
the assumption of certain liabilities. Separately, on October 17,
1997, the Company sold 687,221 shares of ICG Common Stock for
approximately $16.0 million to certain shareholders of CBG. On March
24, 1998, the Company purchased the remaining approximate 9% interest
in CBG for approximately $2.9 million in cash. The excess of the
purchase price over the fair value of the net identifiable assets
acquired in the combined transactions of $48.9 million has been
recorded as goodwill and is being amortized on a straight-line basis
over six years.

(c) Fiscal 1996

In January 1996, the Company purchased the remaining 49% minority
interest of Fiber Optic Technologies, Inc. ("FOTI"), making FOTI a
wholly owned subsidiary. Consideration for the purchase was
approximately $2.0 million in cash and 66,236 common shares of
Holdings-Canada valued at approximately $0.8 million, for total
consideration of approximately $2.8 million. The Company's Network
Services are provided by FOTI.

In February 1996, the Company entered into an agreement with Linkatel
California, L.P. ("Linkatel") and its other partners, Linkatel
Communications, Inc. and The Copley Press, Inc., under which the
Company acquired a 60% interest in Linkatel for an aggregate purchase
price of $10.0 million in cash and became the general partner

F-29

ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------

(4) Purchase Acquisitions and Investments (continued)

of Linkatel. In April 1996, the partnership was renamed ICG Telecom of
San Diego, L.P.

In March 1996, the Company acquired a 90% equity interest in MarineSat
Communications Network, Inc. ("MCN"), (formally Maritime Cellular
Tele-network, Inc.), a Florida-based provider of cellular and
satellite communications for commercial ships, private vessels,
offshore oil platforms and land-based mobile units, for approximately
$0.7 million in cash and approximately $0.1 million of assumed debt,
for total consideration of approximately $0.8 million. In April 1997,
the Company received the remaining 10% interest in MCN as partial
consideration for the sale of its investment in Mexico.

In August 1996, the Company acquired certain Signaling System 7
("SS7") assets of Pace Network Services, Inc. ("Pace"), a division of
Pace Alternative Communications, Inc. SS7 is used by local exchange
companies, long-distance carriers, wireless carriers and others to
signal between network elements, creating faster call set-up resulting
in a more efficient use of network resources. The Company paid cash
consideration of $1.6 million as of September 30, 1996 and an
additional $1.0 million in January 1997, based on the operating
results of the underlying business since the date of acquisition.

(5) Dispositions

(a) Fiscal 1998

On July 17, 1998, the Company entered into separate definitive
agreements to sell the capital stock of MCN and Nova-Net
Communications, Inc. ("Nova-Net"), two wholly owned subsidiaries
within the Company's Satellite Services operations. The sale of MCN
was completed on August 12, 1998 and, accordingly, the Company's
consolidated financial statements include the results of operations of
MCN through that date. The Company recorded a gain on the sale of MCN
of approximately $0.9 million during fiscal 1998. The sale of Nova-Net
was completed on November 18, 1998 and, accordingly, the Company's
consolidated financial statements include the results of operations of
Nova-Net through that date. The Company recorded a loss on the sale of
Nova-Net of approximately $0.2 million during the three months

F-30

ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------

(5) Dispositions (continued)

ended December 31, 1998. The combined revenue, net loss or net loss
per share of MCN and Nova-Net do not represent a significant portion
of the Company's historical consolidated revenue, net loss or net loss
per share.

(b) Fiscal 1996

In October 1996, the Company sold its interest in its Phoenix network
joint venture to its venture partner, GST Telecommunications, Inc. The
Company received approximately $2.1 million in cash, representing $1.3
million of consideration for its 50% interest and $0.8 million for
equipment and amounts advanced to the joint venture. In addition, the
Company received equipment with a net book value of $2.4 million and
assumed liabilities of $0.3 million. A gain on sale of the joint
venture of approximately $0.8 million was recorded in the consolidated
financial statements during the three months ended December 31, 1996.

In December 1995, the Company received approximately $21.1 million as
partial payment for the sale of four of its teleports and certain
related assets, and entered into a management agreement with the
purchaser whereby the purchaser assumed control of the teleport
operations. Upon approval of the transaction by the Federal
Communications Commission ("FCC"), the Company completed the sale in
March 1996 and received an additional $0.4 million due to certain
closing adjustments, for total proceeds of $21.5 million. The Company
recognized a loss of approximately $1.1 million on the sale. Revenue
associated with these operations was approximately $2.5 million for
fiscal 1996. The Company has reported results of operations from these
assets through December 31, 1995.

F-31

ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------

(6) Short-term Investments Available for Sale

Short-term investments available for sale are comprised of the following:

December 31,
-------------------------------------
1997 1998
----------------- ----------------
(in thousands)

Certificates of deposit $ - 31,000
Commercial paper 4,000 16,000
U.S. Treasury securities 108,281 5,000
================= ================
$ 112,281 52,000
================= ================

At December 31, 1997 and 1998, the estimated fair value of the Company's
certificates of deposit, commercial paper and U.S. Treasury securities
approximated cost. All certificates of deposit, commercial paper and U.S.
Treasury securities mature within one year.

(7) Property and Equipment

Property and equipment, including assets held under capital leases, is
comprised of the following:

F-32

ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------

(7) Property and Equipment (continued)

December 31,
-----------------------------------------
1997 1998
------------------ ------------------
(in thousands)

Land $ 709 709
Buildings and improvements 2,238 2,296
Furniture, fixtures and
office equipment 42,295 123,108
Internal-use software costs 3,681 13,655
Machinery and equipment 12,600 20,998
Fiber optic equipment 181,000 259,015
Satellite equipment 29,760 32,418
Switch equipment 85,546 156,313
Fiber optic network 179,705 225,453
Site improvements 13,898 20,029
Service installation costs - 20,679
Construction in progress 185,992 237,394
------------------ ------------------
737,424 1,112,067
Less accumulated depreciation (105,970) (177,933)
================== ==================
$ 631,454 934,134
================== ==================

Property and equipment includes approximately $237.4 million of equipment
which has not been placed in service at December 31, 1998, and accordingly,
is not being depreciated. The majority of this amount is related to
uninstalled transport and switch equipment and new network construction.

For fiscal 1996, the three months ended December 31, 1996, fiscal 1997 and
1998, the Company capitalized interest costs on assets under construction
of $4.9 million, $2.0 million, $3.2 million and $10.4 million,
respectively. Such costs are included in property and equipment as
incurred. The Company recognized interest expense of $85.7 million, $24.5
million, $117.5 million and $170.1 million for fiscal 1996, the three
months ended December 31, 1996, fiscal 1997 and 1998, repectively.

F-33

ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------

(7) Property and Equipment (continued)

Also included in property and equipment at December 31, 1997 and 1998 are
unamortized costs associated with the development of internal-use computer
software of $2.3 million and $11.5 million, respectively. The Company
capitalized $0.7 million, $0.1 million, $2.4 million and $10.0 million of
such costs during fiscal 1996, the three months ended December 31, 1996,
fiscal 1997 and 1998, respectively.

Certain of the assets described above have been pledged as security for
long-term debt and are held under capital leases at December 31, 1998. The
following is a summary of property and equipment held under capital leases:

December 31,
---------------------------------------
1997 1998
----------------- ------------------
(in thousands)

Machinery and equipment $ 3,926 7,072
Fiber optic equipment 6,314 798
Switch equipment 21,380 12,957
Fiber optic network 58,806 77,523
Construction in progress 17,895 -
----------------- ------------------
108,321 98,350
Less accumulated depreciation (8,409) (7,875)
================= ==================
$ 99,912 90,475
================= ==================

Amortization of capital leases is included in depreciation and amortization
in the Company's consolidated statements of operations for all periods
presented.

F-34

ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------

(8) Other Assets

Other assets are comprised of the following:

December 31,
----------------------------------------
1997 1998
----------------- ------------------
(in thousands)

Deposits $ 2,429 17,035
Pace customer base 2,805 2,805
Collocation costs 2,998 5,472
Non-compete agreements 1,386 1,050
Right of entry costs 1,984 2,684
Other 588 2,486
----------------- ------------------
12,190 31,532
Less accumulated amortization (3,124) (6,343)
================= ==================
$ 9,066 25,189
================= ==================

(9) Capital Lease Obligations

The Company has payment obligations under various capital lease agreements
for equipment. Required payments due each year on or before December 31
under the Company's capital lease obligations are as follows (in
thousands):

1999 $ 14,406
2000 15,000
2001 17,098
2002 11,085
2003 11,008
Thereafter 82,607
---------------------
Total minimum lease payments 151,204
Less amounts representing interest (82,759)
---------------------
Present value of net minimum lease payments 68,445
Less current portion (5,086)
=====================
$ 63,359
=====================

F-35

ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------

(10) Long-term Debt

Long-term debt is summarized as follows:

December 31,
-----------------------------------
1997 1998
---------------- ----------------
(in thousands)

9 7/8% Senior discount notes of ICG Services, net of discount (a) $ - 266,918
10% Senior discount notes of ICG Services, net of discount (b) - 327,699
11 5/8% Senior discount notes of Holdings, net of discount (c) 109,436 122,528
12 1/2% Senior discount notes of Holdings, net of discount (d) 367,494 414,864
13 1/2% Senior discount notes of Holdings, net of discount (e) 407,409 465,886
Note payable with interest at the 90-day commercial paper rate plus 4
3/4%, paid in full on August 19, 1998 4,932 -
Note payable with interest at 11%, paid in full on June 12, 1998 1,860 -
Mortgage payable with interest at 8 1/2%, due monthly through 2009,
secured by building 1,131 1,084
Other 90 65
---------------- ----------------
892,352 1,599,044
Less current portion (1,784) (46)
---------------- ----------------
$ 890,568 1,598,998
================ ================

(a) 9 7/8% Notes

On April 27, 1998, ICG Services completed a private placement of 9
7/8% Senior Discount Notes due 2008 (the "9 7/8% Notes") for gross
proceeds of approximately $250.0 million. Net proceeds from the
offering, after underwriting and other offering costs of approximately
$7.9 million, were approximately $242.1 million.

