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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

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, 2002

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.

161 Inverness Drive West
Englewood, Colorado 80112
(Address of principal executive offices)

Registrant’s telephone numbers, including area codes: (888) 424-1144 or (303) 414-5000

Securities registered pursuant to Section 12(b) of the Act:
None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value (8,000,000 shares outstanding as of March 14, 2003)

Warrants to purchase Common Stock (800,000 warrants outstanding as of March 14, 2003)

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. Yes [X]   No [  ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of 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. [  ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [  ]   No[X]

As of March 14, 2003 the aggregate market value of ICG Communications, Inc. Common Stock held by non-affiliates (using the closing price of $3.40 on March 14, 2003) was approximately $19,615,804. This amount does not include approximately 2,230,646 shares held by the affiliates described in Part III, Item 12, “Certain Beneficial Owners.”

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Indicate by check whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [X]   No [  ]

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PART I

Unless the context otherwise requires, the term “Company”, “ICG” or “Registrant” means the combined business operations of ICG Communications, Inc. and its subsidiaries. All dollar amounts are in U.S. dollars.

The Business section and other parts of this Annual Report contain “forward-looking statements” intended to qualify as safe harbors from liability as established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements can generally be identified as such because the context of the statements include words such as “intends,” “anticipates,” “expects,” “estimates,” “plans,” “believes” and other similar words. Additionally, statements that describe the Company’s future plans, objectives or goals also are forward-looking statements. All forward-looking statements are subject to certain risks and uncertainties that could cause actual results or outcomes to differ materially from those currently anticipated. These risks and uncertainties, which are described in more detail in Part II Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, of this Annual Report, include, but are not limited to the following:

	•		Customer concentration and the Company’s ability to retain its major customers on profitable terms;
	•		The Company’s ability to collect reciprocal compensation;
	•		The Company’s ability to sustain positive operating income and EBITDA;
	•		The Company’s ability to successfully maintain commercial relationships with its critical suppliers;
	•		The Company’s ability to manage expansion of its service offerings and its network and infrastructure;
	•		The Secured Notes and Senior Subordinated Term Loan contain certain covenants that restrict the Company’s financial and operational flexibility;
	•		Changes in, or the Company’s inability to comply with, existing government regulations;
	•		The performance of the Company’s network;
	•		The rapid change of technology within the telecommunications industry;
	•		The Company’s ability to access capital markets in a timely manner, at reasonable costs and on satisfactory terms and conditions;
	•		The Reorganized Company is largely controlled by two parties;
	•		Potential for business combinations; and
	•		General economic conditions and the related impact on demand for the Company’s services.

ITEM 1. BUSINESS

BUSINESS OVERVIEW

Services and Customers

ICG is a facilities-based, nationwide communications provider focused on providing data and voice services to Internet Service Providers (“ISP”s), telecommunication carriers and corporate customers. Headquartered in Englewood, Colorado, ICG is a competitive local exchange carrier (“CLEC”) certified in most states, having interconnection agreements with every major local exchange carrier. ICG’s facilities support three primary product offerings:

Dial-Up Services: The Company provides primary rate interface (“PRI”) ports (one and two way) and managed modem remote access services (“RAS”) to many of the largest national ISPs and other telecommunications carriers, as well as to numerous regional ISPs and other communication service companies. Most of these services are provided through the Company’s owned switch facilities. Currently, ICG’s network footprint has the capability to provide Dial-Up service to over 75% of the nation’s population. Before any reciprocal compensation revenues earned from these services, revenue from Dial-Up services

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			accounted for 44% of the Company’s total 2002 revenue. Associated reciprocal compensation revenue accounted for an additional 14% of the Company’s total 2002 revenue. As of December 2002, the Company had approximately 806,000 ISP customer ports in service.
			Point-to-Point Broadband Service: The Company provides dedicated bandwidth to connect (i) inter-exchange carriers (“IXC”s) to local markets, large corporations and other carrier facilities, and (ii) large corporations to their inter-exchange carriers and other corporate locations. Such dedicated bandwidth sales are focused in areas where ICG maintains local fiber and buildings on its own network or in close proximity thereto. Point-to-Point Broadband service also includes switched access and SS7 services. Point-to-Point Broadband service accounted for 25% of the Company’s total 2002 revenue.
			Corporate Services: The Company offers Internet access, data and voice services to corporate customers, with an emphasis on Dedicated Internet Access (“DIA”) and Internet Protocol (“IP”) Telephony services. ICG is well positioned to expand this service with its metropolitan and regional fiber, switching asset base and nation-wide data network infrastructure. Corporate Services accounted for 17% of the Company’s total 2002 revenue. As of December 2002, Corporate Services’ customers purchased approximately 97,000 access lines.

Network

To provide its service offerings, ICG combines approximately 5,700 route miles of metropolitan and regional fiber network infrastructure and its 47 voice and data switches with its nationwide fiber optic backbone, data points of presence (“POP”), 24 asynchronous transfer mode (“ATM”) switches, and numerous private and public Internet peering arrangements. The Company’s data network is supported by an OC-48 capacity nationwide fiber optic backbone currently operating at OC-12 capacity. The design of the physical network permits the Company to offer flexible, high-speed telecommunications services to its customers.

The regional network infrastructure consists of fiber and associated advanced electronics and transmission equipment. The Company’s network includes a centrally controlled, logical IP switch (i.e., “Soft Switch”), and is generally configured in redundant synchronous optical network (“SONET”) rings to make the network accessible to the largest concentration of telecommunications intensive business customers within a given market. This network architecture also offers the advantage of uninterrupted service in the event of a fiber cut or equipment failure, thereby resulting in limited outages and increased network reliability in a cost efficient manner.

REORGANIZATION AND EMERGENCE FROM BANKRUPTCY

During the second half of 2000, a series of financial and operational events negatively impacted ICG and its subsidiaries. These events reduced the Company’s revenue and cash flow expectations for the remainder of 2000 and 2001, which in turn jeopardized the Company’s ability to comply with its existing senior secured credit facility (the “Senior Facility”). As a result of these and other events, on November 14, 2000, ICG and most of its subsidiaries filed voluntary petitions for protection under Chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) in the United States District Court for the District of Delaware (the “Bankruptcy Court”). The filings were made in order to facilitate the restructuring of the Company’s debt, trade liabilities and other obligations.

On December 19, 2001, the Company filed a proposed Plan of Reorganization and a Disclosure Statement in the Bankruptcy Court. The Company subsequently filed a First Amended Plan and Disclosure Statement on March 1, 2002. On March 26, 2002, the Company filed a Second Amended Plan and Disclosure Statement, which were amended on April 3, 2002. The original Plan of Reorganization, the Disclosure Statement, the First Amended Plan and Disclosure Statement, and the Second Amended Plan and Disclosure Statement are collectively referred to herein as the “Original Plan”. On April 3, 2002, the Company submitted the Original Plan to the Company’s creditors for approval. On May 16, 2002, the Company’s balloting agent filed an affidavit indicating that all classes of creditors entitled to vote had overwhelmingly accepted the Original Plan. On May 21, 2002, the Bankruptcy Court entered an order confirming the Original Plan.

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The Original Plan was formulated on the basis of extensive negotiations conducted among the Company and its primary constituencies. As part of the Original Plan, the Company received commitment letters for new financing totaling $65 million (the “Original Exit Financing”). The Original Exit Financing was to be funded predominantly by Cerberus Capital Management, L.P. (“Cerberus”). Although the Bankruptcy Court confirmed the Original Plan, the closing of the Original Exit Financing transactions did not occur and the Original Plan did not become effective as a result of disagreements between the Company and Cerberus.

After consulting with the Company’s official committee of unsecured creditors and the Company’s senior secured lenders, the Company engaged in settlement discussions with Cerberus. As a result of those negotiations, on July 25, 2002, the Company entered into an agreement with Cerberus that was embodied in a proposed modification to the Original Plan. The Original Plan, as modified, is referred to herein as the “Modified Plan”.

The Company determined that the changes to the Original Plan, as reflected in the Modified Plan, required a re-solicitation of votes from certain classes of creditors. Thus, on July 26, 2002, the Company filed the Modified Plan and a Supplement to the Disclosure Statement in the Bankruptcy Court. On August 23, 2002, the Company submitted the Modified Plan to the Company’s creditors for approval. On October 7, 2002, the Company’s balloting agent filed an affidavit indicating that all classes of creditors entitled to vote had again overwhelmingly accepted the Modified Plan. On October 9, 2002, the Bankruptcy Court entered an order confirming the Modified Plan. On October 10, 2002 (the “Effective Date”), the Company’s Modified Plan became effective and the Company emerged from Chapter 11 bankruptcy protection.

Pursuant to the Modified Plan, on October 10, 2002, the Company received new financing consisting of a $25 million senior subordinated term loan (the “Senior Subordinated Term Loan”). The Company’s senior secured credit facility (the “Senior Facility”) balance was then cancelled and replaced with new notes (the “Secured Notes”). Proceeds from the Senior Subordinated Term Loan were utilized to pay down the balance of the Secured Notes to $59 million.

BUSINESS AND STRATEGY

ICG is focused on providing a set of services that combine its core competencies, market reach and customer and vendor relationships with the ability to leverage its existing network infrastructure. The Company’s product offerings include Dial-Up services, Point-to-Point Broadband and Corporate Services, with an emphasis on future growth from DIA and IP Telephony services. The Company expanded its Corporate Services product line in 2002 with the addition of a “bursting” capability for DIA T3 services. ICG is deploying a new IP Telephony product that provides business grade voice and Internet access services over a single T1. The service, known as VoicePipe™, is targeted primarily to Corporate Services customers. The service is feature rich and controlled by a web-portal, enabling customers to have control and flexibility over their personal communications without making an investment in a Private Branch Exchange System (“PBX”). VoicePipe™ was introduced in Colorado in February 2003 and will be expanded to ICG’s core markets during the upcoming year. Also, in 2002 the Company introduced additional billing options for its RAS product offerings. These options, in addition to the flat-rate port option (“iRAS”), enable ISPs to be billed by the hour in a metered fashion (“mRAS”) or per subscriber (“sRAS”) for their usage.

Product Offerings

Dial-Up Services (ISP Business)

The Company’s Dial-Up services are supported by its nationwide fiber optic backbone that connects to numerous public and private peering sites with major ISPs and IXCs. The network, in combination with certain leased long-haul assets, carries data traffic associated with the Company’s ISP business. The design of the physical network permits the Company to offer flexible, high-speed services to its customers.

The Company targets a variety of data access and transport services to ISP and corporate customers. It is not economically feasible for many ISPs to build and maintain their own networks, and consequently they prefer to outsource network facilities management in order to focus internal resources on their core ISP business. To this end,

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ICG offers PRI and RAS to ISPs to manage their Internet access requirements, ranging from connection to facilities management responsibilities.

Dial-Up service competes with broadband services such as cable and DSL for end-users. While Dial-Up subscribers are projected to decline in coming years, the ports required to support end-user customers are anticipated to decline at a slower rate because, as end-users spend more time on-line, their ISPs (ICG’s customers) require more ports to support their customer base. In addition, there has been, and is expected to continue to be, consolidation among regional ISPs into larger national ISPs that require a nationwide network such as ICG’s. Further, there has been consolidation among the providers of Internet infrastructure, leaving ICG with fewer competitors.

ICG’s Dial-Up customers include some of the largest national and regional ISPs. As of December 2002, the Company had approximately 806,000 ISP customer ports providing PRI and RAS. At an industry average of ten end-users per port, ICG estimates that its systems are serving approximately 10% of all Dial-Up Internet subscribers in the United States.