The 9 7/8% Notes are unsecured senior obligations of ICG Services that
mature on May 1, 2008, at a maturity value of $405.3 million. Interest
will accrue at 9 7/8% per annum, beginning May 1, 2003, and is payable
each May 1 and November 1, commencing November 1, 2003. The indenture
for the 9 7/8% Notes contains certain covenants which provide
limitations on indebtedness, dividends, asset sales and certain other
transactions.

F-36

ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------

(10) Long-term Debt (continued)

The 9 7/8% Notes were originally recorded at approximately $250.0
million. The discount on the 9 7/8% Notes is being accreted through
May 1, 2003, the date on which the 9 7/8% Notes may first be redeemed.
The accretion of the discount and the amortization of the debt
issuance costs are included in interest expense in the accompanying
consolidated statements of operations.

(b) 10% Notes

On February 12, 1998, ICG Services completed a private placement of
10% Senior Discount Notes due 2008 (the "10% Notes") for gross
proceeds of approximately $300.6 million. Net proceeds from the
offering, after underwriting and other offering costs of approximately
$9.7 million, were approximately $290.9 million.

The 10% Notes are unsecured senior obligations of ICG Services that
mature on February 15, 2008, at a maturity value of $490.0 million.
Interest will accrue at 10% per annum, beginning February 15, 2003,
and is payable each February 15 and August 15, commencing August 15,
2003. The indenture for the 10% Notes contains certain covenants which
provide limitations on indebtedness, dividends, asset sales and
certain other transactions.

The 10% Notes were originally recorded at approximately $300.6
million. The discount on the 10% Notes is being accreted through
February 15, 2003, the date on which the 10% Notes may first be
redeemed. The accretion of the discount and the amortization of the
debt issuance costs are included in interest expense in the
accompanying consolidated statements of operations.

(c) 11 5/8% Notes

On March 11, 1997, Holdings completed a private placement (the "1997
Private Offering") of 11 5/8% Senior Discount Notes due 2007 (the "11
5/8% Notes") and 14% Exchangeable Preferred Stock Mandatorily
Redeemable 2008 (the "14% Preferred Stock") for gross proceeds of
$99.9 million and $100.0 million, respectively. Net proceeds from the
1997 Private Offering, after costs of approximately $7.5 million, were
approximately $192.4 million.

F-37

ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------

(10) Long-term Debt (continued)

The 11 5/8% Notes are unsecured senior obligations of Holdings
(guaranteed by ICG) that mature on March 15, 2007, at a maturity value
of $176.0 million. Interest will accrue at 11 5/8% per annum,
beginning March 15, 2002, and is payable each March 15 and September
15, commencing September 15, 2002. The indenture for the 11 5/8% Notes
contains certain covenants which provide for limitations on
indebtedness, dividends, asset sales and certain other transactions
and effectively prohibit the payment of cash dividends.

The 11 5/8% Notes were originally recorded at approximately $99.9
million. The discount on the 11 5/8% Notes is being accreted through
March 15, 2002, the date on which the 11 5/8% Notes may first be
redeemed. The accretion of the discount and the amortization of the
debt issuance costs are included in interest expense in the
accompanying consolidated statements of operations.

(d) 12 1/2% Notes

On April 30, 1996, Holdings completed a private placement (the "1996
Private Offering") of 12 1/2% Senior Discount Notes due 2006 (the "12
1/2% Notes") and of 14 1/4% Exchangeable Preferred Stock Mandatorily
Redeemable 2007 (the "14 1/4% Preferred Stock") for gross proceeds of
$300.0 million and $150.0 million, respectively. Net proceeds from the
1996 Private Offering, after issuance costs of approximately $17.0
million, were approximately $433.0 million.

The 12 1/2% Notes are unsecured senior obligations of Holdings
(guaranteed by ICG and Holdings-Canada) that mature on May 1, 2006,
with a maturity value of $550.3 million. Interest will accrue at 12
1/2% per annum, beginning May 1, 2001, and is payable each May 1 and
November 1, commencing November 1, 2001. The indenture for the 12 1/2%
Notes contains certain covenants which provide for limitations on
indebtedness, dividends, asset sales and certain other transactions
and effectively prohibit the payment of cash dividends.

The 12 1/2% Notes were originally recorded at approximately $300.0
million. The discount on the 12 1/2% Notes is being accreted through
May 1, 2001, the date on which the 12 1/2% Notes may first be
redeemed. The accretion of the discount and the amortization of the
debt issuance costs are included in interest expense in the
accompanying consolidated statements of operations.

F-38

ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------

(10) Long-term Debt (continued)

Approximately $35.3 million of the proceeds from the 1996 Private
Offering were used to redeem the 12% redeemable preferred stock of
Holdings (the "Redeemable Preferred Stock") issued in August 1995
($30.0 million), pay accrued preferred dividends ($2.6 million) and to
repurchase 916,666 warrants of the Company ($2.7 million) issued in
connection with the Redeemable Preferred Stock. The Company recognized
a charge to accretion and preferred dividends on preferred securities
of subsidiaries, net of minority interest in share of losses of
approximately $12.3 million for the excess of the redemption price of
the Redeemable Preferred Stock over the carrying amount at April 30,
1996, and recognized a charge to interest expense of approximately
$11.5 million for the payments made to noteholders with respect to
consents to amendments to the indenture governing the 13 1/2% Notes to
permit the 1996 Private Offering.

(e) 13 1/2% Notes

On August 8, 1995, Holdings completed a private placement (the "1995
Private Offering") through the issuance of 58,430 units (the "Units"),
each Unit consisting of ten $1,000, 13 1/2% Senior Discount Notes due
2005 (the "13 1/2% Notes") and warrants to purchase 33 common shares
of Holdings-Canada (the "Unit Warrants"). Net proceeds from the 1995
Private Offering, after issuance costs of approximately $14.0 million,
were approximately $286.0 million.

The 13 1/2% Notes are unsecured senior obligations of Holdings
(guaranteed by ICG and Holdings-Canada) that mature on September 15,
2005, with a maturity value of $584.3 million. Interest will accrue at
the rate of 13 1/2% per annum, beginning September 15, 2000, and is
payable in cash each March 15 and September 15, commencing March 15,
2001. The indenture for the 13 1/2% Notes contains certain covenants
which provide for limitations on indebtedness, dividends, asset sales
and certain other transactions and effectively prohibit the payment of
cash dividends.

The 13 1/2% Notes were originally recorded at approximately $294.0
million, which represents the $300.0 million in proceeds less the
approximate $6.0 million value assigned to the Unit Warrants, which is
included in additional paid-in capital. The discount on the 13 1/2%
Notes is being accreted over five years until September 15, 2000, the
date on which the 13 1/2% Notes may first be redeemed. The value

F-39

ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------

(10) Long-term Debt (continued)

assigned to the Unit Warrants, representing additional debt discount,
is also being accreted over the five-year period. The accretion of the
total discount and the amortization of the debt issuance costs are
included in interest expense in the accompanying consolidated
statements of operations. Holdings may redeem the 13 1/2% Notes on or
after September 15, 2000, in whole or in part, at the redemption
prices set forth in the agreement, plus unpaid interest, if any, at
the date of redemption.

The Unit Warrants entitled the holder to purchase one common share of
Holdings-Canada, which was exchangeable into one share of ICG Common
Stock, through August 8, 2005 at the exercise price of $12.51 per
share. In connection with the Reorganization of Holdings-Canada, all
Unit Warrants outstanding are exchangeable only for shares of ICG
Common Stock on a one-for-one basis and are no longer exchangeable for
shares of Holdings-Canada.

(f) Subsequent to December 31, 1998

As of December 31, 1998, the Company's corporate headquarters
building, land and improvements (collectively, the "Corporate
Headquarters") were leased by the Company under an operating lease
from an unrelated third party. Subsequent to December 31, 1998, the
Company entered into a letter of intent to purchase the Corporate
Headquarters for approximately $43.7 million, which amount represents
historical cost and approximates fair value. The Company intends to
finance the purchase through the conversion of a $10.0 million
security deposit previously paid on the existing operating lease and
through a mortgage on the Corporate Headquarters' assets. Payments on
the mortgage will be due monthly through January 1, 2013, at an
initial interest rate of approximately 14% per annum.

F-40

ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------

(10) Long-term Debt (continued)

Scheduled principal maturities of long-term debt as of December 31, 1998
are as follows (in thousands):

Fiscal year:
1999 $ 111
2000 50
2001 50
2002 50
2003 50
Thereafter 2,206,688
-----------------------
2,206,999
Less unaccreted discount (607,955)
Less current portion (46)
=======================
$ 1,598,998
=======================

(11) Redeemable Preferred Securities of Subsidiaries

Redeemable preferred stock of subsidiary is summarized as follows:

December 31,
---------------------------------------
1997 1998
---------------- ------------------
(in thousands)
14% Exchangeable preferred
stock of Holdings, mandatorily
redeemable in 2008 (a) $ 108,022 124,867
14 1/4% Exchangeable preferred
stock of Holdings, mandatorily
redeemable in 2007 (b) 184,420 213,443
================ ==================
$ 292,442 338,310
================ ==================

(a) 14% Preferred Stock

In connection with the 1997 Private Offering, Holdings sold 100,000
shares of exchangeable preferred stock that bear a cumulative dividend
at the rate of 14% per annum. The dividend is payable quarterly in
arrears each March 15, June 15, September 15, and December 15, and
commenced June 15, 1997. Through March 15, 2002, the dividend is
payable at the option of Holdings in cash or additional shares of 14%
Preferred Stock. Holdings may exchange the 14% Preferred Stock

F-41

ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------

(11) Redeemable Preferred Securities of Subsidiaries (continued)

into 14% Senior Subordinated Exchange Debentures at any time after the
exchange is permitted by certain indenture restrictions. The 14%
Preferred Stock is subject to mandatory redemption on March 15, 2008.

(b) 14 1/4% Preferred Stock

In connection with the 1996 Private Offering, Holdings sold 150,000
shares of exchangeable preferred stock that bear a cumulative dividend
at the rate of 14 1/4% per annum. The dividend is payable quarterly in
arrears each February 1, May 1, August 1 and November 1, and commenced
August 1, 1996. Through May 1, 2001, the dividend is payable, at the
option of Holdings, in cash or additional shares of 14 1/4% Preferred
Stock. Holdings may exchange the 14 1/4% Preferred Stock into 14 1/4%
Senior Subordinated Exchange Debentures at any time after the exchange
is permitted by certain indenture restrictions. The 14 1/4% Preferred
Stock is subject to mandatory redemption on May 1, 2007.

(c) 6 3/4% Preferred Securities

On September 24, 1997 and October 3, 1997, ICG Funding completed a
private placement of 6 3/4% Exchangeable Limited Liability Company
Preferred Securities Mandatorily Redeemable 2009 (the "6 3/4%
Preferred Securities") for gross proceeds of $132.25 million. Net
proceeds from the private placement, after offering costs of
approximately $4.7 million, were approximately $127.6 million.
Restricted cash at December 31, 1998 of $16.9 million consists of the
proceeds from the private placement which are designated for the
payment of cash dividends on the 6 3/4% Preferred Securities through
November 15, 2000.

The 6 3/4% Preferred Securities consist of 2,645,000 exchangeable
preferred securities of ICG Funding that bear a cumulative dividend at
the rate of 6 3/4% per annum. The dividend is paid quarterly in
arrears each February 15, May 15, August 15 and November 15, and
commenced November 15, 1997. The dividend is payable in cash through
November 15, 2000 and, thereafter, in cash or shares of ICG Common
Stock, at the option of ICG Funding. The 6 3/4% Preferred Securities
are exchangeable, at the option of the holder, at any time prior to
November 15, 2009 into shares of ICG Common Stock at an exchange rate
of

F-42

ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------

(11) Redeemable Preferred Securities of Subsidiaries (continued)

2.0812 shares of ICG Common Stock per preferred security, or $24.025
per share, subject to adjustment. ICG Funding may, at its option,
redeem the 6 3/4% Preferred Securities at any time on or after
November 18, 2000. Prior to that time, ICG Funding may redeem the 6
3/4% Preferred Securities if the current market value of ICG Common
Stock equals or exceeds, for at least 20 days of any 30-day trading
period, 160% of the exchange price prior to November 15, 1999, and
150% of the exchange price from November 16, 1999 through November 15,
2000. The 6 3/4% Preferred Securities are subject to mandatory
redemption on November 15, 2009.

On February 13, 1998, ICG made a capital contribution of 126,750
shares of ICG Common Stock to ICG Funding. Immediately thereafter, ICG
Funding sold the contributed shares to unrelated third parties for
proceeds of approximately $3.4 million. ICG Funding recorded the
contribution of the ICG Common Stock as additional paid-in capital at
the then fair market value and, consequently, no gain or loss was
recorded by ICG Funding on the subsequent sale of those shares.

Also, on February 13, 1998, ICG Funding used the remaining proceeds
from the private placement of the 6 3/4% Preferred Securities, which
were not restricted for the payment of cash dividends, along with the
proceeds from the sale of the contributed ICG Common Stock to purchase
approximately $112.4 million of ICG Communications, Inc. Preferred
Stock ("ICG Preferred Stock") which pays dividends each February 15,
May 15, August 15 and November 15 in additional shares of ICG
Preferred Stock through November 15, 2000. Subsequent to November 15,
2000, dividends on the ICG Preferred Stock are payable in cash or
shares of ICG Common Stock, at the option of ICG. The ICG Preferred
Stock is exchangeable, at the option of ICG Funding, at any time prior
to November 15, 2009 into shares of ICG Common Stock at an exchange
rate based on the exchange rate of the 6 3/4% Preferred Securities and
is subject to mandatory redemption on November 15, 2009. The ICG
Preferred Stock has been eliminated in consolidation of the Company's
consolidated financial statements.

F-43

ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------

(11) Redeemable Preferred Securities of Subsidiaries (continued)

The accreted value of the 6 3/4% Preferred Securities is included in
Company-obligated mandatorily redeemable preferred securities of
subsidiary limited liability company which holds solely Company
preferred stock in the accompanying consolidated balance sheet at
December 31, 1998.

Included in accretion and preferred dividends on preferred securities of
subsidiaries, net of minority interest in share of losses is approximately
$27.0 million, $5.8 million, $39.8 million and $55.2 million for fiscal
1996, the three months ended December 31, 1996, and fiscal 1997 and 1998,
respectively, associated with the accretion of issuance costs, discount and
preferred security dividend accruals for the 6 3/4% Preferred Securities,
the 14% Preferred Stock, the 14 1/4% Preferred Stock and the Redeemable
Preferred Stock (issued in connection with the 1995 Private Offering and
redeemed in April 1996). These costs are partially offset by the minority
interest share in losses of subsidiaries of approximately $1.6 million,
$0.8 million and $1.7 million for fiscal 1996, the three months ended
December 31, 1996, and fiscal 1997, respectively. There was no reported
minority interest share in losses of subsidiaries for fiscal 1998.

(12) Stockholders' Equity (Deficit)

(a) Stock Options and Employee Stock Purchase Plan

In fiscal years 1991, 1992 and 1993, the Company's Board of Directors
approved incentive stock option plans and replenishments to those
plans which provide for the granting of options to directors,
officers, employees and consultants of the Company to purchase
285,000, 724,400 and 1,692,700 shares, respectively, of the Company's
Common Stock, with exercise prices between 80% and 100% of the fair
value of the shares at the date of grant. A total of 1,849,600 options
have been granted under these plans with exercise prices ranging from
approximately $2.92 to $14.03. Compensation expense has been recorded
for options granted at an exercise price below the fair market value
of the Company's Common Stock at the date of grant, pursuant to the
provisions of APB 25. The options granted under these plans are
subject to various vesting requirements and expire in five and ten
years from the date of grant.

F-44

ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------

(12) Stockholders' Equity (Deficit) (continued)

The NETCOM 1993 Stock Option Plan was assumed by ICG at the time of
the merger, and approved by ICG's Board of Directors as an incentive
and non-qualified stock option plan which provides for the granting of
options to certain directors, officers and employees to purchase
2,720,901 shares of ICG Common Stock. A total of 2,224,273 options,
net of 2,155,856 cancellations, have been granted under this plan at
exercise prices ranging from $0.65 to $92.14, none of which were less
than 100% of the fair market value of the shares underlying options on
the date of grant, and accordingly, no compensation expense was
recorded for these options under APB 25. The options granted under
this plan are subject to various vesting requirements, generally three
and five years, and expire within ten years from the date of grant.

From fiscal 1994 through fiscal 1998, the Company's Board of Directors
approved incentive and non-qualified stock option plans and
replenishments to those plans which provide for the granting of
options to certain directors, officers and employees to purchase
2,536,000 shares of the Company's Common Stock under the 1994 plan, an
aggregate of 2,700,000 shares of the Company's Common Stock under the
1995 and 1996 plans and 3,400,000 shares of ICG Common Stock under the
1998 plan. A total of 6,922,696 options, net of 4,587,300
cancellations, have been granted under these plans at original
exercise prices ranging from $7.94 to $35.75, none of which were less
than 100% of the fair market value of the shares underlying options on
the date of grant, and accordingly, no compensation expense was
recorded for these options under APB 25. The options granted under
these plans are subject to various vesting requirements and expire in
five and ten years from the date of grant.

In order to continue to provide non-cash incentives and retain key
employees, all employee stock options outstanding on April 16, 1997
with exercise prices at or in excess of $15.875 were canceled by the
Stock Option Committee of the Company's Board of Directors and
regranted with an exercise price of $10.375, the closing price of ICG
Common Stock on the Nasdaq National Market on April 16, 1997.
Approximately 598,000 options, with original exercise prices ranging
from $15.875 to $26.25, were canceled and regranted on April 16, 1997.
For the same business purpose, all employee stock options outstanding
on September 18, 1998 with exercise prices at or in excess of $22.00
were canceled by the Stock Option Committee of the Company's Board of
Directors and regranted with an exercise price of $16.875, the closing
price of ICG Common Stock on the Nasdaq National

F-45

ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------

(12) Stockholders' Equity (Deficit) (continued)

Market on September 18, 1998. A total of 2,413,260 options, with
original exercise prices ranging from $22.00 to $35.75 were canceled
and regranted on September 18, 1998. There was no effect on the
Company's consolidated financial statements as a result of the
cancellation and regranting of options.