The value proposition offered by ICG to ISP customers is:

	•		Outsource network management: ICG’s services provide turnkey network services to the ISP, allowing the ISP to focus on core activities such as marketing, customer acquisition and retention.
	•		Time-to-market advantage: ICG’s nationwide network provides a growing ISP with a national presence in major U.S. markets, enabling the ISP to quickly expand its geographical customer reach.
	•		Expanding nationwide network: ICG’s growing nationwide network provides the largest ISPs with extensive coverage. Currently, ICG’s network footprint has the capability to provide Dial-Up services to over 75% of the nation’s population.
	•		Enhanced dial-up experience: The data network upgrade to v.92 dial-up modem specification and v.44 data compression standard provides ISP subscribers with simultaneous use of the phone line for data and voice, faster log-on rates as well as faster data download rates. These enhanced services provide ICG’s ISP customers with an increased value proposition for their subscribers.
	•		Improved capital utilization: ISPs can utilize their capital to focus on their core business and eliminate substantial selling, general and administrative costs associated with engineering, installing and managing their own networks. As a result of the current industry competition and the capital required to provide quality networks, economies of scale are essential for cost effective pricing.
	•		Billing Flexibility: ICG offers a variety of billing options including monthly port, hourly and per-subscriber usage.

ICG provides the following Dial-Up services:

PRI

PRI utilizes ICG’s network to route ISP end-user calls from the public switched network to the ISP-owned modem banks. The end-user dials up the ISP and the call is sent through the public network and routed to the ICG switch, which then routes the call to the ISP-owned modem banks or RAS equipment. The RAS equipment is typically collocated at an ICG central office facility. If the ISP is not collocated, a private line connection is required between the ISP’s POP and the ICG central office.

PRI is billed at a fixed monthly rate per port. The Company’s direct costs are primarily related to leased DS3 lines that connect the public network to the ICG switch or for leased T1 lines between the ICG switch and an ISP POP that is not collocated with ICG’s facilities.

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RAS

RAS adds network management services as it “connects, sends and routes” customer data traffic. This service has the capability to route data directly over ICG’s network to the Internet, allowing the ISP to outsource its infrastructure and create a national footprint with minimal investment in fixed assets. The Company estimates that approximately 65% of ISP traffic can bypass the ISP.

iRAS is billed at a fixed monthly rate per port, typically under multi-year contracts. In January 2002, the Company began offering mRAS, which is a RAS product billed on a metered basis by the hour, based on usage. The Company’s costs to provide this service are mainly related to the connection charges to the public network, either for a leased DS3 for on-switch traffic or for a leased PRI for off-switch traffic. Costs also include network backbone and backhaul costs to transfer traffic to the ICG hub closest to the ISP POP. In November 2002, the Company began offering sRAS, which is a RAS product charged based on the number of ISP subscribers accessing the ICG network during a monthly billing cycle.

Point-to-Point Broadband

The Company provides the following Point-to-Point Broadband services to a customer base that is comprised primarily of IXCs and large businesses:

Special Access

ICG provides special access services to long distance companies, inter-exchange carriers, ISPs and large end-user business customers. Special access involves providing a dedicated facility used to connect: (i) end-user customers to a long distance carrier’s facilities; (ii) a long distance carrier’s facilities to the local telephone company’s central offices; or (iii) different facilities of the same carrier or one carrier to another within the same local calling area. Special access is offered at DS1, DS3, OC-3, OC-12, OC-48 and OC-192 capacities (with availability depending upon location). Special access services are a high-margin business that accounted for approximately 90% of Point-to-Point Broadband revenue in 2002.

ICG’s value proposition for the Special Access service is:

	•		Network coverage: ICG offers local private line services in 22 different markets located in California, Colorado, Texas, Ohio, Georgia, Tennessee, Kentucky, Alabama, and North Carolina. In addition, ICG offers intercity private line services between multiple city pairs in the states of California, Ohio, Kentucky, and Colorado.
	•		Quality of Service: ICG’s network and monitoring systems provide customers with levels of service that consistently exceed industry standards. This allows customers to focus on their core business needs without concern for their private line service reliability.
	•		Customer Service: ICG focuses on creating flexible solutions that fit individual customer needs, building personalized relationships with customers and offering simple, competitive pricing.

Switched Access

Interstate and intrastate switched access services include transport and switching of calls between two carriers or a carrier and an end-user. By using ICG to switch (terminate or originate) a call, the long distance carrier may reduce their local access costs, which are a major operating expense. Additionally, carriers who use ICG’s Switched Access can benefit from maintaining a single connection to the local switched network, instead of multiple connections with the local ILECs.

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SS7

SS7 services are used to connect long distance (including wireless) and local exchange carriers’ networks, and the SS7 signals between network elements to provide faster call set-up and more efficient use of network resources. Customers enjoy a highly secure and reliable network with ICG’s advanced SS7 network and monitoring system.

Corporate Services

After the passage of the Federal Telecommunications Act of 1996 (the “Telecommunications Act”), ICG positioned itself as a CLEC and targeted the small to medium-sized business market. The Company currently targets the medium to large-sized business market, which it believes represents the most favorable revenue opportunity to leverage its local network infrastructure. While the demand for voice services by businesses has been relatively stable, the demand for data services in commercial applications is expected to increase significantly over the next several years as this customer segment addresses its growing need for data connections, greater bandwidth and the need to outsource network and information technology (“IT”) infrastructure. ICG is positioning itself to take advantage of these industry trends. The Company has the ability to leverage its established CLEC customer base and existing voice and data networks to expand its Corporate Services business. The Company continues to add new services and provides excellent network performance. Growth in the Corporate Services business is anticipated to come primarily from sales of DIA, voice and Internet converged services and enhanced voice services.

ICG provides the following Corporate Services:

Voice

Competitive local dial tone service consists of basic local exchange lines and trunks with business-related voice line features (e.g. voicemail), local calling, and local toll calling. Under the Company’s business strategy, sales of voice services will concentrate on customers with a minimum of 12 lines in areas where the Company has switch capacity. The Company has focused on providing voice services in the following five operating regions in the United States: California, Colorado, Ohio, Texas and parts of the Southeast. ICG believes it provides a more responsive service delivery alternative to existing providers, as well as excellent customer service with the network reliability customers expect in their voice applications.

In recent years, the Company has reduced the types of service and regions in which it would offer voice services in order to focus on core services. As a result, affected customers have been transitioned to other providers. The Company had approximately 230,000 primarily business customer voice lines in service at year-end 2000, which was reduced to approximately 97,000 by year-end 2002.

DIA

DIA provides dedicated bandwidth from a customer’s premises directly to the Internet at T1 and T3 speeds using ICG’s numerous Internet peering arrangements. In order to meet corporate customer needs for Internet connectivity, the Company introduced DIA service in late 2001. The Company plans to emphasize this product in the future, offering full T1 and full or fractional T3 connections. The Company began offering its DIA services in a limited number of markets in 2001 and by the end of 2002 had expanded its footprint to 25 markets. ICG is well positioned to penetrate this market by leveraging its existing investment in metropolitan fiber and nationwide backbone capacity.

Customers of ICG’s DIA service benefit from a Tier I provider with high levels of customer service and network reliability at a competitive price. ICG stands behind its service with an industry-leading Service Level Agreement that proactively provides invoice credits in the event of a network outage.

Voice and Internet Converged Services

ICG began field trials of a new service called VoicePipe™ in October 2002. VoicePipe™ combines customers’ voice and data communications and aggregates them onto a dedicated T1-to-T3 line. Precedence is given to voice communications and bandwidth available for data, which fluctuates automatically to give customers the most

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efficient usage. The customer’s communications travel to ICG’s facilities and then onto the appropriate networks. Voice calls never touch the public Internet. VoicePipe™ is currently available in certain areas of Colorado, including the metropolitan areas of Denver, Boulder, Colorado Springs, Fort Collins and Pueblo. ICG is in the process of expanding the availability of this service to California, Texas, the Ohio Valley and the Southeast, beginning with markets where the Company currently offers voice services.

VoicePipe™ provides businesses with a lower total cost of ownership solution, brings greater mobility to the workforce, and reduces the number of communication vendors required to provide local, long-distance and Internet access. The web-based call management features allow end users to personalize their communication needs and reduce the expense associated with moves, adds and changes. VoicePipe™ works with either analog or IP phones.

The value proposition for VoicePipe™ begins with both its feature-rich applications and the Company’s own managed nationwide data and voice networks that consistently deliver industry standard reliability. ICG proactively monitors its network and provides above average response times when incidents do occur. The launch of VoicePipe™ targets small to medium size businesses.

SALES, CUSTOMER CARE, MARKETING AND CUSTOMER CONCENTRATION

Sales

Direct Sales

The Company’s sales organization includes both regional and national direct sales teams as well as third party sales partners. The Company currently has approximately 130 full-time sales positions approved, 21 of which are national and 109 are regional.

ICG’s regional sales organization focuses primarily on retail opportunities in medium to large enterprise customers. The responsibilities of the regional sales organization include both new sales activities and the ongoing management of existing customers.

The Company’s national sales organization focuses on national opportunities in the carrier and ISP market segments. National account managers’ responsibilities include customer acquisition and revenue generation, relationship management and contract negotiation. This organization is responsible for the overall account relationship on a national basis.

Other Sales Channels

The direct sales force is complemented by alternative sales channels developed to distribute the Company’s increasing number of products and services available. These channels include third party sales partners. The Company currently has distribution arrangements with a number of national, regional and local agents and agency firms, whose representatives market a broad range of the Company’s services. These alternate distribution channels include approximately 175 third party sales partners in markets throughout the United States. The Company expects to increase this distribution channel in the coming months.

Customer Care

ICG believes that the strength of its business is dependent upon solid relationships with its customers. Therefore, ICG has implemented a “Strength of Relationship” initiative designed to move the business culture of ICG beyond the realm of mere customer satisfaction into a culture of customer loyalty. In order to measure its progress in this initiative, the Company has developed a mechanism to measure its relationships with key customers, which is based on the customers perception of ICG’s performance. In addition, the Company’s Network Operations Center (“NOC”) provides 24 x 7 surveillance and monitoring of the network to maintain the Company’s network reliability and performance.

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Marketing

In 2002, the Company restructured its marketing department to provide greater focus on product performance and to better align with the sales, provisioning and finance departments to achieve the Company’s strategic initiatives. Paramount to the reorganization of the marketing department was the division of the department into specific teams dedicated to managing and marketing ICG’s product offerings. Additionally, a field-marketing group was created to support the sales regions and a pricing team was established to place emphasis on competitive pricing and cross-product bundling. The individual teams provide the Company with critical knowledge about each product offering set and are accountable for revenue. In 2002, the Company did relatively little advertising, which was limited to participation in trade show events and gaining exposure through local business journals. ICG did, however, undertake a campaign with Business 2.0 online and various print media outlets. The focus of the campaign was to build awareness of the Company among corporate and IT decision-makers.

Customer Concentration

A significant amount of the Company’s revenue is derived from long-term contracts with certain large customers. In 2002, three customers represented more than 5% of ICG’s total revenue: Qwest Communications Corporation (together with its affiliated entities, “Qwest”); a large national ISP; and UUNET (a subsidiary of WorldCom, Inc., together with it affiliated entities, “WorldCom”). Revenue from Qwest accounted for 30% of total revenue for the year ended December 31, 2002. Revenue from the top three and ten customers in 2002 accounted for 43% and 65%, respectively, of ICG’s total revenue.