In October 1996, the Company established an Employee Stock Purchase
Plan whereby employees can elect to designate 1% to 30% of their
annual salary to be used to purchase shares of ICG Common Stock, up to
a limit of $25,000 in ICG Common Stock each year, at a 15% discount to
fair market value. Stock purchases occur four times a year on February
1, May 1, August 1 and November 1, with the price per share equaling
the lower of 85% of the market price at the beginning or end of the
offering period. The Company is authorized to issue a total of
1,000,000 shares of ICG Common Stock to participants in the plan.
During fiscal 1997 and 1998, the Company sold 109,213 and 111,390
shares of ICG Common Stock, respectively, to employees under this
plan.

During fiscal 1994, NETCOM's Board of Directors approved and adopted
an Employee Stock Purchase Plan which was dissolved upon NETCOM's
merger with ICG. Shares purchased under this plan were converted into
an estimated 119,000 shares of ICG Common Stock.

The Company recorded compensation expense in connection with its
stock-based employee and non-employee director compensation plans of
$0.1 million for fiscal 1996 pursuant to the intrinsic value based
method of APB 25. Had compensation expense for the Company's plans
been determined based on the fair market value of the options at the
grant dates for awards under those plans consistent with the
provisions of SFAS 123, the Company's pro forma net loss and loss per
share would have been as presented below. Pro forma disclosures
include the effects of employee and non-employee director stock
options granted during fiscal 1996, the three months ended December
31, 1996, and fiscal 1997 and 1998.

F-46

ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------

(12) Stockholders' Equity (Deficit) (continued)

Fiscal years ended
Fiscal year ended Three months ended December 31,
September 30, December 31, ------------------------------------
1996 1996 1997 1998
---------------------- --------------------------- --------------- ----------------
(in thousands, except per share amounts)

Net loss:
As reported $ (228,372) (61,313) (360,735) (418,045)
Pro forma (242,974) (64,985) (369,677) (439,362)

Net loss per share-
basic and diluted:
As reported $ (6.19) (1.47) (8.49) (9.25)
Pro forma (6.59) (1.56) (8.70) (9.72)

The fair value of each option grant to employees and non-employee
directors other than NETCOM employees and non-employee directors was
estimated on the date of grant using the Black-Scholes option-pricing
model with the following weighted average assumptions: an expected
option life of three years for directors, officers and other
executives, and two years for other employees, for all periods;
expected volatility of 50% for fiscal 1996, the three months ended
December 31, 1996 and fiscal 1997, and 70% for fiscal 1998; and
risk-free interest rates ranging from 5.03% to 7.42% for fiscal 1996
and the three months ended December 31, 1996, 5.61% to 6.74% for
fiscal 1997 and 4.09% to 5.77% for fiscal 1998. Risk-free interest
rates, as were currently available on the grant date, were assigned to
each granted option based on the zero-coupon rate of U.S. Treasury
bills to be held for the same period as the assumed option life. Since
the Company does not anticipate issuing any dividends on the ICG
Common Stock, the dividend yield for all options granted was assumed
to be zero. The weighted average fair market value of combined ICG and
NETCOM options granted during fiscal 1996, the three months ended
December 31, 1996, and fiscal 1997 and 1998 was approximately $11.10,
$9.48, $10.31 and $13.23 per option, respectively.

F-47

ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------

(12) Stockholders' Equity (Deficit) (continued)

As options outstanding at December 31, 1998 will continue to vest in
subsequent periods, additional options are expected to be awarded
under existing and new plans; accordingly, the above pro forma results
are not necessarily indicative of the impact on net loss and net loss
per share in future periods.

The following table summarizes the status of the Company's stock-based
compensation plans:

Shares underlying Weighted average Options
options exercise price exercisable
---------------------- ---------------------- ---------------------
(in thousands) (in thousands)

Outstanding at October 1, 1995 4,828 $ 14.92 1,230
Granted 2,054 18.30
Exercised (415) 7.35
Canceled (631) 24.73
----------------------
Outstanding at September 30, 1996 5,836 15.49 2,771
Granted 335 18.59
Exercised (31) 8.95
Canceled (56) 12.65
----------------------
Outstanding at December 31, 1996 6,084 15.68 3,476
Granted 3,377 14.94
Exercised (709) 8.13
Canceled (2,604) 25.32
----------------------
Outstanding at December 31, 1997 6,148 11.97 3,532
Granted 5,968 23.34
Exercised (1,395) 12.08
Canceled (3,941) 25.62
----------------------
Outstanding at December 31, 1998 6,780 13.95 3,299
======================

F-48

ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------

(12) Stockholders' Equity (Deficit) (continued)

The following table summarizes information about options outstanding at
December 31, 1998:

Options outstanding Options exercisable
--------------------------------------------------------- --------------------------------------
Weighted
average Weighted Weighted
Range of remaining average average
exercise Number contractual exercise Number exercise
prices outstanding life price exercisable price
------------------- ------------------ ----------------- ------------------ ------------------- -----------------
(in thousands) (in years) (in thousands)

$2.60 - 7.94 1,558 6.40 $ 7.91 1,558 $ 7.91
8.50 - 14.58 1,714 7.15 11.07 1,099 11.31
14.93 - 16.75 381 8.37 15.67 296 15.67
16.88 - 46.65 3,127 9.37 18.32 346 21.02
------------------ -------------------
6,780 3,299
================== ===================

(b) Warrants

Between fiscal 1993 and fiscal 1995, the Company issued a series of
warrants at varying prices to purchase common shares of
Holdings-Canada which, after August 5, 1996, were exchangeable on a
one-for-one basis for Class A Shares of ICG Common Stock. The
following table summarizes warrant activity for fiscal 1996, the three
months ended December 31, 1996, and fiscal 1997 and 1998:

F-49

ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------

(12) Stockholders' Equity (Deficit) (continued)

Outstanding Exercise
warrants price range
------------------- ------------------------
(in thousands)

Outstanding, October 1, 1995 5,502 $ 7.38 - 21.51
Exercised (1,854) 7.94 - 8.73
Repurchased (917) 2.52 - 3.21
--------------------

Outstanding, September 30, 1996 2,731 7.38 - 21.51
Exercised (100) 18.00
Canceled (8) 7.38 - 11.80
--------------------

Outstanding, December 31, 1996 2,623 7.38 - 21.51
Exercised (599) 7.38 - 14.50
Canceled (50) 14.50
--------------------

Outstanding, December 31, 1997 1,974 12.51 - 21.51
Exercised (113) 12.51 - 21.51
Canceled (9) 20.01 - 21.51
====================

Outstanding, December 31, 1998 1,852 12.51
====================

All warrants outstanding at December 31, 1998 have an expiration date of
August 6, 2005 and, in connection with the Reorganization of
Holdings-Canada, are exchangeable only for shares of ICG Common Stock on a
one-for-one basis.

(c) Preferred Stock

The Company is authorized to issue 1,000,000 shares of preferred stock
and 50,000 shares of ICG Preferred Stock. At December 31, 1998, the
Company had no shares of preferred stock outstanding. All of the
issued and outstanding shares of ICG Preferred Stock at December 31,
1998 are held by ICG Funding.

F-50

ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------

(13) Related Party Transactions

At December 31, 1997, the Company had $10.0 million outstanding under a
promissory note from ChoiceCom, which was payable on demand at LIBOR plus
2% per annum (7.97% at December 31, 1997). During fiscal 1998, the Company
advanced another $5.0 million to ChoiceCom under a separate promissory note
with similar terms. Additionally, the Company agreed to perform certain
administrative services for ChoiceCom and make certain payments to vendors
on behalf of ChoiceCom, for which such services and payments were to be
conducted on an arm's length basis and reimbursed by ChoiceCom. At December
31, 1997, amounts outstanding under this arrangement and included in notes
receivable from affiliate were approximately $9.4 million. All amounts due
from ChoiceCom were included in the purchase price of the Company's
acquisition of ChoiceCom on December 31, 1998.

During fiscal 1996, Holdings-Canada and International Communications
Consulting, Inc. ("ICC") entered into a consulting agreement whereby ICC
will provide various consulting services to the Company through December
1999 for approximately $4.2 million to be paid during the term of the
agreement. During fiscal 1996, the three months ended December 31, 1996,
fiscal 1997 and 1998, the Company paid approximately $1.3 million, $0.3
million, $1.1 million and $1.0 million, respectively, related to this
consulting agreement. William W. Becker, a stockholder and former director
of the Company, is President and Chief Executive Officer of ICC.

(14) Commitments and Contingencies

(a) Network Construction

In March 1996, the Company and Southern California Edison Company
("SCE") entered into a 25-year agreement under which the Company will
license 1,258 miles of fiber optic cable in Southern California, and
can install up to 500 additional miles of fiber optic cable. This
network, which will be maintained and operated primarily by the
Company, stretches from Los Angeles to southern Orange County. Under
the terms of this agreement, SCE will be entitled to receive an annual
fee for ten years, certain fixed quarterly payments, a quarterly
payment equal to a percentage of certain network revenue, and certain
other installation and fiber connection fees. The aggregate fixed
payments remaining under the agreement totaled approximately $135.3
million at December 31, 1998. The agreement has been accounted for as
a capital lease in the accompanying consolidated balance sheets.

F-51

ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------

(14) Commitments and Contingencies (continued)

In June 1997, the Company entered into an indefeasible right of use
("IRU") agreement with Qwest Communications Corporation ("Qwest") for
approximately 1,800 miles of fiber optic network and additional
broadband capacity in California, Colorado, Ohio and the Southeast.
Network construction is ongoing and is expected to be completed in
1999. The Company is responsible for payment on the construction as
segments of the network are completed and has incurred approximately
$19.2 million as of December 31, 1998, with remaining costs
anticipated to be approximately $15.8 million. Additionally, the
Company has committed to purchase $6.0 million in network capacity
from Qwest prior to the end of 1999.

(b) Network Capacity Commitments

In November 1998, the Company entered into two service agreements with
WorldCom Network Services, Inc. ("WorldCom"). Both of the agreements
have three-year terms and were effective in September 1998. Under the
Telecom Services Agreement, WorldCom provides, at designated rates,
switched telecommunications services and other related services to the
Company, including termination services, toll-free origination,
switched access, dedicated access and travel card services. Under the
Carrier Digital Services Agreement, WorldCom provides the Company, at
designated rates, with the installation and operation of dedicated
digital telecommunications interexchange services, local access and
other related services, which the Company believes expedites service
availability to its customers. Both agreements require that the
Company provide WorldCom with certain minimum monthly revenue, which
if not met, would require payment by the Company for the difference
between the minimum commitment and the actual monthly revenue.
Additionally, both agreements limit the Company's ability to utilize
vendors other than WorldCom for certain telecommunications services
specified in the agreements. The Company's policy is to accrue and
include in operating costs the effect of any shortfall in minimum
revenue commitments under these agreements in the period in which the
shortfall occurred. The Company has successfully achieved all minimum
revenue commitments to WorldCom under these agreements through
December 31, 1998.

F-52

ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------

(14) Commitments and Contingencies (continued)

(c) Other Commitments

The Company has entered into various equipment purchase agreements
with certain of its vendors. Under these agreements, if the Company
does not meet a minimum purchase level in any given year, the vendor
may discontinue certain discounts, allowances and incentives otherwise
provided to the Company. In addition, the agreements may be terminated
by either the Company or the vendor upon prior written notice.

Additionally, the Company has entered into certain commitments to
purchase capital assets with an aggregate purchase price of
approximately $80.6 million at December 31, 1998.

(d) Operating Leases

The Company leases office space and equipment under non-cancelable
operating leases. Lease expense was approximately $4.9 million, $1.2
million, $11.8 million and $27.0 million for fiscal 1996, the three
months ended December 31, 1996 and fiscal 1997 and 1998, respectively.
Minimum lease payments due each year on or before December 31 under
the Company's operating leases are as follows (in thousands):

1999 $ 30,327
2000 28,734
2001 25,509
2002 19,890
2003 16,384
Thereafter 64,802
=========================
$ 185,646
=========================

(e) Transport and Termination Charges

The Company has recorded revenue of approximately $4.9 million and
$58.3 million for fiscal 1997 and 1998, respectively, for reciprocal
compensation relating to the transport and termination of local
traffic to ISPs from customers of incumbent local exchange carriers
("ILECs") pursuant to various interconnection agreements. The

F-53

ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------

(14) Commitments and Contingencies (continued)

ILECs have not paid most of the bills they have received from the
Company and have disputed substantially all of these charges based on
the belief that such calls are not local traffic as defined by the
various agreements and under state and federal laws and public
policies.

The resolution of these disputes will be based on rulings by state
public utility commissions and/or by the Federal Communications
Commission ("FCC"). To date, there have been favorable final rulings
from 29 states that ISP traffic is subject to the payment of
reciprocal compensation under interconnection agreements. On February
25, 1999, the FCC issued a decision that ISP-bound traffic is largely
jurisdictionally interstate traffic. The decision relies on the
long-standing federal policy that ISP traffic, although
jurisdictionally interstate, is treated as though it is local traffic
for pricing purposes. The decision also emphasizes that because there
are no federal rules governing intercarrier compensation for ISP
traffic, the determination as to whether such traffic is subject to
reciprocal compensation under the terms of interconnection agreements
properly is made by the state commissions and that carriers are bound
by their interconnection agreements and state commission decisions
regarding the payment of reciprocal compensation for ISP traffic. The
FCC has initiated a rulemaking proceeding regarding the adoption of
prospective federal rules for intercarrier compensation for ISP
traffic. In its notice of rulemaking, the FCC expresses its preference
that compensation rates for this traffic continue to be set by
negotiations between carriers, with disputes resolved by arbitrations
conducted by state commissions pursuant to the Telecommunications Act
of 1996 (the "Telecommunications Act").

On March 4, 1999, the Alabama Public Service Commission (the "Alabama
PSC") issued a decision that found that reciprocal compensation is
owed for Internet traffic under four CLEC interconnection agreements
with BellSouth Corporation ("BellSouth"), which agreements were at
issue in the proceeding. With respect to the Company's interconnection
agreement, which was also at issue, the state commission interpreted
certain language in the Company's agreement to exempt ISP-bound
traffic from reciprocal compensation under certain conditions. The
Company believes that the Alabama PSC failed to consider the intent of
the parties in negotiating and executing the Company's interconnection
agreement, the specific language of the Company's interconnection
agreement and the impact of Alabama

F-54

ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------

(14) Commitments and Contingencies (continued)

PSC and FCC policies, and thereby misinterpreted the agreement. The
Company intends to file a request with the Alabama PSC by April 1,
1999 seeking determination that the ruling with respect to the
Company's agreement be reconsidered, and that the Company should be
treated the same as the other CLECs that participated in the
proceeding and for which the Alabama PSC ordered the payment of
reciprocal compensation. While the Company intends to pursue
vigorously a petition for reconsideration with the Alabama PSC, and if
the Company deems it necessary, judicial review, the Company cannot
predict the final outcome of this issue.

The Company has also recorded revenue of approximately $19.1 million
for fiscal 1998, related to other transport and termination charges to
the ILECs, pursuant to the Company's interconnection agreements with
these ILECs. Included in the Company's trade receivables at December
31, 1997 and 1998 are $4.3 million and $72.8 million, respectively,
for all receivables related to transport and termination charges. The
receivables balance at December 31, 1998 is net of an allowance of
$5.6 million for disputed amounts.

Although the Company's interconnection agreement with BellSouth has
expired, the Company has received written notification from BellSouth
that the Company may continue billing BellSouth under the pricing
terms within the expired interconnection agreement, until such
agreement is renegotiated or arbitrated by the relevant state
commissions. The Company's remaining interconnection agreements expire
in 1999 and 2000. While the Company believes that all revenue recorded
through December 31, 1998 is collectible and that future revenue from
transport and termination charges billed under the Company's current
interconnection agreements will be realized, there can be no assurance
that future regulatory and judicial rulings will be favorable to the
Company, that the Alabama PSC will reconsider its ruling, or that
different pricing plans for transport and termination charges between
carriers will not be adopted when the Company's interconnection
agreements are renegotiated or as a result of the FCC's rulemaking
proceeding on future compensation methods. In fact, the Company
believes that different pricing plans will be considered and adopted,
and although the Company expects that revenue from transport and
termination charges likely will decrease as a percentage of total
revenue from local services in periods subject to future
interconnection agreements, the Company's local

F-55

ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------

(14) Commitments and Contingencies (continued)

termination services still will be required by the ILECs and must be
provided under the Telecommunications Act, and likely will result in
increasing volume in minutes due to the growth of the Internet and
related services markets. The Company expects to negotiate reasonable
compensation and collection terms for local termination services,
although there is no assurance that such compensation will remain
consistent with current levels.

(f) Litigation

On April 4, 1997, certain shareholders of Zycom filed a shareholder
derivative suit and class action complaint for unspecified damages,
purportedly on behalf of all of the minority shareholders of Zycom, in
the District Court of Harris County, Texas (Cause No. 97-17777)
against the Company, Zycom and certain of their subsidiaries. This
complaint alleges that the Company and certain of its subsidiaries
breached certain duties owed to the plaintiffs. The plaintiffs were
denied class certification by the trial court and this decision has
been appealed. Trial has been tentatively set for August 1999. The
Company is vigorously defending the claims. While it is not possible
to predict the outcome of this litigation, management believes these
proceedings will not have a material adverse effect on the Company's
financial condition, results of operations or cash flows.

The Company is a party to certain other litigation which has arisen in
the ordinary course of business. In the opinion of management, the
ultimate resolution of these matters will not have a material adverse
effect on the Company's financial condition, results of operations or
cash flows.

(15) Business Units

The Company conducts transactions with external customers through the
operations of its Telecom Services, Network Services and Satellite
Services business units. Shared administrative services are provided
to the business units by Corporate Services. Corporate Services
consists of the operating activities of ICG Communications, Inc., ICG
Funding, LLC, ICG Canadian Acquisition, Inc., ICG Holdings (Canada)
Co., ICG Holdings, Inc. and ICG Services, Inc., which primarily hold
securities and provide certain

F-56

ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------

(15) Business Units (continued)

legal, accounting and finance, personnel and other administrative
support services to the business units.

Direct and certain indirect costs incurred by Corporate Services on
behalf of the business units are allocated among the business units
based on the nature of the underlying costs. Transactions between the
business units for services performed in the normal course of business
are recorded at amounts which are intended to approximate fair value.

Set forth below are revenue, EBITDA (before nonrecurring charges),
which represents the measure of operating performance used by
management to evaluate operating results, depreciation and
amortization, interest expense, total assets and capital expenditures
of continuing operations for each of the Company's business units and
for Corporate Services. As described in note 3, the operating results
of the Company reflect the operations of Zycom and NETCOM as
discontinued for all periods presented.