WorldCom filed for bankruptcy protection on July 21, 2002. Since that time, ICG has continued to provide service to WorldCom. Under the Bankruptcy Code, customers who file for bankruptcy protection may choose to affirm or reject their pre-petition contracts with the Company. If they choose to reject those contracts, the Company’s recourse is to pursue an unsecured claim in the customer’s bankruptcy proceeding for damages associated with rejection of the contract. The ultimate amount and nature of recovery on such claims is highly uncertain and specific to each proceeding. WorldCom and its subsidiaries accounted for approximately 11% of the Company’s total revenue for 2002. ICG and one of Worldcom’s subsidiaries, MCI Worldcom Network Services, Inc., have reached agreement with regard to the assumption of MCI Worldcom Network Services, Inc.’s pre-petition contract. The assumption is subject to approval by Worldcom’s bankruptcy court. If approved, the assumption will result in a total reduction in contractual revenue of approximately $8.9 million over the combined fiscal years 2003 and 2004.

In addition, several of ICG’s customers have approached ICG about the possibility of settling or restructuring future rates and/or levels of service provided under their service contracts. If the Company agrees to settle or restructure the future provisions of any significant customer contracts, ICG’s results of operations and financial condition could be materially affected. At this time, the Company cannot predict the outcome of such negotiations.

NETWORK AND FACILITIES

Regional Network Assets

ICG’s regional network assets include 47 voice and data switches in 29 markets. The Company has approximately 5,700 miles of leased or owned regional and metropolitan fiber comprising 172,574 local fiber strand miles. The majority of the Company’s local fiber networks are built in SONET rings that encircle a metropolitan area. This ring architecture is intended to be accessible to the largest concentration of telecommunications intensive business customers within a given market and provides fiber redundancy to ensure uninterrupted service. ICG connects 5,171 buildings to its network through on-net (i.e., connected to the ICG network via ICG-owned fiber) and hybrid (i.e., connected to the ICG network via third-party fiber) applications, of which 909 buildings are connected on-net. In addition, the network is constructed to provide access to inter-exchange carriers as well as end-user telecommunications traffic in a cost efficient manner.

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Nationwide Network Architecture

ICG’s nationwide data backbone includes OC-12 long-haul capacity connecting 29 markets. The data backbone interfaces with a centrally controlled Soft Switch, 24 ATM switches and numerous POPs containing high performance routers. The Company has Internet peering arrangements at seven public sites: MAE East ATM, MAE West (Santa Clara, CA), MAE West ATM, MAE Dallas ATM, PacBell (San Jose, CA), Sprint NAP (Newark, NJ), and Ameritech (Chicago, IL). In addition, the Company has numerous peering arrangements with private companies such as IXCs and major ISPs, some with multiple locations. The Company also owns and leases dedicated lines throughout the United States. The Company is currently in the process of consolidating numerous data POPs as part of its cost reduction efforts.

The majority of the Company’s long-haul capacity is obtained through 20 year indefeasible right of use (“IRU”) agreements with Qwest. The Company currently has OC-12 capacity in service connecting: San Jose, Los Angeles, Denver, Dallas, Atlanta, Washington D.C., Newark, Chicago, and Seattle. The Company has the option to upgrade the current OC-12 routes to OC-48 capacity at additional cost.

COMPETITION

The Company participates in several sectors of the telecommunications service industry, all of which are highly competitive. In addition, numerous competitors, including major telecommunications carriers, have rapidly expanded their network capabilities in order to service the ISP industry.

The Company’s competitors in the dial-up Internet access market possess significant network infrastructure enabling them to provide ISPs with capacity and access to the Internet. The Company’s primary competitors in this revenue category include Level 3, WorldCom, Sprint and the incumbent local exchange carriers (“ILECs”). Genuity, previously a strong competitor, has been acquired by Level 3. While the Company believes that its network and products will enable it to compete in this industry sector, some of the Company’s competitors have greater market presence, brand recognition, financial, technical and personnel resources than the Company. There can be no assurance that the Company will be able to compete effectively with these companies.

In the Corporate Services and Point-to-Point Broadband sectors, the Company competes in an environment dominated by the ILECs. 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 provided the ILECs with advantages over the Company. Among the Company’s current competitors in this sector are other CLECs, wireless service providers and private networks built by large end-users. In addition, competitors in this industry sector include IXCs such as AT&T and WorldCom. Potential competitors have also arisen by using different technologies, including cable television companies, utilities, ISPs, ILECs outside their current local service areas, and the local access operations of long distance carriers. Many of the Company’s actual and potential competitors have greater financial, technical and marketing resources than the Company.

The Company is aware that consolidation of telecommunications companies, including mergers between certain of the ILECs, between long distance companies and cable television companies, 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 its enactment, several telecommunications companies have indicated their intention to aggressively expand into many segments of the telecommunications industry, including segments in which the Company participates or expects to participate. This may result in more participants than can ultimately be successful in a given segment.

While strong competition currently exists in all sectors of the industry, the Company believes that the demand for voice and data services by business customers provides expanded opportunities for providers such as the Company. There can be no assurance, however, that sufficient demand will exist for the Company’s network services in its selected markets,

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that market prices will not dramatically decline or that the Company will be successful in executing its business strategy in time to meet new competitors, or at all.

REGULATORY ACTIVITY

Each of the services within ICG’s current offerings (Dial-Up, Point-to-Point Broadband and Corporate Services) is subject to some form of regulatory oversight from state and/or federal regulatory authorities.

With respect to the Dial-Up services category, the managed modem services are unregulated. However, the PRI component, which is a material offering with respect to the Company’s Dial-Up services, incurs traditional regulatory oversight such as restrictions on price discrimination, various service quality standards and associated reciprocal compensation revenue.

The Company’s Point-to-Point Broadband service offerings are significantly structured according to the application and collection of interstate and intrastate access charges for telecommunications traffic that originates and terminates on the Company’s network. In most cases, both state and federal regulatory authorities regulate the applicable access charges.

Corporate Services, which includes the provisioning of facilities used to carry traditional voice traffic, incurs the greatest amount of regulatory oversight. Accordingly, in its offerings related to this specific service category, the Company encounters regulatory frameworks relating to reciprocal compensation, resale, interconnection, unbundled network elements (“UNE”), number portability and dialing parity, among others.

General Operational and Intercarrier Compensation Issues

The Telecommunications Act generally requires ILECs to provide interconnection and nondiscriminatory access to their local telecommunications networks and other essential facilities. Such access and interconnections are typically facilitated through written agreements between the parties, which are more commonly known as interconnection agreements. Interconnection agreements are negotiated and enforced on a state-by-state basis. The negotiations involving each agreement are highly complex and can be contentious. Where the parties cannot reach agreement, the Company must petition the applicable state regulatory agency to arbitrate the disputed issues. Rulings of that particular agency are subject to judicial review by the appropriate state court and, with respect to certain issues, a federal district court.

The Company has executed interconnection agreements with every regional bell operating company (“RBOC”) and smaller mid-size ILECs (i.e. Alltel, Citizens/Frontier, Centurytel and TDS) and less complex traffic terminating agreements with a number of independent rural telecommunications carriers. Due to ICG’s growth in 2002, the number of interconnection agreements has grown significantly. Key issues that ICG faces during negotiations include, but are not limited to: (i) “virtual-nxx” network deployment that affects the routing and rating of calls where the terminating party may not physically be in the local calling area of the originating party; (ii) Voice over Internet Protocol (“VoIP”) issues, including whether VoIP traffic should have the same intercarrier compensation as switched access traffic; and (iii) various other financially impactive terms.

Reciprocal compensation historically has been an important source of revenue for the Company. In general, reciprocal compensation is the reimbursement of costs incurred by a carrier that terminates local telecommunications traffic originated on the network of another carrier. The Company maintains that reciprocal compensation is an appropriate regulatory mechanism, regardless of whether the telecommunications traffic is routed to a conventional end user or an ISP, and, thus, is also entitled to receive reciprocal compensation for the transport and termination of Internet bound calls originating on other carrier’s telecommunications networks. The Company’s position has been affirmed by a number of state utility commissions as a result of the arbitration of certain terms and conditions articulated in various RBOC interconnection agreements. While the Company did in fact prevail in a number of arbitrations, in the interest of gaining certainty with respect to the collection of reciprocal compensation, the Company has negotiated voluntary settlement agreements with certain RBOCs that provide for the payment of reciprocal compensation for both traditional voice, as well as Internet bound traffic. The majority of these reciprocal compensation settlement agreements have expired and in such cases, the parties’ current interconnection agreements now govern reciprocal compensation issues.

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The Company’s reciprocal compensation settlement agreement with SBC, however, remains in effect until May 31, 2004.

In April 2001, the Federal Communications Commission (“FCC”), in response to an opinion by the U.S. Court of Appeals for the District of Columbia Circuit (the “D.C. Circuit Court”), issued an order (the “April 2001 Order”) regarding reciprocal compensation for Internet bound traffic. Assuming that the April 2001 Order is not overturned on appeal, reciprocal compensation for the termination of ISP traffic will end after a 36-month transition period, which will be approximately June 2004. Additionally, the April 2001 Order places limits on the volume of reciprocal compensation eligible traffic, the recovery of reciprocal compensation in new markets entered after April 2001, as well as limits on the applicable rate. An appeal of the April 2001 Order was filed in February 2002 in the D.C. Circuit Court and a decision is expected soon.

The Company believes that the April 2001 Order will not have a material effect on interconnection agreements that explicitly require the payment of reciprocal compensation or where payment is required through voluntary settlements. Both the Company and the carrier, however, are bound by the April 2001 Order as it relates to the exchange of reciprocal compensation for Internet bound traffic for interconnection agreements that expire prior to the end of the FCC’s 36 month transition period. Thus, while the April 2001 Order will have no material effect on the ability of the Company to collect reciprocal compensation from RBOCs subject to interconnection agreements containing specific reciprocal compensation provisions, the Company will be limited in its ability to collect reciprocal compensation as to other RBOCs.

Historically, the Company has threatened legal action in order to compel the RBOCs to pay reciprocal compensation invoices in a timely manner. In response, a concerted effort was made beginning in 2001 to generate accurate invoices, which were supported by clear and concise data. Moreover, the Company established a cross-functional team to track payments and disputes in order to minimize large past-due balances. By the end of 2002, the dollar amount of reciprocal compensation disputes lessened considerably and payments became more consistent. However, the RBOCs continue to dispute a certain amount of all invoices and the Company continues to allocate resources to resolve these disputes.

Switched access is also both a relevant revenue source and expense for the Company. In general, switched access is the reimbursement of costs incurred by a carrier that terminates toll telecommunications traffic originated on the network of another carrier. Switched access associated with intrastate toll traffic is governed by the Company’s intrastate tariffs filed with respective state utility commissions. Likewise, switched access associated with interstate toll traffic may be governed by interstate switched access tariffs filed with the FCC. However, due to an FCC order issued in 2001, carriers were required to withdraw their interstate tariffs if their switched access rates exceeded rates established by the FCC. Because the Company’s switched access rates exceeded the rates established by the FCC, it withdrew its interstate access tariff in August 2001.

Federal Regulation

As a result of a previous order adopted by the FCC, carriers were classified for regulatory purposes as either dominant (i.e., generally RBOCs) or non-dominant (i.e., generally CLECs). With respect to most issues, the Company qualifies as a facilities-based CLEC. Consequently, the Company benefits from a reduced regulatory compliance burden as compared to the RBOCs. Nevertheless, the Company must still comply with the certain requirements of the Telecommunications Act, such as offering service on a non-discriminatory basis and at reasonable rates. Further, the Company, being classified as a non-dominant carrier, was required as of August 1, 2001 to cancel all tariffs for whatever interstate services that it was providing at that time. The Company complied with that order and subsequent requirements to cancel tariffs for international services.

The FCC’s non-dominant carrier rules have had no effect on the Company’s intra-state tariffs or other functionally equivalent rate filings. The Company is not subject to rate-of-return regulation in any jurisdiction, nor is it currently required to obtain FCC authorization for the installation, operation or maintenance of its fiber optic network facilities, which are used to provide various services throughout the United States.

The FCC recently conducted a triennial review of its rules pertaining to unbundled network elements (“UNE”s) via the Fourth Notice of Proposed Rule Making. On February 20, 2003, the FCC rendered an oral decision concerning its UNE

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rules. To date, the FCC has not issued a written order regarding this decision. Based on the FCC’s oral decision, however, the Company anticipates that the FCC’s written order will reserve numerous UNE issues for individual state public utility commissions. A significant UNE issue that was addressed in the FCC’s oral decision is a phase-out of Unbundled Network Element Platform (“UNE-P”). Subject to various conditions, the FCC provided a three year timeline to phase-out the ILECs’ obligation to provide CLECs with UNE-P. Although it is expected that the FCC’s written order will be challenged in various jurisdictions and impacted by state public utility commission actions, the Company anticipates the FCC’s order will negatively impact a carrier’s ability to purchase UNE-P in the future. The Company does not currently utilize UNE-P. Although the complete impact of the FCC’s UNE decision will not be fully understood until the FCC’s written order is issued, the Company does not anticipate the FCC’s UNE order to materially impact the Company’s operations.

The FCC is also considering a petition filed by AT&T, which seeks a declaratory ruling that AT&T’s Phone-to-Phone IP Telephony Services are exempt from access charges. Because the Company considers this proceeding material to the development of the nascent VoIP market, it is participating as a commenter. It is uncertain when the FCC will rule on this issue.

State Regulation

In general, state public utility commissions have regulatory jurisdiction over the Company with respect to local and other intrastate telecommunications services. To provide intrastate service (particularly local dial tone service), the Company generally must obtain a Certificate of Public Convenience and Necessity from the state regulatory agency prior to offering service. Additionally, most states require the Company to file tariffs, which articulate the terms and conditions for services that are classified as regulated intrastate services. In some states, the Company may also be subject to various reporting and record-keeping requirements.

Under the Telecommunications Act, state commissions continue to set regulatory requirements, including service quality standards and guidelines, for certificated providers of local and intrastate long distance services. Importantly, state regulatory authorities specify permissible terms and conditions (i.e., price) for interconnection with the RBOCs’ telecommunications networks. Moreover, these same authorities regulate the provision of unbundled network elements by the RBOCs and enforce performance measurements and other material standards related to local competition and interconnection. In certain states, the utility commission has the authority to scrutinize the rates charged by CLECs for intrastate long distance and local services.

Local Government Authorizations

Under the Telecommunications Act, municipalities typically obtain 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 and to pay license or franchise fees, often based on a percentage of gross revenue or a certain amount per linear foot, in order to provide telecommunications services. However, in certain states, including California, Ohio and Colorado, current law limits the amount of such fees to be paid to local jurisdictions to actual costs incurred by the municipality for maintaining the public rights of way. There is no assurance that certain cities that currently do not impose fees will not seek to impose fees in the future nor is there any assurance that, following the expiration of existing franchises, the municipality will be obligated to renew a previous agreement or that previously agreed upon fees will remain at their current levels.

The Telecommunications Act requires that local governmental authorities treat telecommunications carriers in a non-discriminatory and competitively neutral manner. The Act also mandates that any compensation received in exchange for access to the public rights of way be just and reasonable. Where a particular municipality has required unreasonable rights of way access fees, the Company historically has taken an aggressive position, up to and including litigation. However, due to many court rulings across the country in favor of carriers, the Company has been able to lessen its aggressive position and has instead worked to establish non-adversarial relationships with these municipalities. Nevertheless, if any of the Company’s existing franchise or license agreements are terminated prior to their expiration dates or are not renewed, and consequently the Company is forced to remove its facilities from the public rights of way,

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such termination could have a material adverse effect on the Company.

EMPLOYEES

As of December 31, 2002, the Company employed 1,146 full-time employees. None of the Company’s employees are represented by a union. The Company believes that it generally offers compensation packages comparable to those of its competitors similar in size and capital structure. The Company believes that the successful implementation of its business strategy will depend upon its continued ability to attract and retain qualified employees. The Company, however, does not expect to add significant new employees to the organization in the near future. In February 2003, the Company approved a bonus plan for the fiscal year 2003. Payment of bonuses under the plan will be contingent on, among other things, the Company’s financial performance for 2003.

ITEM 2. PROPERTIES

The Company’s real estate portfolio includes numerous properties for administrative, warehouse, equipment, collocation and POP sites.

As of December 31, 2002, the Company had approximately 382,000 square feet of leased office, warehouse, and equipment space in the state of Colorado, including its corporate headquarters building, and approximately 709,000 square feet of space leased in other areas of the United States. Since November 2000, the Company has reduced its real estate portfolio by approximately 226 sites by rejecting leases through the bankruptcy process and through lease expirations. The Company continues to evaluate its real estate needs, and its portfolio of leased locations will be carefully reviewed for optimum use and cost savings opportunities.

The Company leases its approximately 240,000 square feet corporate headquarters building, which is located in Englewood, Colorado. The lease expires in January 2023. The Company sold a 30,000 square foot office building located in Englewood, Colorado in November 2002 for approximately $1,250,000. At the time of the sale, the property had a principal amount owing on its mortgage of approximately $929,000.

In December 1999, a subsidiary of ICG acquired an 8.36 acre parcel of vacant land located adjacent to the Corporate Headquarters for approximately $3.3 million. The Company had planned to use this land in connection with the expansion of its Corporate Headquarters. However, as a result of the Company’s restructuring, expansion plans with respect to this site were abandoned and the property is currently listed for sale.

ITEM 3. LEGAL PROCEEDINGS

On November 14, 2000, the Company and most of its subsidiaries filed voluntary petitions for protection under the Bankruptcy Code in the Delaware Bankruptcy Court (Joint Case Number 00-4238 (PJW)). The bankruptcy petition was filed in order to preserve cash and give the Company the opportunity to restructure its debt. The Company’s Modified Plan was confirmed and became effective on October 10, 2002. The Bankruptcy Court continues to retain exclusive jurisdiction over all matters arising out of and related to the Company’s bankruptcy case, including, but not limited to, the resolution and disposition of pre-petition and administrative claims. The Company expects that these claims will be resolved not later than 2004, and that the Bankruptcy Court will enter a final decree shortly thereafter closing the Chapter 11 case.

During the third and fourth quarters of 2000, the Company and certain former officers were served with fourteen lawsuits filed by various shareholders in the United States District Court for the District of Colorado (the “Colorado District Court”). In October 2001, the Colorado District Court consolidated the various actions and appointed lead plaintiffs’ counsel. In February 2002, lead plaintiffs’ counsel filed a consolidated amended complaint. The amended complaint does not name the Company as a defendant. The amended complaint alleges violations of Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934, and seeks class action certification under Rule 23 of the Federal Rules of Civil Procedure. The amended complaint seeks unspecified compensatory damages. Under section 510(b) of the Bankruptcy Code, all pre-petition securities claims against ICG were mandatorily subordinated and discharged upon the confirmation of the

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Modified Plan. Holders of pre-petition equity securities claims did not receive any recovery from the Company under the Modified Plan.

The Company is a party to certain other litigation that has arisen in the ordinary course of business. In the opinion of management, the ultimate resolution of these matters will not have a material impact on the Company’s financial condition or results of operations. The Company is not involved in any administrative or judicial proceedings relative to an environmental matter.

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

No matters were submitted to a vote of security holders during the quarter ended December 31, 2002.

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PART II

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

The term “Predecessor Company” refers to the Company until its emergence from bankruptcy on October 10, 2002 (the “Effective Date”). The term “Reorganized Company” refers to the Company after its emergence from bankruptcy.

The Predecessor Company’s common stock was quoted on the NASDAQ National Market (“NASDAQ”) from March 25, 1997 until November 18, 2000, under the symbol “ICGX”. The NASDAQ halted trading of the Predecessor Company’s common stock on November 14, 2000, and delisted the stock on November 18, 2000. Between November 19, 2000, and October 10, 2002, the Predecessor Company’s common stock was traded on the Over-the-Counter Market. Pursuant to the Modified Plan, all outstanding shares of the Predecessor Company’s common stock were cancelled on October 10, 2002.

In accordance with the Modified Plan, on the Effective Date a pool of 8,000,000 shares of the Reorganized Company’s common stock was established for distribution to the Predecessor Company’s unsecured creditors on a pro rata basis in exchange for their claims as described in the Modified Plan. The issuance of the Company’s common stock was not subject to registration under the Securities Act of 1933, as amended, pursuant to Section 1145 of the Bankruptcy Code and in accordance with the terms of the Modified Plan. On January 10, 2003, 5,893,250 shares of the Reorganized Company’s common stock were distributed. The distribution of the remaining shares will be completed after the final reconciliation of pre-petition bankruptcy claims filed against the Predecessor Company. The Reorganized Company’s common stock trades on the Over-the-Counter Market under the symbol “ICGC”.

In accordance with the Modified Plan, on the Effective Date, warrants to purchase 800,000 shares of the Reorganized Company’s common stock were established for distribution to certain of the Predecessor Company’s unsecured creditors on a pro rata basis in exchange for their claims, as described in the Modified Plan. The issuance of the warrants was not subject to registration under the Securities Act of 1933, as amended, pursuant to Section 1145 of the Bankruptcy Code and in accordance with the terms of the Modified Plan. On January 10, 2003, warrants to purchase 548,166 shares of the Reorganized Company’s common stock were distributed. The distribution of the remaining warrants will be completed after the reconciliation of pre-petition bankruptcy claims filed against the Predecessor Company. The strike price of the warrants is $9.12, which represented the Reorganized Company’s equity value per share on the Effective Date. The warrants may be exercised from the date of issuance until the later of (i) October 10, 2007, or (ii) the date that a registration statement covering the underlying common stock of the warrants becomes effective.

As of February 10, 2003, there were 182 holders of record of the Company’s common stock. The Company has never paid or declared any dividends, nor does it anticipate paying any dividends in the foreseeable future.

ITEM 6. SELECTED FINANCIAL DATA

The selected financial data for the years ended December 31, 1998, 1999, 2000, 2001 and 2002 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, as well as Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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

This section and other parts of this Annual Report contain “forward-looking statements” intended to qualify as safe harbors from liability as established by the Private Securities Litigation Reform Act of 1995. These forward looking statements can generally be identified as such because the context of the statements include words such as “intends,” “anticipates,” “expects,” “estimates,” “plans,” “believes” and other similar words. Additionally, statements that describe the Company’s future plans, objectives or goals also are forward-looking statements. All forward-looking statements are subject to certain risks and uncertainties that could cause actual results or outcomes to differ materially from those currently anticipated. These risks and uncertainties are described in detail herein under “Liquidity and Capital Resources”.

These forward-looking statements speak only as of the date of this Annual Report. The Company does not undertake any obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Although the Company believes that its plans, intentions and expectations reflected in or suggested by the forward-looking statements made in this Annual Report are reasonable, there is no assurance that such plans, intentions or expectations will be achieved.

The following discussion and analysis of financial condition and results of operations should be read in conjunction with the consolidated financial statements and accompanying notes beginning on page F-1 of this Annual Report. All dollar amounts are in U.S. dollars.