F-57

ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------

(15) Business Units (continued)

Fiscal Three months ended Fiscal years ended
year ended December 31, December 31,
September 30, ----------------------------- --------------------------------
1996 1995 1996 1997 1998
-------------------- -------------- -------------- -------------- ----------------
(unaudited)
(in thousands)

Revenue:
Telecom Services $ 72,815 12,743 27,307 149,358 305,612
Network Services 61,080 15,826 16,460 69,881 62,535
Satellite Services 21,297 6,168 6,188 29,986 40,451
Elimination of intersegment
revenue (1,049) (193) (478) (4,203) (10,979)
================ ============== ============== ============== ================
Total revenue $ 154,143 34,544 49,477 245,022 397,619
================ ============== ============== ============== ================

EBITDA (before nonrecurring
charges) (a):
Telecom Services $ (19,902) (4,462) (10,924) (92,053) (19,995)
Network Services (2,417) (423) 295 (544) (3,245)
Satellite Services (2,999) (1,371) (448) 74 7,088
Corporate Services (17,953) (3,996) (5,682) (27,811) (20,909)
Eliminations (215) (24) (117) (825) (3,692)
================ ============== ============== ============== ================
Total EBITDA (before
nonrecurring charges) $ (43,486) (10,276) (16,876) (121,159) (40,753)
================ ============== ============== ============== ================

Depreciation and amortization (b):
Telecom Services $ 21,295 2,871 7,442 45,798 86,775
Network Services 1,086 145 441 2,110 2,305
Satellite Services 4,809 1,272 1,133 4,462 7,314
Corporate Services 2,447 444 750 3,744 4,286
Eliminations 393 101 (75) 387 865
================ ============== ============== ============== ================
Total depreciation and
amortization $ 30,030 4,833 9,691 56,501 101,545
================ ============== ============== ============== ================
(Continued)

F-58

ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------

(15) Business Units (continued)

Fiscal Three months ended Fiscal years ended
year ended December 31, December 31,
September 30, ------------------------------ --------------------------------
1996 1995 1996 1997 1998
----------------- -------------- -------------- -------------- ---------------
(unaudited)
(in thousands)

Interest expense (b):
Telecom Services $ 6,814 2,432 1,744 11,996 2,693
Network Services 240 148 - 6 23
Satellite Services 175 52 13 - 88
Corporate Services 78,485 12,583 22,697 105,518 167,323
---------------- -------------- -------------- -------------- ---------------
Total interest expense $ 85,714 15,215 24,454 117,520 170,127
================ ============== ============== ============== ===============

Total assets:
Telecom Services (c) $ 349,786 218,579 400,003 663,864 1,135,937
Network Services 25,994 23,214 33,308 31,911 34,378
Satellite Services (c) 46,087 56,498 46,212 46,797 46,760
Corporate Services (c) 761,720 307,188 709,412 353,898 376,796
Eliminations (253,478) (28,312) (254,107) 6,062 (22,689)
Net current assets of discontinued
operations (d) 54,226 131,902 54,481 38,331 -
Net non-current assets of
discontinued operations 97,561 59,850 97,425 76,577 54,243
---------------- -------------- -------------- -------------- ---------------
Total assets $ 1,081,896 768,919 1,086,734 1,217,440 1,625,425
================ ============== ============== ============== ===============

Capital expenditures of continuing
operations (e):
Telecom Services $ 159,997 24,036 67,192 252,008 357,991
Network Services 2,983 279 764 1,577 1,804
Satellite Services 11,442 1,484 2,020 5,901 11,107
Corporate Services 2,728 1,108 438 10,384 960
Eliminations (215) (25) (117) (1,074) (2,916)
---------------- -------------- -------------- -------------- ---------------
Total capital expenditures of
continuing operations $ 176,935 26,882 70,297 268,796 368,946
================ ============== ============== ============== ===============

F-59

ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------

(15) Business Units (continued)

(a) EBITDA (before nonrecurring charges) consists of net loss from
continuing operations before interest, income taxes, depreciation and
amortization, provision for impairment of long-lived assets, net loss
(gain) on disposal of long-lived assets, restructuring costs, other
expense, net and accretion and preferred dividends on preferred
securities of subsidiaries, or simply, revenue less operating costs
and selling, general and administrative expenses. EBITDA (before
nonrecurring charges) is presented as the Company's measure of
operating performance because it is a measure commonly used in the
telecommunications industry. EBITDA (before nonrecurring charges) is
presented to enhance an understanding of the Company's operating
results and is not intended to represent cash flows or results of
operations in accordance with generally accepted accounting principles
("GAAP") for the periods indicated. EBITDA (before nonrecurring
charges) is not a measurement under GAAP and is not necessarily
comparable with similarly titled measures of other companies.

(b) Although not included in EBITDA (before nonrecurring charges), which
represents the measure of operating performance used by management to
evaluate operating results, the Company has supplementally provided
depreciation and amortization and interest expense for each of the
Company's business units and Corporate Services. Interest expense
excludes amounts charged for interest on outstanding cash advances and
expense allocations among the business units and Corporate Services.

(c) Total assets of Telecom Services, Satellite Services and Corporate
Services excludes investments in consolidated subsidiaries which
eliminate in consolidation.

(d) At December 31, 1998, the Company had net current liabilities of
discontinued operations of $23.3 million, and accordingly, such amount
was not included within net current assets of discontinued operations
on that date.

(e) Capital expenditures include assets acquired under capital leases and
excludes payments for construction of the Company's corporate
headquarters.

F-60

ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------

(16) Provision for Impairment of Long-Lived Assets

For fiscal 1997, provision for impairment of long-lived assets includes the
impairment of the Company's Corporate Services investments in StarCom
International Optics Corporation, Inc. ("StarCom") and Zycom of
approximately $5.2 million and $2.7 million, respectively, and the
Company's Satellite Services investments in MCN and Nova-Net of
approximately $2.9 million and $0.9 million, respectively. The Company
recorded its impairment in the investment in StarCom upon notification by a
senior secured creditor of StarCom that it intended to foreclose on its
collateral in StarCom, which subsequently caused the bankruptcy of StarCom.
Based on circumstances of continuing net operating losses and management's
assessment of the estimated fair value of related long-lived assets at
December 31, 1997, the Company recorded an impairment of its investments in
Zycom, MCN and Nova-Net.

For fiscal 1996, provision for impairment of long-lived assets includes the
Company's Telecom Services investments in the Phoenix and Melbourne
networks of approximately $5.8 million and $2.7 million, respectively, and
the Company's Satellite Services investment in its subsidiary in Mexico of
approximately $0.2 million. The provision for impairment of long-lived
assets was based on circumstances of continuing net operating losses and
management's assessment of the estimated fair value of related long-lived
assets at September 30, 1996. Additionally, the Company provided an
allowance for a note receivable from NovoComm, Inc. of approximately $1.3
million based on management's assessment at September 30, 1996 of the
collectibility of amounts due.

(17) Restructuring Costs

During fiscal 1998, the Company completed a decentralization of the
Company's Network Services business unit. The Company recorded
approximately $0.6 million in restructuring costs, consisting primarily of
severance costs, resulting from the decentralization.

Also during fiscal 1998, the Company recorded approximately $1.5 million of
restructuring costs associated with a combined restructuring plan for
Telecom Services and Corporate Services, which was designed to support the
Company's increased strategic focus on its ISP customer base, as well as to
improve the efficiency of operations and general and administrative support
functions. Restructuring costs under this plan include severance and other
employee benefit costs. At December 31, 1998, approximately $0.6 million
remains in accrued liabilities related to the Telecom Services

F-61

ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------

(17) Restructuring Costs (continued)

and Corporate Services restructuring plan, which is expected to be paid
during the first quarter of 1999.

Following the Company's acquisition of NikoNET in July 1998, the Company
closed a regional facility of a newly acquired subsidiary of NikoNET.
Restructuring costs, consisting primarily of severance costs, of
approximately $0.2 million were recorded as a result of the facility
closure during fiscal 1998. Approximately $0.2 million remains in accrued
liabilities at December 31, 1998 related to the facility closure.

(18) Income Taxes

The components of income tax benefit for fiscal 1996 are as follows (in
thousands):

Current income tax expense $ (198)
Deferred income tax benefit 5,329
----------------
Total $ 5,131
================

Current income tax expense of $0.2 million and $0.1 million for fiscal 1996
and 1998, respectively, represents state income tax relating to operations
of a subsidiary company in a state requiring a separate entity tax return.
Accordingly, this entity's taxable income cannot be offset by the Company's
consolidated net operating loss carryforwards. During fiscal 1996, the
deferred tax liability was adjusted for the effects of certain changes in
estimated lives of property and equipment as discussed in note 2. As a
result, the Company recognized an income tax benefit of $5.3 million. No
income tax expense or benefit was recorded in the three months ended
December 31, 1996 or fiscal 1997.

Income tax benefit differs from the amounts computed by applying the U.S.
federal income tax rate to loss before income taxes primarily because the
Company has not recognized the income tax benefit of certain of its net
operating loss carryforwards and other deferred tax assets due to the
uncertainty of realization.

The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1997 and 1998 are as follows:

F-62

ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------

(18) Income Taxes (continued)

December 31,
------------------------------------------
1997 1998
------------------- --------------------
(in thousands)

Deferred income tax liabilities:
Property and equipment, due to excess
purchase price of tangible assets and
differences in depreciation for book and
tax purposes $ 6,254 10,173
------------------- --------------------

Deferred income tax assets:
Net operating loss carryforwards (141,185) (247,126)
Accrued interest on high yield debt obligations
deductible when paid (72,330) (108,895)
Accrued expenses not currently deductible for
tax purposes, including deferred revenue (7,968) (9,275)
Less valuation allowance 215,229 355,123
------------------- --------------------
Deferred income tax assets (6,254) (10,173)
------------------- --------------------
Net deferred income tax liability $ - -
=================== ====================

As of December 31, 1998, the Company has federal and foreign net operating
loss carryforwards ("NOLs") of approximately $617.8 million and $35.0
million, respectively, which expire in varying amounts through 2019.
However, due to the provisions of Section 382, Section 1502 and certain
other provisions of the Internal Revenue Code (the "Code"), the utilization
of these NOLs will be limited. The Company is also subject to certain state
income tax laws, which will also limit the utilization of NOLs. As a result
of ICG's merger with NETCOM, which created a change in ownership of NETCOM
of greater than 50%, the NOLs generated by NETCOM prior to January 21, 1998
that can be used to reduce future taxable income are limited to
approximately $15.0 million per year, before realization of unrecognized
built-in gains.