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BUSINESS OVERVIEW

ICG is a facilities-based, nationwide communications provider focused on providing data and voice services to Internet Service Providers (“ISPs”), telecommunication carriers and corporate customers. Headquartered in Englewood, Colorado, ICG is a competitive local exchange carrier (“CLEC”) certified in most of the United States, having interconnection agreements with every major local exchange carrier. ICG’s facilities support three primary product offerings:

			Dial-Up Services: The Company provides primary rate interface (“PRI”) ports (one and two way) and managed modem remote access services (“RAS”) to many of the largest national ISPs and other telecommunications carriers, as well as to numerous regional ISPs and other communication service companies. Most of these services are provided through the Company’s owned switch facilities. Currently, ICG’s network footprint has the capability to provide Dial-Up service to over 75% of the nation’s population. Before any reciprocal compensation revenues earned from these services, revenue from Dial-Up services accounted for 44% of the Company’s total 2002 revenue. Associated reciprocal compensation revenue accounted for an additional 14% of the Company’s total 2002 revenue. As of December 2002, the Company had approximately 806,000 ISP customer ports in service.
			Point-to-Point Broadband Service: The Company provides dedicated bandwidth to connect (i) inter-exchange carriers to local markets, large corporations and other carrier facilities and (ii) large corporations to their inter-exchange carrier sites and other corporate locations. Such dedicated bandwidth sales are focused in areas where ICG maintains local fiber and buildings on its own network or in close proximity thereto. Point-to-Point Broadband service also includes switched access and SS7 services. Point-to-Point Broadband service accounted for 25% of the Company’s total 2002 revenue.
			Corporate Services: The Company offers Internet access, data and voice services to corporate customers, with an emphasis on Dedicated Internet Access (“DIA”) and Internet Protocol (“IP”) Telephony services. ICG is well positioned to expand this service with its metropolitan and regional fiber and switching asset base and nation-wide data network infrastructure. Corporate Services accounted for 17% of the Company’s total 2002 revenue. As of December 2002, Corporate Services’ customers accounted for approximately 97,000 access lines.

To provide its service offerings, ICG combines its approximately 5,700 route miles of metropolitan and regional fiber network infrastructure and its 47 voice and data switches with its nationwide fiber optic backbone, data points of presence, 24 asynchronous transfer mode (“ATM”) switches, and numerous private and public Internet peering arrangements. The design of the physical network permits the Company to offer flexible, high-speed telecommunications services to its customers.

The regional network infrastructure consists of fiber optic cables and associated advanced electronics and transmission equipment. The Company’s network includes a centrally controlled, logical IP switch (i.e., “Soft Switch”), and is generally configured in redundant synchronous optical network (“SONET”) rings to make the network accessible to the largest concentration of telecommunications intensive business customers within a given market. This network architecture also offers the advantage of uninterrupted service in the event of a fiber cut or equipment failure, thereby resulting in limited outages and increased network reliability in a cost efficient manner.

REORGANIZATION AND EMERGENCE FROM BANKRUPTCY

On November 14, 2000, (the “Petition Date”), ICG and its operating subsidiaries filed voluntary petitions for protection under Chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) in the United States District Court for the District of Delaware (the “Bankruptcy Court”).

On December 19, 2001, the Company filed a proposed Plan of Reorganization and a Disclosure Statement in the Bankruptcy Court. The Company subsequently filed a First Amended Plan and Disclosure Statement on March 1, 2002. On March 26, 2002, the Company filed a Second Amended Plan and Disclosure Statement, which were amended on April 3, 2002. The original Plan of Reorganization, the Disclosure Statement, the First Amended Plan

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and Disclosure Statement, and the Second Amended Plan and Disclosure Statement are collectively referred to herein as the “Original Plan.” On April 3, 2002, the Company submitted the Original Plan to the Company’s creditors for approval. On May 16, 2002, the Company’s balloting agent filed an affidavit indicating that all classes of creditors entitled to vote had overwhelmingly accepted the Original Plan. On May 21, 2002, the Bankruptcy Court entered an order confirming the Original Plan.

The Original Plan was formulated on the basis of extensive negotiations conducted among the Company and its primary constituencies. As part of the Original Plan, the Company received commitment letters for new financing totaling $65 million (the “Original Exit Financing”). The Original Exit Financing was to be funded predominantly by Cerberus Capital Management, L.P. (“Cerberus”). Although the Bankruptcy Court confirmed the Original Plan, the closing of the Original Exit Financing transactions did not occur and the Original Plan did not become effective as a result of disagreements between the Company and Cerberus.

After consulting with the Company’s official committee of unsecured creditors and the Company’s senior secured lenders, the Company engaged in settlement discussions with Cerberus. As a result of those negotiations, on July 25, 2002, the Company entered into an agreement with Cerberus that was embodied in a proposed modification to the Original Plan. The Original Plan, as modified, is referred to herein as the “Modified Plan”.

The Company determined that the changes to the Original Plan, as reflected in the Modified Plan, required a re-solicitation of votes from certain classes of creditors. Thus, on July 26, 2002, the Company filed the Modified Plan and a Supplement to the Disclosure Statement in the Bankruptcy Court. On August 23, 2002, the Company submitted the Modified Plan to the Company’s creditors for approval. On October 7, 2002, the Company’s balloting agent filed an affidavit indicating that all classes of creditors entitled to vote had again overwhelmingly accepted the Modified Plan. On October 9, 2002, the Bankruptcy Court entered an order confirming the Modified Plan. On October 10, 2002 (the “Effective Date”), the Company’s Modified Plan became effective and the Company emerged from Chapter 11 bankruptcy protection.

Pursuant to the Modified Plan, on October 10, 2002, the Company received new financing consisting of a $25 million senior subordinated term loan (the “Senior Subordinated Term Loan”). The Company’s senior secured credit facility (the “Senior Facility”) balance was then cancelled and replaced with new notes (the “Secured Notes”). Proceeds from the Senior Subordinated Tern Loan were utilized to pay down the balance of the Secured Notes to $59 million.

CRITICAL ACCOUNTING POLICIES

Management’s Discussion and Analysis of Financial Condition and Results of Operations addresses the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

On an ongoing basis, management evaluates its estimates and judgments, including those related to revenue recognition, uncollectible accounts receivable, long-lived assets, operating costs and accruals, litigation and contingencies. Management bases its estimates and judgments on historical experience, current economic and industry conditions and on various other factors that are believed to be reasonable under the circumstances. Such information forms the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results, however, may differ from these estimates under different assumptions or conditions. Management believes the following critical accounting policies address the more significant judgments and estimates used in the preparation of its consolidated financial statements.

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Financial Reporting by Entities in Reorganization under the Bankruptcy Code and Fresh Start Reporting

Between November 14, 2000, and October 10, 2002, ICG operated as a debtor-in-possession under the supervision of the Bankruptcy Court. ICG’s financial statements for reporting periods within that timeframe were prepared in accordance with the provisions of Statement of Position 90-7 (“SOP 90-7”), “Financial Reporting by Entities in Reorganization Under the Bankruptcy Code”.

For financial reporting purposes, close of business on October 11, 2002, represents the date of emergence from bankruptcy. As used herein, the following terms refer to the Company and its operations:

The implementation of the Modified Plan resulted in, among other things, Restated Articles of Incorporation and By-laws, a new capital structure, the satisfaction or disposition of various types of claims against the Predecessor Company, the assumption or rejection of certain lease agreements and executory contracts, and the establishment of a new board of directors following the Effective Date.

In connection with the emergence from bankruptcy, the Company adopted Fresh Start reporting (“Fresh Start”) in accordance with the requirements of SOP 90-7. The application of SOP 90-7 resulted in the creation of a new reporting entity. Under Fresh Start reporting, the reorganization value of ICG was allocated to its assets and liabilities on a basis substantially consistent with purchase accounting in accordance with Statement of Financial Accounting Standards (“SFAS”) SFAS No. 141, “Business Combinations.”

Under Fresh Start reporting, the reorganization value of ICG, which represents the fair value of all of ICG’s assets (net of liabilities), was allocated to the Company’s assets and liabilities, other than deferred income taxes, based on their relative fair values. Deferred taxes were determined in accordance with SFAS No. 109, “Accounting for Income Taxes”. The application of SOP 90-7 created a new reporting entity having no retained earnings or accumulated deficit.

The Company engaged an independent financial advisor to assist in the determination of the reorganization value or fair value of ICG. The assumptions underlying the valuation were described in the Modified Plan. The independent financial advisor estimated ICG’s reorganization value range at $250 million to $325 million. The Company used a reorganization value of $284 million, which consists of equity and funded debt of $83 million and $201 million, respectively, for Fresh Start reporting as of October 11, 2002. The Fresh Start adjustments, primarily related to the adjustment of ICG’s assets and liabilities to fair market values, had a significant effect on the Reorganized Company’s subsequent statements of operations.

ICG recorded approximately $4.4 billion of net reorganization income in the Predecessor Company’s statement of operations for 2002, which includes the gain on the restructuring of equity and the discharge of obligations subject to compromise for less than recorded amounts, as well as adjustments to reduce the historical carrying values of the Company’s assets and liabilities to fair market value.

The effects of the reorganization and Fresh Start reporting on ICG’s balance sheet as of October 11, 2002, were as follows (in thousands of dollars):

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(a)		Includes adjustments to record: (i) settlement of post-petition administrative claims and pre-petition priority claims (i.e., tax authorities); (ii) affirmation of certain executory contracts (i.e., capital leases); (iii) discharge of pre-petition unsecured debt for common stock in the Reorganized Company; and (iv) cancellation of the Predecessor Company’s preferred stock, common stock and warrants.
(b)		Includes adjustments to record: (i) proceeds of $25 million from the Senior Subordinated Term Loan, net of $5 million debt discount attributable to the value of the warrants issued; (ii) refinancing of the Predecessor Company’s Senior Facility with the Reorganized Company’s Secured Notes whereby all proceeds from the Senior Subordinated Term Loan were used to immediately pay down the balance of the Secured Notes; (iii) write-off of the $2.5 million unamortized deferred financing costs related to obtaining the Senior Facility and the

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		capitalization of $2.2 million of financing costs related to obtaining the Secured Notes and the Senior Subordinated Term Loan; and (iv) reclassification of $45 million to restricted cash, which represents 75% of the principal balance of the Secured Notes, in accordance with the loan agreement.
(c)		Includes adjustments to record (i) deferred revenue reclassification of $23 million and fair value write-down adjustment of $122 million; (ii) adjustment to reduce the net fair value of property and equipment by $267 million; and (iii) adjustment to reduce the accrued sales tax by $2 million as a result of the reduced property and equipment values of leased equipment.

Revenue Recognition and Accounts Receivable

Revenue for dedicated transport, data, Internet and the majority of switched services, exclusive of switched access, is generally billed in advance on a fixed rate basis and recognized over the period the services are provided. Switched access revenue and inter-carrier compensation, including reciprocal compensation and carrier access, is generally billed on a transactional basis determined by customer usage. The transactional elements of switched access services and inter-carrier compensation are billed in arrears and estimates are used to recognize revenue in the period provided. Fees billed in connection with customer installations and other up front charges are deferred and recognized as revenue ratably over the estimated average contract life.

In the past, the Company entered into indefeasible rights-of-use agreements (“IRUs”), pursuant to which the Company continues to lease its metropolitan fiber and other infrastructure to other telecommunications services providers. If the requirements for sales-type lease accounting were met, the Company recognized revenue in the period that facilities became available for use by the customer. If the requirements for sales-type lease accounting were not met, as was generally the case, the Company has recognized revenue ratably over the term of the agreement. Revenue earned on the portion of IRUs attributable to the provision of maintenance services has been recognized ratably over the term of the agreement. Revenue from IRU agreements in 2000, 2001, 2002 Predecessor and 2002 Reorganized, totaled $14 million, $9 million, $7 million and $1 million, respectively.

The Company records reciprocal compensation and carrier access revenue in accordance with regulatory authority approval and pursuant to interconnection agreements with incumbent local exchange carriers (“ILECs”) and interexchange carriers (“IXCs”) for the origination, transport and/or termination of traffic originated by ILEC and IXC customers, including Internet traffic. The Company recognizes revenue as the service is provided, except in those cases where the revenue is under dispute and collection is uncertain.

On October 1, 2000, the Company adopted Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition in Financial Statements”, which provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the Securities and Exchange Commission. Effective January 1, 2000, installation revenue is deferred and recognized ratably as revenue over the estimated average contract life. Prior to the adoption of SAB No. 101, the Company recognized installation revenue as services were performed. As required by generally accepted accounting principles, the Company reflected the effects of the change in accounting principle as if such change had been adopted as of January 1, 2000, and included in the results of operations for the year ended December 31, 2000, a charge of $7 million relating to the cumulative effect of this change in accounting principle. In addition, the change in accounting principle resulted in an increase in revenue for the year ended December 31, 2000, of $1 million.

The Company recognizes revenue at the amount expected to be realized, which includes billing and service adjustments. Valuation allowances for uncollectible accounts receivable are established through a charge to selling, general and administrative expenses. The Company assesses the adequacy of this reserve periodically, evaluating general factors such as the length of time individual receivables are past due, historical collection experience, the economic and competitive environment, and changes in the credit worthiness of customers. The Company also assesses the ability of specific customers to meet their financial obligations and establishes specific valuation allowances based on the amount the Company expects to collect from these customers, as considered necessary. If circumstances relating to specific customers change or economic conditions improve or worsen such that past

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collection experience and assessment of the economic environment are no longer relevant, the estimate of the recoverability of the Company’s trade receivables may change.

The Company had, as of December 31, 2002, total accounts receivable outstanding of $36 million and an allowance for uncollectible accounts receivable of $9 million.

Operating Costs and Accrued Liabilities

The Company leases certain network facilities, primarily circuits, from ILECs and CLECs to augment its owned infrastructure for which it is generally billed a fixed monthly fee. The Company also uses the facilities of other carriers for which it is billed on a usage basis. The Company issued a significant number of disconnect orders to ILECs and CLECs for leased circuits throughout 2001 as a result of the Company’s optimization of its network and associated operating cost structure, as well as the curtailment of the Company’s expansions plans. In addition, many of these providers changed the Company’s billing account numbers (“BANs”) in an attempt to segregate the Company’s pre- and post-Chapter 11 petition billing activity. Disconnected services were frequently not reflected on a timely basis by these facilities providers on the Company’s invoices, resulting in inaccurate invoices and disputes, and the assignment of new BANs by these facilities providers frequently resulted in incorrect balances being carried forward on invoices. The Company disputes invoices for usage billings when the call record detail is not adequate to support such charges. As a result of these and other types of billing disputes, the Company is in settlement negotiations with certain providers.

In determining the amount of such operating expenses and related accrued liabilities to reflect in its financial statements, the Company considers the adequacy of documentation of disconnect notices, compliance with prevailing contractual requirements for submitting such disconnect notices and disputes to the provider of the facilities, and compliance with its interconnection agreements with these carriers. Significant judgment is required in estimating the ultimate outcome of the dispute resolution process, as well as any other amounts that may be incurred to conclude the negotiations or settle any litigation.

Property and Equipment

The Company’s property and equipment includes property and equipment in service, under construction or development, and held for sale.

Property and equipment in service is stated at historical cost, reduced by provisions to recognize impairment in value. Costs associated directly with network construction, service installations and development of business support systems, including employee related costs, and interest expense incurred during the construction period, are capitalized. Depreciation is calculated on a straight-line basis over the assets’ estimated useful lives, which are determined based on historical usage with consideration given to technological changes, trends in the industry and other economic factors that could impact the network architecture and asset utilization. Assets held for sale are stated at the estimated proceeds from the sale, less costs to sell.

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. Amortization of equipment held under capital leases is included in depreciation and amortization expense, and is calculated on a straight-line basis over the estimated useful lives of the assets, or the related lease term, whichever is shorter.

The Company provides for the impairment of long-lived assets pursuant to SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, 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 the asset’s carrying value exceeds the estimated undiscounted future cash flows from the asset, excluding interest. Measurement of the impairment loss is then based on the estimated fair value of the asset. Considerable judgment is required to project such future cash flows and, if required, estimate the fair value of the impaired long-lived assets.

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The Company recorded approximately $1.7 billion, $28 million and $0.6 million of provision for impairment of long-lived assets in 2000, 2001 and 2002 Predecessor, respectively. Pursuant to the adoption of Fresh Start, the Company wrote down the value of its property and equipment by $392 million, and the balance of the accumulated depreciation by $126 million. The total Fresh Start value of the long-lived assets was generally allocated on a pro rata basis to the individual asset categories based on asset appraisals obtained in November 2001 and March 2002. The new property and equipment values are being depreciated over the remaining useful lives of the assets.

LIQUIDITY AND CAPITAL RESOURCES

Reorganized Capital Structure

Pursuant to the Modified Plan, all outstanding shares of the Predecessor Company’s preferred and common stock, as well as all other outstanding equity securities, including warrants and options, were cancelled on October 10, 2002.

In accordance with the Modified Plan, a total of 8,000,000 shares of the Reorganized Company’s common stock was established for distribution to the Predecessor Company’s unsecured creditors on a pro rata basis, as described in the Modified Plan. On January 10, 2003, 5,893,250 shares of the Reorganized Company’s common stock were distributed. The distribution of the remaining shares will be completed after the final reconciliation of pre-petition bankruptcy claims filed against the Predecessor Company.

In accordance with the Modified Plan, warrants to purchase 800,000 shares of the Reorganized Company’s common stock were established for distribution to certain of the Predecessor Company’s unsecured creditors on a pro rata basis, as described in the Modified Plan. On January 10, 2003, warrants to purchase 548,166 shares of the Reorganized Company’s common stock were distributed. The distribution of the remaining warrants will be completed after the final reconciliation of pre-petition bankruptcy claims filed against the Predecessor Company. The strike price of the warrants is $9.12, which represented the Reorganized Company’s equity value per share on the Effective Date. The warrants may be exercised from the date of issuance until the later of (i) October 10, 2007, or (ii) the date that a registration statement covering the underlying common stock of the warrants becomes effective.

Pursuant to the Modified Plan, on October 10, 2002, the Company received new financing consisting of the $25 million Senior Subordinated Term Loan. The Company’s Senior Facility balance was then cancelled and replaced with the Secured Notes. Proceeds from the Senior Subordinated Term Loan were utilized to pay down the balance of the Secured notes to $59 million. The Secured Notes are secured by substantially all assets of the Company. The principal balance of the Secured Notes is projected to begin amortizing in August 2003 and will mature in May 2005. Interest on the Secured Notes accrues at a premium of 3.5% to 6.0% over LIBOR or, at the Company’s option, at a premium of 2.25% to 4.75% over the bank’s prime rate. The interest rate premium at any given time is determined based on the cumulative amount of the principal prepayments made by the Company. Interest is payable quarterly in arrears. The weighted average interest rate in effect at December 31, 2002 was 7.8%.

The Senior Subordinated Term Loan is subordinate only to the Secured Notes and is secured by substantially all assets of the Company. The loan accrues interest at 14% per annum, which is payable monthly in arrears, and matures on July 25, 2006. In connection with the Senior Subordinated Term Loan, warrants to purchase a total of 673,684 shares of the Reorganized Company’s common stock were issued. Of the 673,684 shares, warrants to purchase 200,000 shares have an exercise price equal to $9.12, and warrants to purchase 473,684 shares have an exercise price of $0.01. All such warrants expire, if unexercised, on July 25, 2007. The warrants have an estimated fair market value of $5 million, which has been established as a debt discount with a corresponding increase to additional paid-in capital of stockholders’ equity in the Reorganized Company’s balance sheet. The debt discount is amortized to interest expense over the remaining term of the Senior Subordinated Term Loan.

The Senior Subordinated Term Loan was arranged by Cerberus. Subject to certain ownership percentage requirements, the Senior Subordinated Term Loan entitles Cerberus to appoint two directors to the reorganized Company’s Board of Directors. Pursuant to the Modified Plan, W. R. Huff Asset Management Co. L.L.P. (“Huff”) is also entitled to appoint two directors. The Company’s Chief Executive Officer, Randall E. Curran, serves as Chairman of the Company’s Board

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of Directors. Pursuant to the Company’s Restated By-laws, certain corporate actions require the approval of a supermajority of the Board.

The Secured Notes and the Senior Subordinated Term Loan require the Company to meet certain financial covenants, including minimum EBITDA requirements and limitations on capital expenditures. The Secured Notes and the Senior Subordinated Term Loan covenants also require that the Company maintain a minimum cash balance equal to 75% of the outstanding principal amount of the Secured Notes until July 25, 2003, and 50% of the outstanding principal balance thereafter. Accordingly, on the Effective Date the Company transferred $45 million to a cash collateral account, which is classified as restricted cash in the Company’s balance sheet. The Company expects that $17 million of the restricted cash balance will become available as a result of scheduled principal repayments of the Secured Notes and the reduction of the required minimum cash balance to 50% of the outstanding principal amount of the Secured Notes in the second half of 2003. Therefore, $17 million of restricted cash has been classified as current at December 31, 2002.

The Company leases certain office facilities and fiber equipment under various capital lease arrangements. As of December 31, 2002, the Company had $97 million in capital lease obligations, $6 million of which is due in 2003. Capital lease obligations include the Company’s corporate headquarters building, land and improvements (collectively, the “Company Headquarters”). The balance of the Company Headquarters lease agreement was $51 million at December 31, 2002. The lease expires in January 2023.

Other debt totaling $26 million consists primarily of notes issued to vendors and taxing authorities. The notes have interest rates that range from 4% to 10%, and a weighted average interest rate at December 31, 2002, of 7.5%. The expiration dates of the notes range from 2003 through 2006. Principal and interest are generally payable monthly. Approximately $9 million of other debt has yet to be formally documented with a note, but is expected to be in the near future.

Under the Reorganized Company’s articles of incorporation and in accordance with the Modified Plan, the Company is authorized to issue 10,000,000 shares of preferred stock at a par value of $0.001 per share; however, none had been issued as of December 31, 2002.

Funding Requirements

At December 31, 2002, the Company had cash, cash equivalents and restricted cash totaling $102 million, which is comprised of the following: (i) cash and cash equivalents of $51 million; (ii) restricted cash – current of $17 million, which represents the amount the Company expects will be available for current operations in the second half of 2003; and (iii) restricted cash – non-current of $34 million.

The Company expects to pay approximately $17 million in 2003 to certain holders of pre-petition claims, professional services providers, and other parties for matters relating to the Company’s bankruptcy proceedings.

The Company anticipates that it will need additional financing in 2005 and 2006 in order to refinance the Secured Notes and the Senior Subordinated Term Loan, respectively, which become due. Such refinancing, however, is contingent upon market conditions and the Company’s results of operations, and is therefore not assured.