A valuation allowance has been provided for the deferred tax asset relating
to the Company's NOLs, as management is not presently able to determine
when the Company will generate future taxable income.

F-63

ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------

(19) Employee Benefit Plans

The Company has established salary reduction savings plans under Section
401(k) of the Code which the Company administers for participating
employees. All full-time employees are covered under the plans after
meeting minimum service and age requirements. Under the plan available to
NETCOM employees from January 1, 1997 through July 1, 1998, the Company
made a matching contribution of 100% of each NETCOM employee's contribution
up to a maximum of 3% of the employee's eligible earnings. Prior to 1997,
NETCOM's matching contribution was limited to 50% of each NETCOM employee's
contribution up to a maximum of 6% of the employee's eligible earnings.
Under the plan available to all ICG employees, including NETCOM employees
subsequent to July 1, 1998, the Company makes a matching contribution of
ICG Common Stock up to a maximum of 6% of the employee's eligible earnings.
Aggregate matching contributions under the Company's employee benefit plans
were approximately $1.6 million, $0.6 million, $3.6 million and $4.0
million during fiscal 1996, the three months ended December 31, 1996, and
fiscal 1997 and 1998, respectively. The portion of this expense which
relates directly to employees of NETCOM is included in loss from
discontinued operations for all periods presented.

(20) Summarized Financial Information of ICG Holdings, Inc.

As discussed in note 10, the 11 5/8% Notes issued by Holdings during 1997
are guaranteed by ICG. The 12 1/2% Notes and the 13 1/2% Notes issued by
Holdings during fiscal 1996 and 1995, respectively, are also guaranteed by
ICG and Holdings-Canada.

The separate complete financial statements of Holdings have not been
included herein because such disclosure is not considered to be material to
the holders of the 11 5/8% Notes, the 12 1/2% Notes and the 13 1/2% Notes.
However, summarized combined financial information for Holdings and
subsidiaries and affiliates is as follows:

F-64

ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------

(20) Summarized Financial Information of ICG Holdings, Inc. (continued)

Summarized Consolidated Balance Sheet Information

December 31,
--------------------------------------
1997 1998
----------------- ------------------
(in thousands)

Current assets $ 213,625 277,098
Property and equipment, net 631,117 636,747
Other non-current assets, net 120,878 170,151
Net non-current assets of
discontinued operations 2,940 220
Current liabilities 95,792 81,299
Net current liabilities of discontinued
operations 367 944
Long-term debt, less current portion 890,503 1,004,316
Capital lease obligations, less current
portion 66,939 63,359
Due to parent 30,970 191,889
Due to ICG Services - 137,762
Redeemable preferred stock 292,442 338,311
Stockholders' deficit (408,453) (733,664)

Summarized Consolidated and Combined Statement of Operations Information

Three months ended Fiscal years ended
Fiscal year ended December 31, December 31,
September 30, -------------------------------- -------------------------------
1996 1995 1996 1997 1998
---------------------- --------------- -------------- --------------- ---------------
(unaudited)
(in thousands)

Total revenue $ 154,143 34,544 49,477 245,022 400,309
Total operating costs
and expenses 239,343 50,322 75,199 430,816 546,850
Operating loss (85,200) (15,778) (25,722) (185,794) (146,541)
Loss from continuing
operations before
cumulative effect
of change in accounting (169,439) (34,211) (49,266) (321,802) (320,363)
Net loss (172,687) (34,281) (49,750) (328,193) (325,211)

F-65

ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------

(21) Condensed Financial Information of ICG Holdings (Canada) Co.

Condensed financial information for Holdings-Canada only is as follows:

Condensed Balance Sheet Information

December 31,
-----------------------------------------
1997 1998
---------------------- ----------------
(in thousands)

Current assets $ 162 162
Advances to subsidiaries 30,970 191,889
Non-current assets, net 2,604 2,414
Current liabilities 107 73
Long-term debt, less
current portion 65 65
Due to parent 21,146 182,101
Share of losses of subsidiary 408,453 733,664
Shareholders' deficit (396,035) (721,438)

Condensed Statement of Operations Information

Fiscal year ended Three months ended December Fiscal years ended December 31,
September 30, 31,
------------------------------- ----------------------------------
1996 1995 1996 1997 1998
-------------------- --------------- -------------- --------------- -----------------
(unaudited)
(in thousands)

Total revenue $ - - - - -
Total operating costs
and expenses 3,438 361 73 195 192
Operating loss (3,438) (361) (73) (195) (192)
Losses from subsidiaries (172,687) (34,281) (49,750) (328,193) (325,211)
Net loss attributable to
common shareholders (184,107) (34,642) (49,823) (328,388) (325,403)

F-66

ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued
- ----------------------------------------------------------------------------

(22) Condensed Financial Information of ICG Communications, Inc. (Parent
company)

At December 31, 1998, the primary assets of ICG are its investments in ICG
Services, ICG Funding, ICG Acquisition and NikoNET, including advances to
those subsidiaries. Certain corporate expenses of the parent company are
included in ICG's statement of operations and were approximately $1.2
million and $2.2 million for fiscal 1997 and 1998, respectively. At
December 31, 1998, ICG had no operations other than those of ICG Services,
ICG Funding, ICG Acquisition and their subsidiaries.

F-67

FINANCIAL STATEMENT SCHEDULE

ICG Communications, Inc. Page

Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . S-1

Schedule II: Valuation and Qualifying Accounts . . . . . . . . . . S-2

Independent Auditors' Report

The Board of Directors and Stockholders
ICG Communications, Inc.:

Under the date of February 15, 1999, we reported on the consolidated balance
sheets of ICG Communications, Inc. and subsidiaries as of December 31, 1997 and
1998 and the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for the fiscal years ended September 30, 1996, the
three months ended December 31, 1996, and the fiscal years ended December 31,
1997 and 1998 as contained in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1998. In connection with our audits of the
aforementioned consolidated financial statements, we have also audited the
related financial statement Schedule II: Valuation and Qualifying Accounts. This
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion on this financial statement schedule
based on our audits. We did not audit the consolidated financial statements and
related financial statement schedule of NETCOM On-Line Communication Services,
Inc. ("NETCOM"), a discontinued wholly owned subsidiary of the Company, as of
December 31, 1997 or for the fiscal year ended December 31, 1996, the
three-month period ended December 31, 1996, or the fiscal year ended December
31, 1997, whose total assets constitute 11.7 percent in fiscal 1997, and whose
loss from operations constitutes 100.5 percent in fiscal 1996, 96.0 percent in
the three months ended December 31, 1996, and 83.8 percent in fiscal 1997 of the
consolidated loss from discontinued operations. Those consolidated financial
statements were audited by other auditors whose reports have been furnished to
us, and our opinion, insofar as it relates to the amounts included in the
financial statement schedule for NETCOM, is based solely on the reports of the
other auditors.

In our opinion, based on our audits and the reports of the other auditors, the
related financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.

As explained in note 2 to the consolidated financial statements, during the
fiscal year ended September 30, 1996, the Company changed its method of
accounting for long-term telecom services contracts.

KPMG LLP

Denver, Colorado
February 15, 1999

S-1

ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES Schedule II

Valuation and Qualifying Accounts
- -------------------------------------------------------------------------------

Additions
-----------------------------
Balance at Charged to Charged to Balance at
beginning costs and other end of
Description of period expenses accounts Deductions period
- ------------------------------------------------ ------------ ------------- -------------- ------------- -------------
(in thousands)
Allowance for uncollectible trade receivables:

Fiscal year ended September 30, 1996 $ 2,142 1,531 - (1,293) 2,380
------------ ------------- -------------- ------------- -------------

Three months ended December 31, 1996 $ 2,380 914 - (883) 2,411
------------ ------------- -------------- ------------- -------------

Fiscal year ended December 31, 1997 $ 2,411 3,985 - (1,142) 5,254
------------ ------------- -------------- ------------- -------------

Fiscal year ended December 31, 1998 $ 5,254 12,031 - (1,812) 15,473
------------ ------------- -------------- ------------- -------------

Allowance for uncollectible note receivable:

Fiscal year ended September 30, 1996 $ 175 7,100 - - 7,275
------------ ------------- -------------- ------------- -------------

Three months ended December 31, 1996 $ 7,275 - - - 7,275
------------ ------------- -------------- ------------- -------------

Fiscal year ended December 31, 1997 $ 7,275 - - (3,975) 3,300
------------ ------------- -------------- ------------- -------------

Fiscal year ended December 31, 1998 $ 3,300 - - (2,000) 1,300
------------ ------------- -------------- ------------- -------------

Allowance for impairment of long-lived assets:

Fiscal year ended September 30, 1996 $ 2,000 - - - 2,000
------------ ------------- -------------- ------------- -------------

Three months ended December 31, 1996 $ 2,000 - - - 2,000
------------ ------------- -------------- ------------- -------------

Fiscal year ended December 31, 1997 $ 2,000 5,170 - (2,000) 5,170
------------ ------------- -------------- ------------- -------------

Fiscal year ended December 31, 1998 $ 5,170 - - - 5,170
------------ ------------- -------------- ------------- -------------

See accompanying independent auditors' report.

S-2

INDEX TO EXHIBITS
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

EXHIBITS

3.3: Agreement and Plan of Reorganization by and among ICG Communications, Inc.,
ICG Canadian Acquisition, Inc., ICG Holdings (Canada), Inc. and ICG
Holdings (Canada) Co., dated November 4, 1998.

3.4:Order of Amalgamation between ICG Holdings (Canada), Inc. and ICG Holdings
(Canada) Co., dated December 22, 1998.

3.5: Memorandum and Articles of Association of ICG Holdings (Canada) Co. filed
with the Registrar of Joint Stock Companies, Halifax, Nova Scotia.

4.11:Second Amended and Restated Articles of Incorporation of ICG Holdings,
Inc., dated March 10, 1997.

10.29: ICG Communications, Inc. 1998 Stock Option Plan.

10.30: Form of Stock Option Agreement for 1998 Stock Option Plan.

10.31: Amendment No. 1 to the ICG Communications, Inc. 1998 Stock Option Plan,
dated December 15, 1998.

10.32: Form of Agreement regarding Gross-Up Payments, by and between ICG
Communications, Inc. and each of J. Shelby Bryan, Harry R. Herbst, Douglas
I. Falk and H. Don Teague, dated December 16, 1998.

21.1: Subsidiaries of the Registrant.

23.1: Consent of KPMG LLP.

23.2: Consent of Ernst & Young LLP.

27.1:Financial Data Schedule of ICG Communications, Inc. for the Fiscal Year
Ended December 31, 1998.

EXHIBIT 21.1

Subsidiaries of the Registrant

State of Incorporation Doing Business
Name of Subsidiary As
- ---------------------------------------------------------------------- ------------------------ ----------------------------

Bay Area Teleport, Inc. Delaware --
Communications Buying Group, Inc. Ohio --
DataChoice Network Services, L.L.C. Nevada --
Fiber Optic Technologies of the Northwest, Inc.
(formerly known as Fiber Optic Technologies of
Oregon, Inc.) Oregon --
ICG Access Services - Southeast, Inc.
(formerly known as PrivaCom, Inc.) Delaware --
ICG Canadian Acquisition, Inc. Delaware --
ICG ChoiceCom, L.P. Delaware --
(formerly known as CSW/ICG ChoiceCom, L.P.)
ICG ChoiceCom Management, LLC
(formerly known as Southwest TeleChoice Management, LLC
and CSW/ICG ChoiceCom Management, LLC) Delaware --
ICG Enhanced Services, Inc. Colorado --
ICG Equipment, Inc. Colorado --
ICG Fiber Optic Technologies, Inc.
(formerly known as Fiber Optic Technologies, Inc.) Colorado --
ICG Funding, LLC Delaware --
ICG Holdings, Inc.
(formerly known as IntelCom Group (U.S.A.), Inc.) Colorado --
ICG Holdings (Canada) Co. Nova Scotia --
ICG Ohio LINX, Inc.
(formerly known as Ohio Local Interconnection Network
Exchange Co.) Ohio --
ICG PST, Inc.
(formerly known as NETCOM On-Line Communication Services,
Inc.) Delaware --
ICG Satellite Services, Inc.
(formerly known as Commden Ltd. and as ICG Wireless
Services, Inc.) Colorado --
ICG Services, Inc. Delaware --
ICG Telecom Canada, Inc. Federal Canadian --
ICG Telecom Group, Inc.
(formerly known as ICG Access Services, Inc.) Colorado --

State of Incorporation Doing Business
Name of Subsidiary As
- ---------------------------------------------------------------------- ------------------------ ----------------------------

ICG Telecom Group of Virginia, Inc. Virginia --
ICG Telecom of San Diego, L.P. California --
(formerly known as Linkatel of California, L.P.)
Maritime Telecommunications Network, Inc. Colorado --
NikoNET, LLC Georgia --
PTI Harbor Bay, Inc. Washington --
TransAmerican Cable, Inc. Kentucky MidAmerican Cable
UpSouth Corporation Georgia --
Zycom Corporation Alberta, Canada --
(formerly known as Camber Sports, Inc.)
Zycom Corporation Texas --
Zycom Network Services, Inc. Texas --
(formerly known as Travel Phone, Inc.)

Consent of KPMG LLP

The Board of Directors
ICG Communications, Inc.:

We consent to incorporation by reference in the registration statements Nos.
33-96660, 333-08729, 333-18839, 333-38823, 333-40495 and 333-40495-01 on Form
S-3 of IntelCom Group Inc. and Nos. 33-14127, 333-25957, 333-39737, 333-45213
and 333-56835 on Form S-8 of ICG Communications, Inc. of our reports dated
February 15, 1999, relating to the consolidated balance sheets of ICG
Communications, Inc. and subsidiaries as of December 31, 1997 and 1998, and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for the fiscal years ended September 30, 1996, the three-month
period ended December 31, 1996, and the fiscal years ended December 31, 1997 and
1998, and the related financial statement schedule, which reports appear in the
December 31, 1998 Annual Report on Form 10-K of ICG Communications, Inc.

As explained in note 2 to the consolidated financial statements, during the
fiscal year ended September 30, 1996, the Company changed its method of
accounting for long-term telecom services contracts.

KPMG LLP

Denver, Colorado
March 29, 1999

Consent of Ernst & Young LLP, Independent Auditors

We consent to the incorporation by reference in the Registration Statements
(Forms S-3 of IntelCom Group Nos. 33-96660 and 333-08729; Forms S-3 of ICG
Communications, Inc. Nos. 333-18839, 333-38823, 333-40495 and 333-40495-01; and
Forms S-8 of ICG Communications, Inc. Nos. 33-14127, 333-25957, 333-39737, and
333-45213) of our reports (a) dated February 13, 1998 with respect to the
consolidated balance sheet of NETCOM On-Line Communication Services, Inc. as of
December 31, 1997 and the related statements of operations, stockholders' equity
and cash flows for each of the two years in the period ended December 31, 1997
(not presented separately herein), and (b) dated April 16, 1998 with respect to
the consolidated balance sheet of NETCOM On-Line Communication Services, Inc. as
of December 31, 1996 and the related statements of operations, stockholders'
equity and cash flows for the three months then ended (not presented separately
herein), included in this Annual Report (Form 10-K) of ICG Communications, Inc.,
ICG Holdings (Canada) Co. and ICG Holdings, Inc.

Ernst & Young LLP

San Jose, California
March 26, 1999

SIGNATURES

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

ICG Communications, Inc.

By: /s/J. Shelby Bryan
--------------------------------------
J. Shelby Bryan
President and Chief Executive Officer

Date: March 30, 1999

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

Signature Title Date

/s/William J. Laggett Chairman of the Board of Directors March 30, 1999
- -------------------------------
William J. Laggett
President and Chief Executive Officer (Principal
/s/J. Shelby Bryan Executive Officer) March 30, 1999
- -------------------------------
J. Shelby Bryan
Executive Vice President and Chief
Financial Officer (Principal Financial
/s/Harry R. Herbst Officer) March 30, 1999
- -------------------------------
Harry R. Herbst
Vice President and Corporate Controller
/s/Richard Bambach (Principal Accounting Officer) March 30, 1999
- -------------------------------
Richard Bambach

/s/John U. Moorhead Director March 30, 1999
- -------------------------------
John U. Moorhead

/s/Leontis Teryazos Director March 30, 1999
- -------------------------------
Leontis Teryazos

/s/Walter Threadgill Director March 30, 1999
- -------------------------------
Walter Threadgill

SIGNATURES

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

ICG Holdings (Canada) Co.

By: /s/J. Shelby Bryan
----------------------------------------
J. Shelby Bryan
President and Chief Executive Officer

Date: March 30, 1999

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

Signature Title Date

President and Chief Executive Officer (Principal
/s/J. Shelby Bryan Executive Officer) March 30, 1999
- -------------------------------
J. Shelby Bryan
Executive Vice President, Chief Financial Officer
/s/Harry R. Herbst and Director (Principal Financial Officer) March 30, 1999
- -------------------------------
Harry R. Herbst
Executive Vice President, General Counsel,
/s/H. Don Teague Secretary and Director March 30, 1999
- -------------------------------
H. Don Teague
Vice President and Corporate Controller
/s/Richard Bambach (Principal Accounting Officer) March 30, 1999
- -------------------------------
Richard Bambach

SIGNATURES

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

ICG Holdings, Inc.

By: /s/J. Shelby Bryan
-------------------------------------
J. Shelby Bryan
President, Chief Executive Officer and
Director

Date: March 30, 1999

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

Signature Title Date

Chairman of the Board of Directors, President and
Chief Executive Officer (Principal Executive
/s/J. Shelby Bryan Officer) March 30, 1999
- ------------------------------
J. Shelby Bryan
Executive Vice President, Chief Financial Officer
/s/Harry R. Herbst and Director (Principal Financial Officer) March 30, 1999
- ------------------------------
Harry R. Herbst
Executive Vice President, General Counsel,
/s/H. Don Teague Secretary and Director March 30, 1999
- ------------------------------
H. Don Teague
Vice President and Corporate Controller
/s/Richard Bambach (Principal Accounting Officer) March 30, 1999
- ------------------------------
Richard Bambach

/s/Douglas I. Falk Executive Vice President - Telecom and Director March 30, 1999
- ------------------------------
Douglas I. Falk