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Capital Commitments

Contractual Cash Commitments

The following table summarizes the Company’s contractual cash commitments at December 31, 2002:

Capital Expenditures

Capital expenditures, exclusive of amounts required to maintain network functionality, will be driven primarily by customer demand for the Company’s services. If customer demand for new services does not meet management’s expectations, capital expenditures will be proportionally reduced. The Company expects that approximately $13 million will be required in 2003 for capital expenditures related to network infrastructure upgrades, enhancements to back office systems and to sustain the current network functionality. The Company has significant capacity available on its data backbone, metropolitan and regional fiber networks and in its modem banks. It is the Company’s objective to use this capacity to generate future revenue streams.

Assessment of Risks and Uncertainties

The Company is subject to a number of significant risks. The telecommunications industry contains many inherent risks, and the Company faces risks specific to its own operations. These risks include, but are not limited to the following:

Customer concentration and the Company’s ability to retain its major customers on profitable terms

A significant amount of the Company’s revenue is derived from long-term contracts with certain large customers. In 2002, three customers individually represented more than 5% of ICG’s total revenue: Qwest Communications Corporation (together with its affiliated entities, “Qwest”), a large national ISP and UUNET (a subsidiary of WorldCom, Inc., together with its affiliated entities, “WorldCom”). Revenue from Qwest accounted for 30% of total revenue for the year ended December 31, 2002. Revenue from the top three and ten customers in 2002 accounted for 43% and 65%, respectively, of ICG’s total revenue.

In general, upon the contractual expiration of the Company’s agreements with its customers, there can be no assurance that customers will elect to continue such agreements; in fact, they may elect to disconnect services. In addition, certain material customer agreements do not require the customer to maintain minimum commitments at their current levels. There can be no assurance that such customers will continue to purchase the same amount of services from ICG.

During 2002, a number of the Company’s customers filed for bankruptcy protection. Under the Bankruptcy Code, customers who file for bankruptcy protection may choose to affirm or reject their pre-petition contracts with the Company. If they choose to reject those contracts, ICG’s recourse is to pursue an unsecured claim in the customer’s bankruptcy proceeding for damages associated with rejection of the contract. The ultimate amount and nature of recovery on such claims is highly uncertain and specific to each proceeding. WorldCom filed for bankruptcy protection on July 21, 2002.

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Since WorldCom’s bankruptcy filing, ICG has continued to provide service to WorldCom. The WorldCom entities accounted for approximately 11% of the Company’s revenue in 2002. ICG and one of Worldcom’s subsidiaries, MCI Worldcom Network Services, Inc., have reached agreement with regard to the assumption of MCI Worldcom Network Services, Inc.’s pre-petition contract. The assumption is subject to approval by Worldcom’s bankruptcy court. If approved, the assumption will result in a total reduction in contractual revenue of approximately $8.9 million over the combined fiscal years 2003 and 2004.

As of December 31, 2002, customers who have filed for bankruptcy protection represented less than 14% of the Company’s monthly revenue. This revenue could be subject to rejection pursuant to the customer’s bankruptcy proceedings. The Company is unable at this time to predict the ultimate outcome of such proceedings. Furthermore, given the depressed state of the national economy and the telecommunications sector in particular, there can be no assurance that the Company will not continue to lose significant recurring revenue due to customer bankruptcies.

In addition, several of ICG’s other customers have approached ICG about possibly settling or restructuring future rates and/or levels of service provided under their service contracts. If the Company agrees to settle or restructure the future provisions of any significant customer contracts, ICG’s results of operations and financial condition could be materially affected. At this time, the Company cannot predict the possible outcome of such negotiations.

While management continues to evaluate and plan for the expiration of certain contracts with large customers and the replacement of monthly recurring revenue from customers currently involved in bankruptcy proceedings, the unexpected loss of any one or more of these customers, particularly Qwest, could have a significant impact on the Company’s operating results.

The Company’s ability to collect reciprocal compensation

Reciprocal compensation rates are negotiated elements of inter-carrier compensation established pursuant to interconnection agreements between the parties. The Company has executed interconnection agreements with all regional bell operating companies (“RBOCs”) and most other ILECs and, while the initial terms of some of those agreements have expired or are soon expiring, the Company is in the process of renegotiating and extending the terms of the interconnection agreements. The interconnection agreements currently in effect with three of the major RBOCs expire in June 2003, October 2003, and June 2004, respectively.

In most states in which the Company provides services, regulatory bodies have established lower traffic termination rates than the negotiated rates provided for in the Company’s interconnection agreements. As a result, future reciprocal compensation rates will likely be lower than the rates under the expiring interconnection agreements.

Reciprocal compensation revenue is discussed in more detail under “Results of Operations.”

The Company’s ability to sustain positive operating income and EBITDA

Prior to filing for Bankruptcy, the Company incurred substantial net losses and negative cash flows from operating activities. Since the second quarter of 2001, however, the Company has experienced positive EBITDA. Additionally, since the third quarter of 2002, the Company has experienced positive operating income. Nevertheless, there can be no assurance that the Company will continue to experience positive EBITDA or operating income. A reconciliation of EBITDA results to net income (loss) is presented herein under “Results of Operations”.

The Company’s ability to successfully maintain commercial relationships with its critical suppliers

The Company relies in part on other telecommunications service providers to provide data communications capacity via leased telecommunications lines. If its suppliers are unable or unwilling to provide or expand their current levels of service to the Company in the future, or are unable to provide these services in a timely manner, ICG’s operations could be materially affected. Although leased telecommunications lines are available from several alternative suppliers, there can be no assurance that ICG could obtain substitute services from other providers at reasonable prices or in a timely fashion. ICG is also subject to risks relating to potential disruptions in its suppliers’ services,

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and there are no assurance that such interruptions will not occur in the future. Service interruptions could produce substantial customer dissatisfaction and possibly cause the Company to fail to meet its minimum network performance commitments, which could adversely affect the Company’s results of operations and financial condition.

The Company’s ability to manage expansion of its service offerings and its network and infrastructure

The Company plans to introduce new communications services, expand service in its existing markets, and possibly expand service offerings into new markets. Such projects of a significant nature entail various operational and financial risks, including the following:

	•		Obtaining any required governmental permits and rights-of-way;
	•		Implementing interconnection agreements with ILECs and addressing other regulatory matters;
	•		Designing, acquiring, and installing transmission, switching and data facilities;
	•		Attracting new customers and selling new services to existing customers;
	•		Training and managing the Company’s employee base; and
	•		Accurately predicting and managing the cost and timing of associated capital expenditure programs.

In the event the Company is unable to successfully manage and implement such projects, the Company’s business, results of operations and financial condition could be adversely affected in a material manner.

The Secured Notes and Senior Subordinated Term Loan contain certain covenants that restrict the Company’s financial and operational flexibility

Under the terms of the Secured Notes and Senior Subordinated Term Loan, the Company is required to adhere to a number of affirmative, negative and financial covenants, including among other things, covenants which require it to maintain a minimum cash balance, maintain a minimum level of EBITDA performance and limitations on capital expenditures.

In addition, the Secured Notes and the Senior Subordinated Term Loan contain other restrictive provisions or covenants that limit, and in some circumstances prohibit, the Company’s ability to:

	•		Incur additional debt;
	•		Engage in mergers and acquisitions;
	•		Pay dividends, make investments or other restricted payments;
	•		Create liens;
	•		Sell assets; and
	•		Raise additional capital.

These provisions and covenants may limit the Company’s future financial and operating flexibility. In addition, if the Company is unable to maintain compliance with the covenants in the Secured Notes and the Senior Subordinated Term Loan, the lenders may accelerate repayment of amounts owed under these credit agreements. Furthermore, the Secured Notes and the Senior Subordinated Term Loan contain cross-default provisions under which the Company is deemed to be in default under such credit agreements if it is in default under any of the Company’s other material outstanding obligations.

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Based on certain internal Company projections, the Company would need to request a modification or waiver with respect to the minimum level of EBITDA performance by the fourth quarter of 2004 if such projected future operating results were to ultimately be realized. However, management anticipates that the Company’s business provides sufficient flexibility (i.e. improved sales and revenue performance, reduced costs, etc.) so as to enable the Company to remain in compliance with the financial covenants. The Company’s financial projections are based on the good faith assumptions of management, which are inherently uncertain. Actual results could be materially different (positively or negatively) from these projections, which in turn could impact the Company’s compliance with the financial covenants. In the event of non-compliance, absent the Company’s ability to obtain a modification or waiver of non-compliance from the secured lenders, or secure additional capital or alternative financing, the secured lenders could declare a default requiring the Company to accelerate repayment.

Changes in, or the Company’s inability to comply with, existing government regulations

Communications services are subject to significant regulation at the federal, state and local levels. Assumptions inherent in ICG’s business plan are consistent with both existing, as well as recently enacted regulatory changes. An adverse change to the regulatory environment, however, could negatively impact the Company in a number of ways, including:

	•		Delays in receiving required regulatory approvals or the imposition of onerous conditions for these approvals;
	•		Difficulties in completing and obtaining regulatory approval of interconnection agreements, which provide for the interconnection of ICG’s networks with existing local telephone companies’ networks;
	•		Enactment of new, adverse legislation or regulatory requirements or changes in the interpretation of existing laws or regulations; and
	•		Enactment of new, adverse legislation that increases the Company’s tax burden or the tax burden of the Company’s customers.

Many regulatory proceedings regarding issues that are important to the Company’s business are currently underway or are being contemplated by federal and state authorities. Changes in regulations or future regulations adopted by federal, state or local regulators, or other legislative or judicial initiatives relating to the telecommunications industry could cause ICG’s pricing and business models to fluctuate or otherwise have a material adverse effect on the Company.

The performance of the Company’s network

Many of the Company’s material service contracts require the Company to meet certain minimum performance standards. In the event the Company fails to meet these minimum performance levels, the Company may be required to issue credits and the customers may, in certain circumstances, have the ability to terminate their contracts and pursue other civil remedies. Although the Company’s network has been designed in such a manner so as to mitigate the impact of network outages, there can be no guarantee that such a significant network failure will not occur. In the event of such a network outage, the Company could fail to meet these performance standards and its revenue could be impacted accordingly.

Additionally, while the Company has installed what it believes are adequate protections to guard against unauthorized use of its network by third parties, these safeguards are not infallible and it is possible that the integrity of the network could be compromised to the detriment of the Company and its customers.

The rapid change of technology within the telecommunications industry

ICG believes its telecommunications infrastructure enables the Company to provide superior service and reliability to its customers. Nevertheless, the Company continuously evaluates emerging technologies in light of its planned

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service offerings and the demands of its customer base in order to maintain the Company’s competitive positioning within the industry (i.e. functionality, operating cost structure, etc.).

Integrating new technologies into the Company’s network, if necessary, may prove difficult and expensive and technological upgrades to the Company’s network may not become available in a timely fashion at a reasonable cost, or at all. Furthermore, the development and introduction of new technologies by competitors may reduce the cost of services similar to those the Company provides and/or could give rise to new competition not currently anticipated. If the Company’s network infrastructure becomes obsolete and the Company is unable to maintain its competitive positioning, ICG’s business, results of operations and financial condition could be adversely affected in a material manner.

Moreover, the Company relies on critical vendors to continue to support the existing technology deployed in the Company’s network. While the Company’s vendors are committed to supporting such critical Company infrastructure for the near term, such support will not necessarily be available indefinitely. In such circumstances, the Company would either need to develop alternative methods of support or replace existing technology, neither of which may be feasible.

The Company’s ability to access capital markets in a timely manner, at reasonable costs and on satisfactory terms and conditions

The terms and conditions of the Secured Notes and the Senior Subordinated Term Loan require repayments in 2005 and 2006, respectively. Management does not anticipate that internally generated funds will be sufficient to satisfy these debt payments. Accordingly, depending upon actual operating results, ICG will likely need to raise additional funds to refinance the Secured Notes and the Senior Subordinated Term Loan in 2005 and 2006, respectively.

Further, the Company may need to raise additional funds to take advantage of unanticipated opportunities, including expansion or acquisitions of complementary businesses or technologies, develop new products or services, or respond to unanticipated competitive pressures.

If ICG does not have sufficient funding for its growth or contractual cash commitments, it may be required to delay or abandon certain development plans or seek additional capital earlier than anticipated. The Company cannot provide any assurance that additional financing arrangements will be available to it on acceptable terms, or at all. Moreover, ICG’s outstanding indebtedness may adversely affect its ability to engage in additional financings. If adequate funds are not available, ICG’s business, results of operations and financial condition could be adversely affected in a material manner.

The Reorganized Company is largely controlled by two parties

As of March 14, 2003, Huff and Cerberus control approximately 21.6% and 16.3%, respectively, of the voting securities of the Reorganized Company. See Part III, Item 12, “Certain Beneficial Owners.” In addition, pursuant to the Modified Plan and the Company’s Restated By-laws, the Company’s Board of Directors is comprised of five directors, with Huff and Cerberus each having the right to appoint two directors. Further, a super-majority vote of the existing Board of Directors is required to appoint an additional director. If the Company issues additional stock for aggregate consideration of at least $25,000,000 in cash, assets or stock to anyone other than Huff or Cerberus, the number of directors may be increased by two members with a majority vote of the Board.

Additionally, the non-Huff and non-Cerberus shareholders currently do not have the authority to amend the Restated By-laws as they relate to the control of the Board of Directors by Huff and Cerberus. The non-Huff and non-Cerberus shareholders will have the authority to replace one of the Huff nominees only when Huff beneficially owns less than 5% of the common stock of the Reorganized Company (before management options). The second Huff nominee can be replaced if Huff holds less than 1% (before management options) of the common stock of the Reorganized Company. The non-Huff and non-Cerberus shareholders will have the authority to replace one of the Cerberus nominees only when Cerberus beneficially owns less than 5% of the common stock of the Reorganized Company (before management options) and Cerberus no longer owns any portion of the Senior Subordinated Term

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Loan. The second Cerberus nominee can be replaced if Cerberus no longer owns any of the Senior Subordinated Term Loan and holds less than 1% (before management options) of the common stock of the Reorganized Company.

As a result of the foregoing, it is likely that, for the foreseeable future, Huff and Cerberus will have the collective ability to control all matters requiring Board action, including potential financing transactions, mergers and acquisitions, sales or other dispositions of assets, the nomination of directors and the overall management and policies of the Company. It is also possible, however, that in certain circumstances the interests of Huff and Cerberus may not coincide. Moreover, as certain of the directors are in some cases also employees or agents of Huff or Cerberus, they may not be considered independent by some standards.

Potential for business combinations

The Company continuously evaluates the feasibility and possible strategic benefits of potential business combinations and other transactions that would extend its geographic markets, expand its services, or enlarge the capacity of the Company’s networks. Notwithstanding the required consent from its secured lenders under the Senior Notes and the Senior Subordinated Term Loan in order to consummate such a transaction, any material transaction that the Company would undertake could result in an increase in the Company’s indebtedness or the issuance of additional common stock or both, or a change of control. There can be no assurance that the Company will enter into any such transaction or, if it does, on what terms.

General economic conditions and the related impact on demand for the Company’s services

The national economy, and the telecommunications industry in particular, have been significantly affected by the current economic slowdown. Many of the Company’s customers have experienced substantial financial difficulty over the last year, in some cases leading to bankruptcies and liquidations. The financial difficulties of the Company’s customers could have a material impact if the Company is unable to collect revenue from these customers. In addition, customers experiencing financial difficulty are less likely to order additional services, and the Company’s business plan is predicated upon increasing both the number of customers and the services current customers order.

The telecommunications industry is extremely competitive, particularly with regard to pricing for services and service levels. Many of the Company’s existing and potential competitors have significantly greater resources than ICG. Competitors may also have more established brand names and larger customer bases to better promote their services.

Further, the immense capital investments made in the telecommunications industry have created an oversupply of network infrastructure. Combined with this oversupply, rapid technological advancements and intense competition have resulted in significant pricing pressure in each of the Company’s main service areas. While the Company believes that overall its pricing is competitive, it cannot predict what impact such oversupply of network infrastructure will have on future operating results. There can be no assurance that sufficient demand will exist for the Company’s services, that prices will not continue to decline, or that the Company can successfully compete in its selected markets.

Moreover, the financial difficulties experienced by the telecommunications industry diminish the Company’s ability to obtain additional capital and may adversely affect the willingness of potential customers to move their telecommunications services to an emerging provider such as ICG.

Off Balance Sheet Financing

The Company has no off balance sheet financing other than long term commitments for operating leases and rents as shown in the summary of Contractual Cash Commitments.

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Historical Cash Activities

Net Cash Provided (Used) By Operating Activities

Predecessor Company

The Predecessor Company’s operating activities before reorganization items provided positive cash flow totaling $142 million, $74 million and $29 million in 2000, 2001 and 2002 Predecessor, respectively.

In 2002 Predecessor, operating activities before reorganization items consisted of a net loss before reorganization items of $21 million and cash used by working capital of $24 million, offset by non-cash charges of $74 million. In 2001, operating activities before reorganization items consisted of a net loss before reorganization items of $99 million, offset by non-cash charges of $136 million and cash provided by working capital of $37 million. In 2000, operating activities before reorganization items consisted of a net loss before reorganization items of approximately $2.4 billion, offset by cash provided by working capital of $212 million and non-cash charges of $2.3 billion, comprised primarily of approximately $1.7 billion of provision for impairment of long-lived assets.

Reorganization items used $20 million, $86 million and $31 million of cash in 2000, 2001 and 2002 Predecessor, respectively. Reorganization items represent primarily reorganization income (expense), net, adjusted for non-cash items recognized during the bankruptcy process. These non-cash items were comprised primarily of Fresh Start reporting adjustments in 2002 Predecessor, changes in liabilities subject to compromise and restructuring accruals, gains related to contract settlements, and a gain related to the write-off of deferred financing and offering costs in 2000.

Reorganized Company

The Reorganized Company’s operating activities in 2002 provided positive cash flow totaling $4 million. Operating activities before reorganization items provided positive cash flow of $8 million, which was offset by a decrease in restructuring accruals of $4 million. The $8 million of cash provided by operating activities before reorganization items consisted of depreciation and amortization of $8 million and other non-cash charges of $3 million, offset by a net loss of $1 million and cash used by working capital of $2 million.

Net Cash Used By Investing Activities

Predecessor Company

Investing activities used $558 million, $18 million and $78 million in 2000, 2001 and 2002 Predecessor, respectively. Net cash used by investing activities was primarily comprised of purchases of property and equipment, proceeds from disposition of property, equipment and other assets, purchases and sales of short-term investments, and fluctuations in restricted cash and long-term deposit balances.

Net cash used by investing activities includes cash expended for the acquisition of property, equipment and other assets of $596 million, $44 million and $37 million in 2000, 2001 and 2002 Predecessor, respectively, which is net of the change in prepaid expenses, accounts payable and accrued liabilities related to the acquisition of property and equipment.

Additionally, in accordance with the terms of the Secured Notes, on the Effective Date the Company transferred $45 million to a cash collateral account, which is classified as restricted cash in the Company’s balance sheet.

The Company’s capital expenditures (including assets acquired under capital leases) were $974 million, $92 million and $41 million in 2000, 2001 and 2002 Predecessor, respectively. In 2000 and 2001, the Company acquired assets under capital leases and IRU agreements of $231 million and $51 million, respectively. No assets under capital leases or IRU agreements were acquired in 2002 Predecessor.

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Reorganized Company

Investing activities in 2002 Reorganized used $8 million, primarily comprised of purchases of property and equipment, offset by proceeds from decreases in long-term deposits and restricted cash, and proceeds from the disposition of property, equipment and other assets. Net cash used by investing activities includes cash expended for the acquisition of property, equipment and other assets of $11 million in 2002 Reorganized, which is net of the change in prepaid expenses, accounts payable and accrued liabilities related to the acquisition of property and equipment.

The Company’s 2002 Reorganized capital expenditures were $10 million. No assets under capital leases or IRU agreements were acquired in 2002 Reorganized.

Net Cash Provided (Used) By Financing Activities

Predecessor Company

Financing activities provided $528 million in 2000 and used $21 million, $11 million and $1 million in 2001 and 2002 Predecessor, respectively.

Financing activities for 2002 Predecessor include the receipt of new financing consisting of a $25 million Senior Subordinated Term Loan, which was used to pay down the Secured Notes to a balance of $59 million. The Company also made payments of $2 million for long-term debt issuance costs and $9 million for capital leases.

Due to the Company’s ongoing bankruptcy proceedings, the Company’s financing activities in 2001 were minimal. All pre-petition contractual debt and capital lease payments were suspended pursuant to the Company’s bankruptcy proceedings and subject to revised payment terms on a specific, case-by-case basis. The Company ceased the accretion of discounts and the accrual of interest on all unsecured debt subject to compromise as of the Petition Date. The Company continued to accrue and make interest payments on all fully secured long-term debt and capital lease obligations. During 2001, the Company made principal payments on capital leases of $17 million. In addition, the Company made $1 million in preferred stock dividend payments in 2001 as part of a settlement approved by the Bankruptcy Court.

Net cash provided by financing activities in 2000 includes proceeds from the Senior Facility, the 8% Series A Convertible Preferred Stock, and the issuance of common stock in conjunction with the exercise of options and warrants and the Company’s employee stock purchase plan. These cash inflows were offset by principal payments on long-term debt, capital leases and IRU agreements and payments of long-term debt issuance costs and preferred dividends.

Reorganized Company

Financing activities used $1 million in 2002 Reorganized, consisting primarily of principal payments on long-term debt and capital leases.

RESULTS OF OPERATIONS

Due to the adoption of Fresh Start reporting as of October 11, 2002, the Reorganized Company’s post-Fresh Start balance sheet, statement of operations and statement of cash flows have not been prepared on a consistent basis with, and are therefore generally not comparable to, those of the Predecessor Company prior to the application of Fresh Start. In accordance with SOP 90-7, the Reorganized Company’s balance sheet, statement of operations and statement of cash flows have been presented separately from those of the Predecessor Company.

The Reorganized Company’s revenue (except as noted below), operating costs, selling, general and administrative expenses, and bad debt expense were not affected by the adoption of Fresh Start reporting. Therefore, the Predecessor Company’s 2002 amounts have been combined with the Reorganized Company’s 2002 amounts for comparison and analysis purposes herein.

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(1)		Revenue for the Reorganized Company is comparable to the revenue for the Predecessor Company, except with respect to revenue recognition of certain deferred revenue. Due to the write down of the deferred revenue balance in connection with the application of Fresh Start reporting, revenue was reduced by $1 million per quarter.
(2)		EBITDA consists of net income (loss) from continuing operations before interest, income taxes, reorganization income (expense), net, depreciation and amortization, and other income (expenses), net. EBITDA 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 for the periods indicated. EBITDA is not a measurement under generally accepted accounting principles and is not necessarily comparable with similarly titled measures of other companies. The following table is a reconciliation of the net income (loss) reported by the Company to EBITDA: