FORM 10-K.--ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

      [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
          Exchange Act of 1934

                   For the fiscal year ended December 31, 1997

                                       or

      [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
          Exchange Act of 1934

                      (Commission file Number 1-11965) ICG
                              COMMUNICATIONS, INC.
                       (Commission file Number 333-40495)
                                ICG FUNDING, LLC
                      (Commission file Number 1-11052) ICG
                             HOLDINGS (CANADA), INC.
                      (Commission file Number 33-96540) ICG
                                 HOLDINGS, INC.
           (Exact names of Registrants as specified in their charters)

---------------------------------------- ---------------------------------------
Delaware                                  84-1342022
Delaware                                  84-1434980
Canada                                    Not applicable
Colorado                                  84-1158866
(State or other jurisdiction of
incorporation or organization)            (I.R.S. Employer Identification No.)
---------------------------------------- ---------------------------------------
161 Inverness Drive West,
Englewood, Colorado 80112                 Not applicable

161 Inverness Drive West,
Englewood, Colorado 80112                 Not applicable

1710-1177 West Hastings Street            c/o ICG Communications, Inc.
Vancouver, BC V6E 2L3                     161 Inverness Drive West
                                          P.O. Box 6742
                                          Englewood, Colorado 80155-6742

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

Securities registered pursuant to Section 12(b) of the Act:
--------------------------------------------------------------------------------
                                          Name of each exchange
  Title of each class                     on which registered
---------------------------------------- ---------------------------------------
Common Stock, $.01 par value              Nasdaq National Market
(44,621,254 shares outstanding on
March 26, 1998)
Not applicable                            Not applicable
Class A Common Shares, no par value       Not applicable
(31,822,756  shares outstanding on
March 26, 1998)
Not applicable                            Not applicable
---------------------------------------- ---------------------------------------


<PAGE>

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



     Indicate by check mark whether the Registrants:  (1) have filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
Registrants  were required to file such  reports),  and (2) have been subject to
such filing requirements for the past 90 days. [X]Yes [ ]No

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

On March 26, 1998 the aggregate market value of ICG Communications,  Inc. Common
Stock held by  non-affiliates  (using the  closing  price of $41.75 on March 26,
1998) was approximately $1,862,937,355.

ICG  Communications,  Inc.  owns  all  of  the  issued  and  outstanding  common
securities of ICG Funding, LLC.

On March 26, 1998,  the aggregate  market value of ICG Holdings  (Canada),  Inc.
Class A Common  Shares held by  non-affiliates  (using the closing  price of ICG
Communications,   Inc.   Common  Stock  of  $41.75  on  March  26,  1998),   was
approximately $991,145.

ICG Holdings  (Canada),  Inc. owns all of the issued and  outstanding  shares of
Common Stock of ICG Holdings, Inc.








<PAGE>
                                       3



                                TABLE OF CONTENTS


PART I  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         5
  ITEM 1.  BUSINESS . . . . . . . . . . . . . . . . . . . . . . . .         5
    Overview  . . . . . . . . . . . . . . . . . . . . . . . . . . .         5
    Recent Developments . . . . . . . . . . . . . . . . . . . . . .         6
    Telecom Services  . . . . . . . . . . . . . . . . . . . . . . .         8
      Strategy  . . . . . . . . . . . . . . . . . . . . . . . . . .         9
      Telecom Services Networks . . . . . . . . . . . . . . . . . .        10
      Services. . . . . . . . . . . . . . . . . . . . . . . . . . .        12
      Industry. . . . . . . . . . . . . . . . . . . . . . . . . . .        15
    Network Services  . . . . . . . . . . . . . . . . . . . . . . .        16
    Satellite Services  . . . . . . . . . . . . . . . . . . . . . .        17
    Customers And Marketing . . . . . . . . . . . . . . . . . . . .        18
    Competition . . . . . . . . . . . . . . . . . . . . . . . . . .        19
    Regulation  . . . . . . . . . . . . . . . . . . . . . . . . . .        22
    Employees . . . . . . . . . . . . . . . . . . . . . . . . . . .        26
  ITEM 2.  PROPERTIES . . . . . . . . . . . . . . . . . . . . . . .        27
  ITEM 3.  LEGAL PROCEEDINGS  . . . . . . . . . . . . . . . . . . .        27
  ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . .        27

PART II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        28
  ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
           STOCKHOLDER MATTERS. . . . . . . . . . . . . . . . . . .        28
  ITEM 6.  SELECTED FINANCIAL DATA. . . . . . . . . . . . . . . . .        29
  ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
           CONDITION AND RESULTS OF OPERATIONS. . . . . . . . . . .        32
  ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. . . . . . .        53
  ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
           ACCOUNTING AND FINANCIAL DISCLOSURES . . . . . . . . . .        54

PART III  . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        55
  ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANTS. . . . .        55
    Executive Officers of ICG . . . . . . . . . . . . . . . . . . .        56
    Directors of ICG  . . . . . . . . . . . . . . . . . . . . . . .        57
    Directors and Executive Officers of ICG Funding,
    Holdings-Canada and Holdings. . . . . . . . . . . . . . . . . .        58
  ITEM 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . .        60
    Director Compensation . . . . . . . . . . . . . . . . . . . . .        60
    Compensation Committee Interlocks and Insider Participation . .        60
    Board Compensation Committee Report on Executive Compensation .        60
    Executive Compensation  . . . . . . . . . . . . . . . . . . . .        62
      Summary Compensation Table. . . . . . . . . . . . . . . . . .        63
      Option/SAR Grants in Last Fiscal Year . . . . . . . . . . . .        65
      Aggregated Option Exercises in Last Fiscal Year End
      Option Values . . . . . . . . . . . . . . . . . . . . . . . .        66
      Ten-Year Option/SAR Repricings. . . . . . . . . . . . . . . .        66
    Executive Employment Contracts  . . . . . . . . . . . . . . . .        68


<PAGE>
                                       4




  ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
           MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . .        70
  ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . .        72

PART IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        74
  ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORT ON
           FORM 8-K . . . . . . . . . . . . . . . . . . . . . . . .        74
    Financial Statements. . . . . . . . . . . . . . . . . . . . . .        74
    Report on Form 8-K. . . . . . . . . . . . . . . . . . . . . . .        83
    Exhibits  . . . . . . . . . . . . . . . . . . . . . . . . . . .        83
    Financial Statement Schedule  . . . . . . . . . . . . . . . . .        83

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

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



<PAGE>
                                       5





                                     PART I


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

ITEM 1. BUSINESS

Overview

     The  Company  is one  of the  nation's  leading  integrated  communications
providers ("ICPs") of competitive communications services, based on estimates of
the  industry's  1997 revenue.  ICPs seek to provide an alternative to incumbent
local exchange  carriers  ("ILECs"),  long distance  carriers,  Internet service
providers ("ISPs") and other  communications  service providers for a full range
of communications  services in the increasingly  deregulated  telecommunications
industry.  Through its competitive  local exchange carrier ("CLEC")  operations,
the  Company  operates   networks  in  four  regional  clusters  covering  major
metropolitan statistical areas in California,  Colorado, Ohio and the Southeast.
The Company also provides a wide range of network systems integration  services,
maritime and international satellite transmission services,  and subsequent to
January 21,  1998,  a variety of  Internet  connectivity  and other  value-added
Internet services.  As a leading  participant in the rapidly growing competitive
local  telecommunications  industry,  the  Company has  experienced  significant
growth,  with total revenue  increasing  from  approximately  $111.6 million for
fiscal 1995 to approximately $273.4 million for fiscal 1997.

     The Federal  Telecommunications Act of 1996 (the "Telecommunications  Act")
and pro-competitive state regulatory  initiatives have substantially changed the
telecommunications  regulatory  environment in the United  States.  Due to these
regulatory  changes,  the Company is now permitted to offer all  interstate  and
intrastate  telephone  services,  including  competitive  local dial  tone.  The
Company is marketing and selling local dial tone services in major  metropolitan
areas in the following regions:  California, which began service in late January
1997,  followed  by Ohio in  February  1997,  Colorado  in  March  1997  and the
Southeast  in May 1997.  During  fiscal  1997,  the Company  sold  approximately
178,000 local access lines, of which approximately 141,000 were in service as of
December 31, 1997. As a complement to its local  exchange  service,  the Company
has begun  marketing  bundled  service  offerings  which include long  distance,
enhanced  telecommunications  services  and data  services.  The  Company has 19
operating  high  capacity  digital  voice  switches  and 15 data  communications
switches, and plans to install additional switches as demand warrants.

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

<PAGE>
                                       6


Recent Developments

     Merger  with NETCOM  On-Line  Communication  Services,  Inc. On January 21,
1998, the Company completed a merger with NETCOM On-Line Communication Services,
Inc. ("NETCOM") ("NETCOM Merger"). Located in San Jose, California,  NETCOM is a
provider  of  Internet  connectivity  and World Wide Web  ("Web")  site  hosting
services and other value-added services. For calendar years 1995, 1996 and 1997,
NETCOM  reported  revenue of  approximately  $52.4  million,  $120.5 million and
$160.7 million, respectively, and EBITDA losses of approximately $(6.3) million,
$(20.3) million and $(1.7) million,  respectively.  The Company will account for
the business combination under the pooling of interests method of accounting.

     At the  effective  time of the NETCOM  Merger,  each  outstanding  share of
NETCOM common  stock,  $.01 par value,  became  automatically  convertible  into
shares of ICG common stock at an exchange  ratio of 0.8628  shares of ICG common
stock per NETCOM  common  share.  As a result of this  transaction,  the Company
expects to issue an estimated  10.2  million  shares of ICG common stock for the
NETCOM common shares  outstanding on January 21, 1998. Cash will be paid in lieu
of any fractional shares.

     The Company  believes  that the NETCOM  Merger  will create a  full-service
business  communications  company providing a single source for a complete range
of voice, data,  Internet,  Web site hosting and other  communications  services
over an extensive  fiber optic  network.  Currently,  approximately  one-half of
NETCOM's customers are located in the Company's  existing network territory.  It
is anticipated  that the NETCOM Merger will enable the combined entity to better
utilize ICG's fiber and frame relay networks by providing  NETCOM with extensive
network infrastructure for the on-net transportation of its Internet traffic.

     Announcement of New Service Offerings. In March 1998, the Company announced
its plans to offer long distance service via Internet protocol ("IP") technology
at rates as low as 5.9 cents per  minute.  This  service  will be offered in 166
cities across the nation,  covering 90% of the U.S. long distance market, by the
end of fiscal  1998.  ICG and NETCOM will begin to market this  service over the
Internet and through its inbound  telemarketing  center in the second quarter of
1998.  The Company  also plans to offer by the end of fiscal 1998  competitively
priced high-speed data transmission services via digital subscriber line ("DSL")
technology to all business and end user customers  within its existing  regional
clusters. DSL technology utilizes the existing twisted copper pair connection to
the business or end user,  giving the customer  significantly  greater bandwidth
when connecting to the Internet.

     Acquisition of  Communications  Buying Group, Inc. On October 17, 1997, the
Company  purchased  approximately  91%  of  the  outstanding  capital  stock  of
Communications  Buying Group,  Inc.  ("CBG"),  an Ohio based local  exchange and
centrex reseller (the "CBG  Acquisition").  The Company paid total consideration
of  approximately  $46.5 million,  plus the  assumption of certain  liabilities.
Separately, on October 17, 1997, the Company sold approximately $16.0 million of
common stock, $.01 par value ("Common Stock"),  to certain  shareholders of CBG.
The Company  purchased the remaining  approximately  9% interest of CBG on March
24, 1998 for approximately $2.9 million in cash.
<PAGE>
                                       7

     CBG  focuses  its  sales and  marketing  efforts  on small to  medium-sized
businesses  in certain  cities in Ohio and provides a one-stop  solution for the
local and long  distance  needs of its  customers.  For calendar  years 1996 and
1997,  CBG's  revenue  was  approximately   $21.4  million  and  $33.8  million,
respectively,  and EBITDA losses were  approximately  $(1.0)  million and $(3.2)
million, respectively.

     The Company  believes that the business  strategy of CBG is closely aligned
with the Company's  business strategy and that it can successfully  leverage the
services offered by CBG to enhance the Company's offering of similar services in
its existing Ohio markets,  including all those  currently  served by CBG. As of
December 31, 1997,  the  acquisition  of CBG has more than doubled the Company's
sales  presence in Ohio to  approximately  91 people.  In addition,  the Company
believes  that its ability to migrate,  over time,  a portion of CBG's  existing
customer base to its fiber optic facilities offers significant cost savings. The
Company  believes that the transaction has  significantly  furthered its goal of
becoming the dominant alternative to the ILEC in Ohio.

     Network  Expansion.  The Company  continues to expand its network footprint
through  several   strategic   initiatives  with  utility  companies  and  other
telecommunication  carriers. In January 1997, the Company announced an agreement
with a subsidiary  of The  Southern  Company  ("Southern")  that will permit the
Company to construct a 100-mile fiber optic network in the Atlanta  metropolitan
area.  In June 1997,  the  Company  entered  into an  indefeasible  right of use
("IRU") agreement with Qwest Communications  Corporation for approximately 1,800
miles of fiber optic network and  additional  broadband  capacity in California,
Colorado, Ohio and the Southeast.  The Company expects this new capacity will be
used for the  transmission  of  local,  long  distance  and data  communications
services in and between the Company's markets.

     CSW Strategic Alliance.  In January 1997, the Company announced a strategic
alliance  with Central and South West  Corporation  ("CSW") which was formed for
the purpose of developing and marketing  telecommunications  services in Austin,
Corpus Christi,  Dallas,  Houston and San Antonio,  Texas. The venture entity, a
limited  partnership named CSW/ICG ChoiceCom,  L.P.  ("ChoiceCom"),  is based in
Austin,  Texas.  CSW holds 100% of the interest in ChoiceCom and the Company has
an  option  to  purchase  a 50%  interest  at any time  prior  to July 1,  2003.
Subsequent  to July 1, 1999,  if the  Company  has not  exercised  its  purchase
option, CSW will have the right to sell, at a price pursuant to the terms of the
limited partnership agreement, either 51% or 100% of the partnership interest in
ChoiceCom to the Company.  CSW and the Company each have two  representatives on
the  Management  Committee  of the general  partner of  ChoiceCom.  ChoiceCom is
currently  offering  local  exchange,  long  distance and long haul  services in
Austin,  Corpus  Christi,  Dallas,  Houston  and San  Antonio,  Texas  and other
selected  areas  of  Texas  and  may  offer  these  services  as  well  as  data
communications and other services in Arkansas, Louisiana and Oklahoma.

     Financings.  In March  1997,  the  Company  raised net  proceeds  of $192.4
million  from the sale of 11 5/8% Senior  Discount  Notes due 2007 (the "11 5/8%
Notes") of Holdings and 14% Exchangeable  Preferred Stock Mandatorily Redeemable
2008 (the "14% Preferred Stock") of Holdings. Cash interest on the 11 5/8% Notes
accrues at 11 5/8% per annum  beginning March 15, 2002 and is payable each March
15 and September 15,  commencing  September  15, 2002.  The 14% Preferred  Stock
accrues  dividends  quarterly at a rate of 14% per annum.  Dividends are payable
quarterly  in cash or,  on or prior to March  15,  2002,  at the sole  option of
Holdings, in additional shares of 14% Preferred Stock. The 11 5/8% Notes and the
14% Preferred Stock have been registered under the Securities Act.
<PAGE>
                                       8


     In September and October 1997,  the Company's new wholly owned  subsidiary,
ICG Funding,  LLC, a Delaware  limited  liability  company,  completed a private
placement of $132.25 million of Exchangeable Limited Liability Company Preferred
Securities (the "6 3/4% Preferred Securities").  The 6 3/4% Preferred Securities
are mandatorily  redeemable  November 15, 2009 at the liquidation  preference of
$50.00 per security, plus accrued and unpaid dividends.  Dividends on the 6 3/4%
Preferred  Securities  are  cumulative  at the rate of 6 3/4% per  annum and are
payable in cash through November 15, 2000 and, thereafter,  in cash or shares of
Common Stock at the option of ICG Funding.  The 6 3/4% Preferred  Securities are
exchangeable,  at the option of the  holder,  into  Common  Stock at an exchange
price of $24.025  per share,  subject to  adjustment.  ICG  Funding  may, at its
option,  redeem the 6 3/4% Preferred Securities at any time on or after November
18,  2000.  Prior to that time,  ICG  Funding  may  redeem the 6 3/4%  Preferred
Securities  if the current  market  value of Common  Stock equals or exceeds the
exchange price,  for at least 20 days of any consecutive  30-day trading period,
by 170% prior to November  16,  1998;  by 160% from  November  16, 1998  through
November 15, 1999; and by 150% from November 16, 1999 through November 15, 2000.
The 6 3/4%  Preferred  Securities and the Common Stock issuable upon exchange of
such securities have been registered under the Securities Act.

     In February 1998, the Company raised proceeds,  net of underwriting  costs,
of  approximately  $291.6 million from the sale of 10% Senior Discount Notes due
2008 (the "10% Notes") of ICG Services,  Inc., a Delaware  corporation and newly
formed,  wholly owned,  unrestricted  subsidiary of ICG ("ICG  Services").  Cash
interest on the 10% Notes accrues at 10% per annum  beginning  February 15, 2003
and is payable each February 15 and August 15,  commencing  August 15, 2003. The
10% Notes will be redeemable at the option of ICG Services, in whole or in part,
on or after  February  15,  2003.  ICG Services is obligated to register the 10%
Notes under the Securities Act.

     ICG  Equipment,  Inc. In January 1998,  the Company  formed ICG  Equipment,
Inc., a Colorado  corporation and wholly owned  subsidiary of ICG Services ("ICG
Equipment").  Holdings'  subsidiaries intend to enter into arrangements with ICG
Equipment  to  purchase  or lease  telecommunications  equipment,  software  and
capacity and related services.  The equipment and services provided to Holdings'
subsidiaries  will be utilized to upgrade and expand its network  infrastructure
to take full  advantage of the  opportunities  and cost  savings  available as a
result of the acquisitions  made by ICG Services.  Any such arrangements will be
on an arm's length basis and on  comparable  terms that  Holdings'  subsidiaries
would be able to obtain from a third party.

Telecom Services

     The Company  operates  local  exchange  networks in the  following  markets
within  its four  regional  clusters:  California  (Sacramento,  San  Diego  and
portions of the Los  Angeles and San  Francisco  metropolitan  areas);  Colorado
(Denver,  Colorado Springs and Boulder); Ohio (Akron,  Cleveland,  Columbus, and
Dayton) and the Southeast (Birmingham,  Charlotte,  Louisville,  and Nashville).
The Company  plans to build a network in Atlanta,  Georgia in  conjunction  with
Southern.  Through  its  strategic  alliance  with CSW,  the Company is offering
services in Austin, Corpus Christi,  Dallas,  Houston and San Antonio, Texas and
other selected areas of Texas, and may offer services in Arkansas, Louisiana and
Oklahoma in the future. See "-Recent Developments." The Company will continue to
expand  its  network  through  construction,  leased  facilities  and  strategic
alliances and through acquisitions.  The Company's operating networks have grown
from 627 fiber  route miles at the end of fiscal 1995 to 3,043 fiber route miles
as  of  December  31,  1997.   Telecom   Services  revenue  has  increased  from
approximately $32.3 million for fiscal 1995 to approximately  $177.7 million for
fiscal 1997.
<PAGE>
                                       9




     The Company's new subsidiary, NETCOM, is a leading provider of high quality
Internet  solutions to individuals and small and medium-sized  businesses in the
United  States and also  provides  the same high quality  Internet  solutions in
Canada  and the United  Kingdom.  NETCOM  offers a broad  spectrum  of  Internet
solutions designed to enhance customer  productivity through the integration and
application of technologies by providing a  comprehensive  software  platform to
interface with the Web, premium quality Internet access and support services and
on-line tools to automate Web site  creation and  development.  These  offerings
have led to significant  growth, with revenue increasing from approximately $2.4
million for 1993 to  approximately  $160.7  million for the calendar  year ended
December  31,  1997.  In January  1997,  NETCOM  announced  plans to migrate its
customer focus away from high volume,  low margin  consumer  customers to higher
margin products for small and medium-sized business customers.

Strategy

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

     Increase  Revenue  and Margins  through  Bundled  Services to Business  End
Users. The Company  believes that customers are increasingly  demanding a broad,
full service  approach to  providing  telecommunications  services.  By offering
integrated  technology-based  communications solutions,  management believes the
Company     will    be    better     able    to    capture     business     from
telecommunications-intensive commercial accounts. To this end, the Company plans
to  complement  its  competitive  local  and  long  distance  telecommunications
offerings  with its recently  announced  IP  telephony  service and the Internet
products  developed by NETCOM,  and cross-market these combined products through
ICG's  direct  sales  force.  Additionally,   NETCOM  intends  to  market  ICG's
telecommunications products to its small and medium-sized business customer base
over the Internet. Management believes a targeted business end user strategy can
better leverage ICG's network footprint and telecommunications investment.
<PAGE>
                                       10


     Concentrate  Networks in Regional  Clusters.  The Company  believes that by
focusing on regional  clusters it will be able to more  effectively  service its
customers'  needs and efficiently  market,  operate and control its networks and
expanded  service  offerings.  As a result,  the  Company has  concentrated  its
networks in regional  clusters serving major  metropolitan  areas in California,
Colorado, Ohio and the Southeast. The Company is expanding its network footprint
to include  certain  cities in Texas  through a strategic  alliance with CSW and
intends to further  expand its network  footprint  to include  Atlanta,  Georgia
through its agreement with Southern. In addition,  NETCOM may be able to realize
extensive  cost  synergies  by focusing  future  growth  within  ICG's  existing
footprint.  For example,  a  significant  portion of NETCOM's  customer  base is
located in California.  To the extent  feasible,  NETCOM will route its Internet
traffic over ICG's California  network.  NETCOM plans to continue to operate and
grow its business in the United States outside of ICG's network footprint and in
Canada and the United Kingdom. See "-Recent Developments."

     Network Connectivity. Significant amounts of telecommunications traffic are
carried  within  the  Company's  regional  clusters.  Management  believes  that
integrating  these clusters  through the connection of individual  networks will
provide significant benefits,  including cost advantages.  These cost advantages
would  result  from the  Company's  ability to carry  regional  traffic  on-net,
thereby  improving  operating margins by reducing payments to other carriers for
the use of their  facilities.  Accordingly,  the  Company  is in the  process of
connecting  networks within each of its  California,  Colorado and Ohio clusters
with intrastate fiber optic cable.

     Alliances with Utilities.  The Company has established  strategic alliances
with  utility  companies  to  take  advantage  of  their  existing  fiber  optic
infrastructures  and customer  relationships.  This approach affords the Company
the opportunity to license or lease fiber optic facilities on a long-term basis,
which is more  timely  and  cost  effective  than  constructing  facilities.  In
addition, utilities possess conduit and other facilities that enable the Company
to more easily install  additional fiber to extend existing  networks in a given
market.  Finally,  management  expects these strategic  alliances to combine the
Company's expertise in providing high quality  telecommunications  services with
the  utility's  name   recognition  and  customer   relationships  in  marketing
telecommunications products and services to the utility's customer base.

     Integrate   Investments   and  Expand.   The  Company  expects  to  acquire
telecommunications,  Internet  and  related  businesses  that  complement  ICG's
business  strategy  to offer a wide array of  telecommunications,  Internet  and
related services,  primarily to business  customers.  Acquisition  targets could
include U.S. and foreign CLECs, ISPs and long distance companies,  among others.
The Company  intends to make future  acquisitions  primarily  through the use of
Common Stock, cash on hand and the proceeds from securities offerings.

Telecom Services Networks

     The  Company's  networks are  generally  comprised  of fiber optic  cables,
switching facilities,  advanced electronics,  transmission equipment and related
wiring and equipment.  The Company  typically designs a ring architecture with a
view  toward  making the network  accessible  to the  largest  concentration  of
telecommunication intensive businesses in a given market.
<PAGE>
                                       11


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

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

     The Company's network  monitoring center in Denver monitors and manages the
Company's transport networks and provides high-level monitoring of the Company's
local  exchange  switches.  Additionally,  the  Company  contracts  with  Lucent
Technologies,  Inc. for detailed  performance  monitoring of its local  exchange
switches.  Centralized  electronic  monitoring  and  control  of  the  Company's
networks allows the Company to avoid  duplication of this function in each city,
thereby reducing costs.

     Switched services involve the transmission of voice,  video or data to long
distance carrier-specified or end user-specified termination sites. By contrast,
the special  access  services  provided by the Company and other CLECs involve a
fixed  communications link or "pipe," usually between an end user and a specific
long  distance   carrier's  point  of  presence  ("POP").   With  a  switch  and
interconnection to various carriers' networks, it is possible for the Company to
direct a long distance  carrier's  traffic to any end user regardless of whether
the end user is physically  connected to the Company's  owned or leased network.
In  addition,  a switch is required in order for the Company to provide the full
range  of local  telephone  services.  The  Company  is  marketing  and  selling
competitive  local dial tone  services  in  California,  Colorado,  Ohio and the
Southeast. See "-Regulation-State Regulation."

     NETCOM owns and operates a data  communications  network  consisting  of 17
hubs containing frame relay switches and  high-performance  routers connecting a
backbone  of leased  Asynchronous  Transfer  Mode  ("ATM")  switches  and leased
high-speed  dedicated  data  lines in the United  States,  Canada and the United
Kingdom.  NETCOM  maintains  247 POPs in the  United  States and Canada and also
offers virtual local access numbers in Canada and the United Kingdom. The design
and  architecture  of the  physical  network  permits  NETCOM  to  offer  highly
flexible,  reliable high-speed services to its customers and support significant
subscriber growth. The NETCOM  infrastructure is monitored by network operations
centers ("NOCs") in San Jose,  California,  Dallas, Texas,  Toronto,  Canada and
London, England.
<PAGE>
                                       12


Services

     The Company's  competitive local exchange services include local dial tone,
long  distance,  data  services,  special  access and  interstate and intrastate
switched access services.  Competitive local dial tone services consist of basic
local  exchange  lines and trunks for business,  related line features  (such as
voice mail, Direct Inward Dialing (DID),  hunting and custom calling  features),
local  calling,  and  intraLATA,  also called local toll,  calling.  The Company
believes that having a full  complement of  communications  services,  including
local and long distance  services,  will  strengthen its overall market position
and help the Company to better  penetrate the local  exchange  marketplace.  The
Company has also developed long distance  services,  including calling and debit
cards, to complement its local exchange services family of products. The Company
recently  announced plans to offer a bundled service of local, long distance and
data services,  including  Internet  services,  delivered over a T-1 connection.
This service will be offered primarily to ICG's larger business customers.

     The Company announced its initial offering of long distance services in May
1997. The target customers for such services are the Company's  existing and end
user customers.  The Company's existing switches have facilitated the entry into
this  business  and reduced its cost of  obtaining  long  distance  transmission
capacity.  However,  the Company has been  reliant on other  carriers to provide
transmission and termination of long distance  traffic.  Therefore,  the Company
has  entered  into   transmission   agreements,   which  typically  provide  for
transmission on a per minute basis,  with long distance carriers to fulfill such
needs.  To reduce its cost of  services,  the Company  may lease  point-to-point
circuits on a monthly or longer term fixed cost basis where it anticipates  high
traffic volume.

     The Company recently announced its plans to offer IP long distance services
priced as low as 5.9 cents per  minute in 166  markets  by the end of 1998.  The
Company plans to carry the IP traffic over  NETCOM's  data backbone  network and
terminate a large  portion of the traffic  via  NETCOM's  238 POPs in the United
States,  thereby  eliminating  terminating  access charges.  If a call cannot be
terminated over ICG's  facilities,  it will be billed at a rate of 7.6 cents per
minute.  The Company  expects to begin  offering this service  during the second
quarter of 1998,  initially  targeting  NETCOM's  existing customer base of over
500,000 customers. The Company plans to market this product via the Internet and
through the Company's inbound telemarketing center.

     The Company  also  announced  that it will offer DSL  services  with speeds
ranging from 144kbps to 9mbps to offer its customers high-speed Internet access.
The Company plans to lease unbundled local loops from the ILEC in the respective
market  and  install  its DSL  equipment  in the  ILEC  central  office  and the
customer's  premises.  This  service  will be  offered  primarily  to the  small
business  and  work-at-home  markets,  which  historically  have  been  a  large
percentage of NETCOM's customer base.
<PAGE>
                                       13


     To  complement  its  telecommunications  services  offerings,  the  Company
announced its initial  offering of data  communications  services in California,
Colorado and Ohio during the first quarter of 1997. These services  targeted the
Company's   existing  customers  and  other  businesses  with  substantial  data
communications  requirements.  Although to date,  the Company has not  generated
substantial revenue from such services, the Company expects that its new service
offerings,  including its IP telephony strategy and DSL technology, and NETCOM's
extensive  experience  providing  data  transmission  services,  will  allow the
Company to  significantly  enhance its presence  within the data  communications
market during fiscal 1998.

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

     The Company's  interstate and intrastate  switched access services  include
the  transport  and  switching  of calls  between  the long  distance  carrier's
facilities and either the local telephone  company central offices or end users.
By performing the switching  services,  the Company can reduce the long distance
carriers' local access costs,  which constitute  their major operating  expense.
The Company has  experienced  negative  operating  margins from the provision of
wholesale  switched services because it relies on ILEC networks to terminate and
originate customers' switched traffic. The Company has recently raised prices on
its  wholesale  switched  services  product in order to improve  margins  and is
de-emphasizing  its wholesale  switched services to free up switch port capacity
for its higher margin dial tone product. In addition,  as the Company provides a
greater  portion  of the  local  segment  of a  call,  the  Company  expects  to
experience improved operating margins.

     The  Company's  Signaling  System  7  ("SS7")  services  provide  signaling
connections between long distance and local exchange carriers,  and between long
distance carriers' networks.  SS7, known as look-ahead routing, is used by local
exchange  companies,  long distance  carriers,  wireless  carriers and others to
signal between network  elements,  creating  faster call set-up,  resulting in a
more  efficient  use of network  resources.  SS7 is now the standard  method for
telecommunications signaling worldwide. The Company has deployed signal transfer
points ("STPs") throughout its networks to efficiently route SS7 data across the
United States.  SS7 is also the enabling  technology  for advanced  intelligence
network platforms, a set of services and signaling options that carriers can use
to create new services or customer options.  Carriers purchase  connections into
the  Company's  SS7 network,  and also purchase  connections  to other  carriers
(local and long distance) on a monthly recurring basis.
<PAGE>
                                       14


     In August  1996,  the Company  acquired  the SS7  business of Pace  Network
Services, Inc., a division of Pace Alternative Communications,  Inc. The Company
has also developed a nationwide SS7 service with Southern New England  Telephone
("SNET"),  one of the nation's ten largest local exchange carriers.  The Company
believes  that,  together  with  SNET,  it is  one of  the  largest  independent
suppliers of SS7  services.  The  Company's  STPs are  integrated  with two SNET
"gateway" STPs in Connecticut.

     NETCOM.  Through its merger with  NETCOM,  the Company  currently  provides
Internet  solutions  principally  through  dial-up,  direct  access and Web site
hosting  services.  Direct access and Web site hosting  services  provide higher
revenue per customer  and higher  margins  than  dial-up  services.  NETCOM also
receives revenue from value-added services such as security, anti-virus and data
storage.

     Dial-Up Services. NETCOM's dial-up customers receive an integrated Internet
solution  consisting of high quality access,  software and 24 hours a day, seven
days a week,  automated  customer  support.  NETCOM  dial-up  customers  connect
directly  to the  Internet  via  NETCOM's  network  which  provides  high speed,
reliable  access.  All NETCOM  dial-up  accounts  allow access to the Internet's
resources,  including E-mail, the Web and USENET newsgroups. In addition, NETCOM
dial-up customers can receive a one megabyte ("Mb") personal Web page, access to
a daily  customized  newspage  via  E-mail,  and  access to  on-line  financial,
corporate  and  market  information  and  analytical  tools.  Enhanced  services
available  to dial-up  customers  include  features  such as  additional  E-mail
addresses,  enhanced support  offerings,  software and virus updates,  access to
research  libraries,  domain name service,  monthly back-up, 10 Mb data storage,
750 Mb per month data transfer  capability  and premium  service and  technology
support.

     NETCOM customers can quickly register using NETCOMplete software, available
for both Windows and Macintosh  platforms via compact disk,  and set up a NETCOM
account by following a sequence of simple,  on-screen steps. All of the software
needed to  connect  and access  the  Internet  is  automatically  installed  and
configured, eliminating the need for complex set up procedures. NETCOMplete also
provides an  easy-to-use  interface as well as software  from  leading  industry
participants,  bookmark managers, off-line browsers and additional software that
enhances  a  customer's  Internet  experience.  Revenue  from  dial-up  services
increased  from $102.9  million for the calendar year ended December 31, 1996 to
$133.7  million for the calendar  year ended  December  31,  1997,  representing
approximately  85% and 83%,  respectively,  of  total  NETCOM  revenue  for such
periods.

     Direct Access Services.  NETCOM offers a full suite of high-speed dedicated
Internet   connection   and  service   products  which  provide  its  small  and
medium-sized business customers with direct access to the full range of Internet
applications.  These  Internet  services are offered to  businesses  over leased
lines at various speeds,  including 56 Kbps, T-1 and T-3 levels,  depending upon
the  customer's  needs.  Through its direct access  product line,  NETCOM offers
Internet access services  including domain name and Internet  protocol  address,
router configurations, on-line usage statistics and security consultation. There
are  generally no usage  charges for any of NETCOM's  dedicated  customers,  and
E-mail service and USENET news feed are provided at no additional charge. Direct
network  connection  requires  the  customer to obtain a leased line from ICG or
another local telephone company. NETCOM provides an Internet connection based on
frame relay technology provided by local telephone carriers. Revenue from direct
access  services  increased  from  $16.3  million  for the  calendar  year ended
December  31, 1996 to $19.5  million for the  calendar  year ended  December 31,
1997,  representing  approximately  14% and 12%,  respectively,  of total NETCOM
revenue for such periods.
<PAGE>
                                       15


     Web Site Hosting  Services.  NETCOM offers Web site hosting services to its
small and medium-sized  business  customers as well as to individuals.  Web site
hosting  services  include  client  domain name  registration,  hosting and site
maintenance.  Services  provided  are fully  scalable  but  would,  in a typical
package,  include  domain  name  registration,  10 E-mail  addresses,  access to
NETCOM's on-line  business center,  CGI scripting (which enables visitors to the
Web site to leave their names and addresses),  weekly back-up service,  50 Mb of
data  storage,  1,000  Mb per  month  of data  transfers,  traffic  logs and Web
statistics  and premium  service and technology  support.  Revenue from Web site
hosting  services  increased  from $1.3  million  for the  calendar  year  ended
December 31, 1996 to $6.3 million for the calendar year ended December 31, 1997,
representing approximately 1% and 4%, respectively,  of total NETCOM revenue for
such periods.

     Value-Added  Services.  As part of its dial-up,  direct access and Web site
hosting services,  NETCOM offers its small and medium-sized  business  customers
value-added  business  connectivity  solutions package designed to address their
needs of increased security, reliability, access speed and customer service. The
Company  believes that  businesses  are willing to pay premium  prices for these
premium services.  One such feature is Automatic  Reconnect which  automatically
re-routes customers' traffic to an alternate Integrated Services Digital Network
("ISDN")  line so that in the event of certain  kinds of  service  interruptions
customers may remain connected. In order to provide a secure, private connection
among multiple specific  locations,  NETCOM's  SecureConnect  product performs a
security  assessment and then implements,  monitors and troubleshoots a flexible
security  solution to provide  secure  communication  between  central  offices,
branch offices and off-site employees without  jeopardizing the integrity of the
internal network.  Another  value-added service NETCOM offers is 24 hours a day,
seven  days a week  support.  For  larger  customers,  NETCOM  offers  flexible,
high-speed dedicated line service that is scalable to grow as traffic increases.
Other value-added  services offered include password  protected Web sites, usage
statistics, anti-virus software and additional domain names.

     Zycom. The Company owns a 70% interest in Zycom Corporation ("Zycom") which
operates  an  800/888/900  number  service  bureau and a switch  platform in the
United  States  supplying  information  providers and  commercial  accounts with
audiotext and customer support services.

Industry

     The Company operates in the local telephone  services market as an ICP. The
Company  is  competing  in the  local,  long  distance  and data  communications
markets,  and subsequent to January 21, 1998, the Internet  services market,  to
provide  "full  service"  to its end user and  carrier  customers.  The  Company
believes it can maximize  revenue and profit  opportunities  by  leveraging  its
extensive network  facilities in providing multiple  communications  services to
its customers.
<PAGE>
                                       16


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


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

     The Internet access services market is one of the fastest growing  segments
of the  telecommunications  services  market.  According  to  industry  research
analysts,  the  market for  consumer  and  business  Internet  connectivity  and
enhanced  services  exceeded $3 billion in 1996,  and is  estimated to reach $18
billion in revenue by the year 2000,  reflecting a compounded annual growth rate
of  approximately  50%.  Business  connectivity  and  value-added  services  are
estimated to represent  in excess of 50% of the overall  market.  The use of the
Internet by small and medium-sized  businesses in particular is expected to grow
substantially from its current low levels of market penetration.

     ISPs  provide   customers   with  a  variety  of  services  to  meet  their
Internet-related needs. Internet services include the following categories:  (i)
access services (dial-up,  direct access and Web site hosting); (ii) value-added
services  (security  services,  anti-virus and data storage);  and (iii) content
services (information creation,  aggregation and delivery).  Some ISPs offer all
of these  services  while  others  specialize  in only one or two. As the market
continues to segment in these three areas,  there are opportunities for both the
specialists  who  can  provide   superior  service  in  one  area,  as  well  as
full-service  providers who can bundle services and offer discounts.  There were
over 4,300 ISPs in the United  States and Canada as of October 31, 1997 compared
to just  over  3,000  as of  October  31,  1996.  There  have  been  some  large
acquisitions of ISPs as CLECs and others attempt to enter the industry.  Because
of low barriers to entry, there are local and regional ISPs entering the market,
which has caused the level of competition to intensify.

     The  availability  of an  expansive  variety  of  compelling  business  and
consumer applications over the Internet has attracted a large number of consumer
and business users.  The total number of connections to ISP networks,  according
to International  Data  Corporation,  was 17 million as of November 1997, and is
predicted to reach over 30 million by the year 2000. Market trends  contributing
to the overall  growth in  connectivity  include  advancements  in  technologies
required to navigate the Internet,  the  availability of Internet  connectivity,
and the rich consumer and business content available.  The Company believes that
ongoing  development of access to and applications of the Internet will continue
to attract a valuable consumer audience for businesses.

Network Services

     Through  the   Company's   wholly   owned   subsidiary,   ICG  Fiber  Optic
Technologies,   Inc.  ("FOTI"),  the  Company  supplies  information  technology
services  and  selected  networking   products,   focusing  on  network  design,
installation,  maintenance  and  support  for a variety of end users,  including
Fortune 1000 firms and other large businesses and telecommunications  companies.
Revenue from Network Services was approximately $65.6 million for fiscal 1997.

<PAGE>
                                       17



     The Company provides network infrastructures, systems and support services,
including  the  design,  engineering  and  installation  of local  and wide area
networks,  ("LANs/WANs")  for its  customers.  These  networks  (within end user
offices, buildings or campuses) may include fiber optic,  twisted-pair,  coaxial
and other  network  technologies.  The Company  specializes  in turnkey  network
installations   including   cabling  and  electronics   that  address   specific
environments.  The Company also provides  professional network support services.
These  services  include  network  move,  add and change  services  and  ongoing
maintenance  and  support  services.  Network  Services  revenue is  expected to
constitute a smaller portion of the Company's future revenue as Telecom Services
revenue increases.

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

Satellite Services

     The Company's  Satellite  Services  operations  provide satellite voice and
data services to major cruise lines,  commercial  shipping vessels,  yachts, the
U.S. Navy and offshore oil platforms.  The Company also owns a teleport facility
which provides international voice and data transmission  services.  Revenue for
Satellite Services  operations was approximately  $30.0 million for fiscal 1997.
The Company intends to dispose of its Satellite  Services  operations to better
focus its efforts on its core Telecom services unit, although it has not entered
into a formal arrangement for such disposition.

     MTN.  In January  1995,  the  Company  and an  unaffiliated  entity  formed
Maritime  Telecommunications Network, Inc. ("MTN") which purchased the assets of
a business providing digital wireless  communications  through satellites to the
maritime cruise industry, U.S. Navy vessels and offshore oil platforms utilizing
an experimental  radio frequency license issued by the FCC. MTN provides private
communications networks to various cruise lines allowing for the transmission of
data  communications and allowing  passengers to make calls from their cabins to
anywhere in the world. MTN additionally provides its communications  services to
seismic  vessels,  to  commercial  shipping  vessels  and to the  U.S.  Navy  in
conjunction  with a major  long  distance  provider,  which  serves  as the long
distance carrier, while MTN provides the shipboard communications equipment. The
Company believes that the radio spectrum employed under its experimental license
and a recent grant of Special  Temporary  Authority  ("STA"),  which uses C-band
radio frequencies,  enables it to provide a higher quality maritime service than
is available through the radio frequencies currently allocated to other maritime
service providers.
<PAGE>
                                       18


     In  April  1996,  the FCC  issued  a waiver  allowing  MTN to  apply  for a
permanent FCC license to utilize the same C-band  frequencies  as are being used
under the  experimental  license.  MTN's  application is pending.  The Company's
experimental  license was renewed for an additional  two-year period on November
21, 1997.  Additionally,  in January 1997,  the FCC granted an STA which enables
MTN to conduct operations as proposed in the pending application for a permanent
license,  for six-month periods. MTN filed for six-month renewals for the STA on
July 25, 1997 and January 27, 1998 and the Company has received verbal grants of
the  six-month  extensions.  There can be no assurance  that the Company will be
granted a permanent  license,  that the  experimental  license and STA currently
being used will  continue  to be renewed  for future  terms or that any  license
granted by the FCC will not require substantial  payments from the Company.  See
"-Regulation."

     MCN. In March 1996, the Company acquired a 90% equity interest in MarineSat
Communications  Network,  Inc. ("MCN") (formally Maritime Cellular  TeleNetwork,
Inc.), a  Florida-based  provider of cellular and satellite  communications  for
commercial ships,  private vessels and land-based mobile units. This acquisition
expands the Company's  business from C-band satellite  services for cruise ships
and naval vessels to cover  land-based  units and smaller ships.  In April 1997,
the  Company  received  the  remaining  10% equity  interest in MCN as a partial
consideration for the sale of another of its subsidiaries.

     Nova-Net. In May 1994, the Company acquired Nova-Net  Communications,  Inc.
("Nova-Net"), which provides private data networks utilizing very small aperture
terminals  ("VSATs") and  specializes  in data  collection and in monitoring and
control  of  customer   production  and   transmission   facilities  in  various
industries,   including   oil  and  gas,   electric  and  water   utilities  and
environmental  monitoring  industries.  Nova-Net  designs,  builds  and  manages
private data  networks  that enable a variety of companies to transmit  critical
sensor and flow  readings  to key  monitoring  points from  multiple  locations.
Nova-Net  manages networks 24 hours a day, seven days a week through its network
control center in Englewood, Colorado.

     Teleport.  The  teleport  in Holmdel,  New Jersey,  acquired as part of the
Company's  acquisition  of  MTN,  is  located  20  miles  south  of  Newark  and
specializes in international digital voice and data communications services with
full fiber  interconnect to the local telephone  company  facilities in New York
City.  Teleport services are also provided to the maritime  industry,  including
support of the  Company's  cruise  ship,  U.S.  Navy and  offshore  oil platform
telephone  and data  services  business.  In addition,  the Company  markets the
resale of services from the four teleports it sold in 1996.

Customers And Marketing

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

<PAGE>
                                       19



     The Company markets its Telecom  Services  products through direct sales to
end users and wholesale accounts,  and direct mail, to a limited extent. Telecom
Services  revenue from major long distance  carriers and  resellers  constituted
approximately 78%, 71%, 69% and 64% of the Company's Telecom Services revenue in
fiscal 1995 and 1996, the three-month  period ended December 31, 1996 and fiscal
1997,  respectively.  The balance of the Company's  Telecom Services revenue was
derived  from end users.  The Company  anticipates  revenue  from end users will
increase in the future as it continues to expand its bundled service  offerings,
increases its sales and marketing teams and focuses more on the end user segment
of the  market.  In support of this  strategy,  the  Company  has  substantially
increased its direct sales and marketing  staff.  The Company's  sales force has
grown  from  143  people  at  December  31,  1996 to  approximately  356  people
(including sales management, technical sales support and administrative support)
at December 31, 1997.  Telecom service  agreements with its customers  typically
provide  for terms of one to five  years,  fixed  prices  and early  termination
penalties.

     The Company has  telecommunications  sales offices in: Irvine, Los Angeles,
Oakland,  Sacramento  and San Diego,  California;  Denver and Colorado  Springs,
Colorado; Cleveland, Columbus and Dayton, Ohio; Birmingham, Alabama; Louisville,
Kentucky;  Charlotte,  North Carolina; and Nashville,  Tennessee.  The Company's
marketing staff is located in Denver, Colorado.

     NETCOM's primary focus is on providing high quality  Internet  solutions to
individuals and to small and medium-sized  businesses.  In order to achieve this
objective,  NETCOM engages in marketing and  advertising  activities,  alliances
with  key  strategic  partners,  seminars  in  targeted  regional  markets,  and
distribution via both direct and indirect  channels.  NETCOM's current marketing
efforts  emphasize  its  strategy of focusing on providing  premium  services to
businesses and individuals  through integrated  product offerings.  The campaign
incorporates  the theme of productivity  and efficiency and includes an emphasis
on  the  full  range  of  NETCOM  solutions.   NETCOM's  current  marketing  and
distribution  channels include  original  equipment  manufacturer  arrangements,
agreements with value-added  resellers,  retail  distribution,  direct marketing
efforts, including trade shows and telesales, and the Web.

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

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

Competition

     The Company operates in an increasingly  competitive  environment dominated
by the ILECs,  mainly the Regional Bell  Operating  Companies  ("RBOCs") and GTE
which are among the  Company's  current  competitors.  Also  included  among the
Company's  current  competitors  are other ILECs,  other CLECs,  network systems
integration  service  providers,  microwave  and  satellite  service  providers,
teleport operators,  wireless telecommunications  providers and private networks
built by large end users.  Potential  competitors  (using  similar or  different
technologies) include cable television companies, utilities, ILECs outside their
current local service  areas,  and the local access  operations of long distance
carriers.  Consolidation  of  telecommunications  companies,  including  mergers
<PAGE>
                                       20



between certain of the RBOCs,  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  enactment  of  the  Telecommunications  Act,  several
telecommunications  companies have  indicated  their  intention to  aggressively
expand  their  ability  to  address  many  segments  of  the  telecommunications
industry,  including  segments in which the Company  participates and expects to
participate. For example, AT&T Corp. ("AT&T"), MCI Communications Corp. ("MCI"),
Time  Warner  Communications,  Inc.,  Texas  Utilities  Company  and other large
companies are entering the local markets,  as  competitors of the Company.  This
may result in more  participants  than can  ultimately  be successful in a given
market.

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

     In every market in which the Company operates telecom service networks, the
ILECs (which are the historical  monopoly providers of local telephone services)
are the primary  competitors.  The ILECs have  long-standing  relationships with
their  customers  and provide  those  customers  with various  transmission  and
switching  services.  The ILECs also have the potential to subsidize  access and
switched  services  with revenue from a variety of businesses  and  historically
have benefited from certain state and federal  regulations that have favored the
ILECs over the Company.  In certain  markets where the Company  operates,  other
CLECs also operate or have  announced  plans to enter the market.  Some of those
CLECs are affiliated  with major long distance  companies.  Current  competitors
also  include  network  systems   integration   services   providers,   wireless
telecommunications  providers  and  private  networks  built by large end users.
Additional  competition may emerge from cable television  operators and electric
utilities.  Many of the Company's actual and potential  competitors have greater
financial, technical and marketing resources than the Company.
<PAGE>
                                       21


     The  Company's  networks  compete most  directly with the RBOCs and GTE. In
general,  the  provision  of  interstate  access  services by the RBOCs and GTE,
including the rates charged for such services,  is regulated by the FCC, and the
provision of intrastate  access and local services,  including the rates charged
for such services, is regulated by the individual state regulatory  commissions.
See "-Regulation." In the past, FCC policies have constrained the ability of the
RBOCs and GTE to decrease their prices for interstate access services,  based on
their status as dominant  carriers.  Although FCC regulatory  approval for price
reductions  (beyond  certain  parameters)  still must be  obtained,  the FCC has
allowed all recently  proposed  access  reductions  to become  effective and has
granted the RBOCs  flexibility in pricing their interstate  access services on a
central office by central  office basis.  This pricing  flexibility  resulted in
certain RBOCs lowering their prices in high density zones, the probable arena of
competition  with the Company.  In addition,  the FCC has granted waivers of its
access charge pricing rules to the RBOCs to allow them to further reduce certain
access prices.  In May 1997, the FCC released a decision  amending and reforming
many of its access charge rules and sought further comment on additional issues.
In addition,  the FCC  released a separate  decision in May 1997  reforming  its
rules  on  universal  service  subsidies  pursuant  to the  requirements  of the
Telecommunications  Act. As a whole,  the FCC's  decision  reforming  the access
charge rules is not likely to have a material  adverse  impact on the  Company's
access  services  offerings,  because the  decision  required  relatively  small
decreases in total access prices  charged by the ILECs.  The major impact of the
FCC's  decision  was to shift  access cost  recovery by the ILECs to  flat-based
charges from usage-sensitive  (minute-of-use) charges. The continued lowering of
access  rates  and  increased  pricing  flexibility  for the  RBOCs  and GTE may
adversely affect the Company's ability to compete for certain  services.  If the
RBOCs and GTE continue to lower access rates,  there would be downward  pressure
on certain  special  access and switched  access rates  charged by CLECs,  which
pressure may adversely affect the Company's profitability. See "-Regulation." In
addition,  the  Telecommunications  Act and its implementation by the states and
the FCC  allows  the RBOCs to seek  permission  to  provide  a broader  range of
services  and likely will enable the RBOCs and GTE to more  effectively  compete
against long distance  carriers,  which are the Company's  primary customers for
telecom services.

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

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

     Satellite Services. In the delivery of domestic and international satellite
services,  the  Company  competes  with  other  full  service  teleports  in the
northeast  region of the United States.  The bases of competition  are primarily
reliability,  price and transmission  quality.  Most of the Company's  satellite
competitors  focus  on  the  domestic  video  market.  Competition  is  expected
principally from a number of domestic and foreign  telecommunications  carriers,
many of which have substantially  greater financial and other resources than the
Company. In the maritime  telecommunications market, MTN competes primarily with
COMSAT Corporation ("COMSAT") in providing similar telecommunications  services.
COMSAT has FCC licenses  that are similar to MTN's,  it owns its own  satellites
and it is the sole U.S. point of control for access to Intelsat satellites.
<PAGE>
                                       22


     Internet  Services.  Beginning  January 21,  1998,  the Company  also faces
competition  within the Internet services market. The market for Internet access
and related services is highly competitive. There are no substantial barriers to
entry and the Company anticipates that competition will continue to intensify as
the use of the Internet grows.  The tremendous  growth and potential market size
of the  Internet  access  market has  attracted  many new  start-ups  as well as
existing   businesses  from  different   industries.   Current  and  prospective
competitors  include,  in addition to other  national,  regional and local ISPs,
long distance and local exchange telecommunications companies, cable television,
direct  broadcast  satellite,  wireless  communications  providers,  and on-line
service providers.

Regulation

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

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

     The Telecommunications Act generally requires ILECs to negotiate agreements
to provide  interconnection  and  nondiscriminatory  access to their networks on
more favorable terms than were previously  available in the past. However,  such
new  agreements  are  subject to  negotiations  with each ILEC which may involve
considerable  delays and may not necessarily be obtained on terms and conditions
that are desirable to the Company.  In such instances,  the Company may petition
the proper state regulatory agency to arbitrate disputed issues. Ultimately, the
terms of an arbitrated  agreement  are subject to review by the federal  courts.
There can be no assurance that the Company will be able to negotiate  acceptable
interconnection agreements or that, if state regulatory authorities impose terms
and conditions on the parties in  arbitration,  such terms will be acceptable to
the Company.

     On August 8, 1996, in two separate  decisions (the "First Report and Order"
and  the  "Second  Report  and  Order"),  the FCC  adopted  rules  and  policies
implementing the local competition provisions of the Telecommunications Act. The
FCC,  among  other  things,  adopted  national  guidelines  with  respect to the
unbundling of ILECs' network elements,  resale of ILEC services,  the pricing of
interconnection  services and unbundled  elements,  and other local  competition
issues. Numerous parties appealed both of the FCC's orders to the Eighth Circuit
Court, and in October 1996 the Eighth Circuit Court stayed the implementation of
many of the rules in the First Report and Order.  On July 18,  1997,  the Eighth
Circuit  Court  issued a decision  on the First  Report and Order  which  upheld
certain  of the  FCC's  rules and  reversed  the  FCC's  rules on other  issues,
including the pricing rules. On August 22, 1997, the Eighth Circuit Court issued
its decision on the Second Report and Order,  which  concluded  that the FCC had
exceeded its jurisdiction in issuing certain rules on dialing parity.
<PAGE>
                                       23


     Separate  petitions  for  rehearing of the July 18 decision were filed with
the Eighth  Circuit Court by a group of  interexchange  carriers,  two groups of
ILECs and a group of CLECs.  On  October  14,  1997,  the Eighth  Circuit  Court
granted the ILEC petitions for rehearing, and denied the CLEC and IXC petitions.
The Court's decision on rehearing  vacated an additional FCC rule that addressed
the ability of new  entrants to purchase  ILEC  network  elements at  cost-based
rates on a bundled rather than an unbundled basis.

     The FCC and other parties filed petitions for certiorari  seeking review by
the U.S.  Supreme Court of the Eighth  Circuit  Court's  decision,  and the U.S.
Supreme Court has granted the petitions for  certiorari and agreed to review the
case. It is  anticipated  that the case will be argued  before the U.S.  Supreme
Court in the fall of 1998,  with a final  decision  issued in 1999.  The  Eighth
Circuit  Court's  ruling  remains  in effect  pending  final  action by the U.S.
Supreme Court.

     On December 31, 1997,  the United  States  District  Court for the Northern
District  of Texas,  in a case  brought by SBC  Communications,  Inc.,  issued a
decision holding that Sections 271 through 275 of the Telecommunications Act are
unconstitutional.  The decision addresses the restrictions contained in Sections
271  through 275 of the  Telecommunications  Act on the lines of  businesses  in
which the RBOCs may engage, including establishing the conditions that the RBOCs
must satisfy before they may provide interLATA long distance  telecommunications
services in their local telephone service areas. On February 11, 1998, a stay of
the decision  was issued by the United  States  District  Court for the Northern
District  of Texas,  which  stay will  remain  in effect  pending  appeal of the
decision by the Fifth Circuit Court of Appeals.

     Federal  Regulation.  The Company generally operates as a regulated carrier
with fewer  regulatory  obligations than the ILECs. The Company must comply with
the  requirements of the  Telecommunications  Act, such as offering service on a
non-discriminatory  basis at just  and  reasonable  rates.  The FCC  treats  the
Company as a non-dominant  carrier. The FCC has established  different levels of
regulation for dominant and non-dominant  carriers. Of domestic common carriers,
only GTE and the RBOCs are classified as dominant  carriers for the provision of
access services, and all other providers of domestic common carrier services are
classified  as  non-dominant.   Under  the  FCC's   streamlined   regulation  of
non-dominant   carriers,  the  Company  must  file  tariffs  with  the  FCC  for
international   services  on  an  ongoing  basis.  The  Company's  provision  of
international  long distance  services  requires prior  authorization by the FCC
pursuant to Section  214 of the  Telecommunications  Act,  which the Company has
obtained.   The  FCC  recently  eliminated  the  requirement  that  non-dominant
interstate  access  carriers  must file  tariffs.  The Company is not subject to
price cap or rate of return  regulation,  nor is it currently required to obtain
FCC  authorization  for the installation or operation of its fiber optic network
facilities  used for services in the United States.  The Company may install and
operate  non-radio  facilities  for  the  transmission  of  domestic  interstate
communications  without  prior FCC  authorization.  The Company's use of digital
microwave  radio  frequencies  and satellite  earth stations in connection  with
certain of its  telecommunications  services  is subject to FCC radio  frequency
licensing regulation.  See "-Federal Regulation of Microwave and Satellite Radio
Frequencies."
<PAGE>
                                       24


     State  Regulation.  In general,  state regulatory  agencies have regulatory
jurisdiction  over the Company when Company  facilities and services are used to
provide local and other intrastate services.  Under the Telecommunications  Act,
states cannot effectively prohibit any entity from providing  telecommunications
services,  but the states continue to have general authority to set criteria for
reviewing   applications  to  provide  intrastate   services   (including  local
services).  State regulators will continue to set the requirements for providers
of local and  intrastate  services,  including  quality  of  services  criteria.
However,  state regulators can no longer allow (or require)  restrictions on the
resale of  telecommunications  services.  State regulators also can regulate the
rates charged by CLECs for  intrastate and local services and can set prices for
interconnection  by CLECs with the ILEC  networks.  The  Company's  provision of
local dial tone and intrastate switched and dedicated services are classified as
intrastate and therefore subject to state  regulation.  The Company expects that
it will offer more intrastate services as its business and product lines expand.
To  provide  intrastate  service  (particularly  local dial tone  service),  the
Company generally must obtain a Certificate of Public  Convenience and Necessity
("CPCN") from the state  regulatory  agency prior to offering  service.  In most
states,  the Company also is required to file tariffs  setting  forth the terms,
conditions  and prices for services that are  classified as  intrastate,  and to
update or amend its  tariffs as rates  change or new  products  are  added.  The
Company   may  also  be  subject  to  various   reporting   and   record-keeping
requirements.

     The Company currently holds CPCNs (or their equivalents) from the states of
Alabama,  California,  Colorado,  Florida,  Georgia,  Indiana,  Kentucky,  North
Carolina,  Ohio,  Oklahoma,  Tennessee  and Texas.  The Company has authority to
provide local and intrastate long distance services in each of these states.

     Local Government  Authorizations.  Under the Telecommunications  Act, local
authorities  retain  jurisdiction  under  applicable  state law to  control  the
Company's access to municipally owned or controlled rights of way and to require
the Company to obtain  street  opening and  construction  permits to install and
expand its fiber optic network.  In addition,  many  municipalities  require the
Company to obtain licenses or franchises (which generally have terms of 10 to 20
years) and to pay license or  franchise  fees,  often based on a  percentage  of
gross  revenue,  in order to provide  telecommunications  services,  although in
certain states including California and Colorado, such fees may be imposed under
current state law. Certain  municipalities in Colorado,  however, are continuing
to charge franchise fees pending enforcement by the Colorado courts. There is no
assurance  that  certain  cities that do not impose fees will not seek to impose
fees,  nor is there any assurance  that,  following  the  expiration of existing
franchises, fees will remain at their current levels. In many markets, the ILECs
have  been  excused  from  paying  such  franchise  fees or pay  fees  that  are
materially  lower than those  required  to be paid by the  Company for access to
public  rights  of  way.  However,  under  the  Telecommunications   Act,  while
municipalities  may  still  regulate  use of their  streets  and  rights of way,
municipalities  may  not  prohibit  or  effectively  prohibit  any  entity  from
providing any  telecommunications  services. In addition, the Telecommunications
Act  requires  that  local  governmental  authorities  treat  telecommunications
carriers in a non-discriminatory and competitively neutral manner. If any of the
Company's existing franchise or license agreements are terminated prior to their
expiration  dates or not renewed,  and the Company is forced to remove its fiber
from the streets or abandon its network in place,  such termination could have a
material adverse effect on the Company.
<PAGE>
                                       25


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

     The Company is required to obtain authorization from the FCC for its use of
radio frequencies to provide satellite and wireless services.  The Company holds
a number of  point-to-point  microwave  radio  licenses that are used to provide
telecommunications  services in  California.  Additionally,  the Company holds a
number of satellite  earth station  licenses in connection with its operation of
satellite-based  networks.  The Company also  provides  maritime  communications
services  pursuant  to an  experimental  license  and a grant of a STA. In April
1996,  the FCC  issued a waiver  to the  Company  which may allow it to obtain a
permanent FCC license to provide these services using the same radio frequencies
currently  being used under the  experimental  license and STA.  The Company has
filed an application for a permanent license under the terms of the FCC's waiver
decision,  and the  application  is pending.  The STA was granted on January 30,
1997 and enables the Company to conduct operations  pursuant to such application
during the FCC's review.  Applications for six-month  extensions of the STA were
filed on July  25,  1997 and on  January  27,  1998  and  verbal  grants  of the
extensions  have been  issued by the FCC.  There  can be no  assurance  that the
Company will be granted a permanent license,  that the experimental  license and
STA  currently  being used will  continue to be renewed for future terms or that
any license  granted by the FCC will not require  substantial  payments from the
Company.

     Regulation  of  Internet  Services.  The  Company  is  currently  providing
Internet access services through its recently  acquired  subsidiary,  NETCOM, in
part through data transmissions over public telephone lines. These transmissions
are governed by regulatory policies establishing charges and terms for wire-line
communications.  Although  the  Company  is  not  currently  subject  to  direct
regulation by the FCC or any other  governmental  agency (other than regulations
applicable to businesses generally),  due to the increasingly  widespread use of
the Internet, it is possible that additional laws and regulations may be adopted
with respect to the  Internet,  covering  issues such as content,  user privacy,
pricing,   libel,   intellectual  property  protection  and  infringement,   and
technology export and other controls. It also is possible that the Company could
become  subject  to  regulation  by the FCC or  another  regulatory  agency as a
provider of basic  telecommunications  services.  The FCC is currently reviewing
its regulatory  positions on whether to impose common carrier  regulation on the
network  transport  and  communications  facilities  aspects of an  enhanced  or
information  service  package.  Such  changes in the  regulatory  structure  and
environment  affecting the Internet access market,  including regulatory changes
that  directly or  indirectly  affect  telecommunications  costs or increase the
likelihood of competition from the RBOCs or other telecommunications  companies,
could have an adverse effect on the Company's business.  For example, the FCC is
considering  whether  ISPs  should be  required  to pay access  charges to local
telephone  companies for each minute that  dial-access  users spend connected to
ISPs through telephone company  switches,  and is also considering  whether ISPs
should be required to make monetary  contributions to federal  universal service
funds. In addition,  some telephone companies are seeking similar relief through
state regulatory agencies. Such rules, if adopted at either the federal or state
level,  would have a material adverse effect on the Company.  The Company cannot
predict the impact, if any that future regulation or regulatory changes may have
on its business.
<PAGE>
                                       26


     Certain states have deemed the provision of Internet services to be taxable
and in such states, NETCOM collects such taxes from its customers.  Other states
have not yet  announced  a policy in this regard or have  affirmatively  decided
that such  services are not taxable.  If such states  retroactively  subject the
provision of Internet services to sales tax or if customers are unwilling to pay
sales tax that may be assessed in the future,  such events could have a material
adverse effect on the Company.

     The Company believes it is entitled to receive reciprocal compensation from
ILECs for the transport and  termination of local traffic to ISPs from customers
of the ILECs, pursuant to various interconnection  agreements.  These ILECs have
not paid most of the bills they have received from the Company and have disputed
substantially  all of these  charges,  arguing  that ISP  traffic  is not  local
traffic as defined by the various  agreements  and under state and federal  laws
and public policies.  To date, there have been favorable  rulings from 15 states
and public utilities  commissions and no unfavorable  final rulings by any state
public utilities  commission or the FCC that would indicate that calls placed by
end users to ISPs would not qualify as local  traffic  subject to the payment of
reciprocal  compensation.  While the Company  believes  that  future  regulatory
rulings on this issue will  continue to treat such calls as local,  there can be
no assurance that such future rulings will continue to be favorable.

Employees

     On December 31, 1997, the Company employed a total of 2,219  individuals on
a full time  basis.  There are 48  employees  in the  Company's  Oregon  network
systems integration services office who are represented by collective bargaining
agreements  which  expire on May 31, 1998 and  December  31,  2000.  The Company
believes that its relations with its employees are good.

<PAGE>
                                       27

ITEM 2.   PROPERTIES

     The  Company's  physical  properties  include  owned and  leased  space for
offices, storage and equipment rooms and collocation sites. Additional space may
be purchased or leased by the Company as networks are expanded. The Company owns
a 30,000  square-foot  building  located in the Denver  metropolitan  area which
houses a portion of the Company's Telecom Services business.  The Company leases
approximately  176,000 square feet of office space for operations located in the
Denver metropolitan area and approximately 262,000 square feet in other areas of
the United States.

     As of December  31,  1997,  the Company had  acquired  property for and had
partially  constructed  its new  headquarters in Englewood,  Colorado,  which is
planned to accommodate  most of the Company's  Colorado  operations.  In January
1998, the Company sold the substantially completed building to a third party and
entered into an agreement to lease back the  approximately  265,000  square foot
facility under a long-term operating lease.

ITEM 3.  LEGAL PROCEEDINGS

     On  April 4,  1997,  certain  shareholders  of  Zycom  filed a  shareholder
derivative suit and class action complaint for unspecified damages,  purportedly
on behalf of all minority shareholders of Zycom, in the District Court of Harris
County,  Texas (Cause No.  97-17777)  against the Company,  Zycom and certain of
their  subsidiaries.  This complaint  alleges  various  statutory and common law
claims. The Company is vigorously defending the claims. While it is not possible
to predict the outcome of this litigation, management believes these proceedings
will not have a material  adverse effect on the Company's  financial  condition,
results of operations or cash flows.

     A putative  class  action  lawsuit  was filed on July 15,  1997 in Superior
Court of  California,  Orange  County,  alleging  unfair  business  practice and
related causes of action  against  NETCOM in connection  with its offers of free
trial periods and cancellation procedures and claiming damages of at least $10.0
million.  The case is in the preliminary stages, the complaint has been answered
and plaintiff has served initial requests for discovery.  NETCOM believes it has
meritorious defenses to such claims and intends to vigorously defend the action.

     The Federal Trade Commission ("FTC") is conducting an inquiry regarding the
advertising,  marketing,  subscription and billing  practices of NETCOM.  NETCOM
believes that it has made reasonable  efforts to comply with applicable laws. If
the FTC were to conclude that NETCOM  violated any applicable law, it could seek
relief  in the form of  equitable  relief,  civil  monetary  penalties  or other
remedies.

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

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

         None.

<PAGE>
                                       28


                                     PART II

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

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

     The following table sets forth, for the fiscal periods indicated,  the high
and low sales prices of the Holdings-Canada Class A Common Shares as reported on
the AMEX through  August 2, 1996,  and the VSE through  March 12, 1997,  and the
high and low sales  prices of the ICG Common  Stock as reported on the AMEX from
August 5, 1996  through  March 24,  1997 and on the Nasdaq  from March 25,  1997
through the date indicated  below.  The table also sets forth the average of the
monetary exchange rates on the last day of each such relevant fiscal period.
<TABLE>
<CAPTION>


                                                   American Stock
                                              Exchange/Nasdaq National                Vancouver                 Exchange
                                                     Market (1)                  Stock Exchange (1)               Rate
                                              --------------------------    ------------------------------
                                                 High           Low             High             Low             (C$/$)
                                              -----------    -----------    -------------    -------------    -------------
<S>                                            <C>           <C>             <C>               <C>                   <C>
Fiscal Year Ended September 30, 1996
    First Quarter                              $   12.75     $     8.63      C$        -       C$       -            1.36
    Second Quarter                                 17.88          10.25                -                -            1.36
    Third Quarter                                  27.38          17.13            17.50            17.50            1.36
    Fourth Quarter                                 25.88          18.50                -                -            1.36

Three Months Ended December 31, 1996 (2)       $   22.25      $   14.00      C$    28.35      C$    28.35            1.37

Fiscal Year Ended December 31, 1997 (2)
    First Quarter                              $   18.13      $   10.38      C$        -      C$        -            1.38
    Second Quarter                                 21.13           8.63              N/A              N/A             N/A
    Third Quarter                                  24.63          17.75              N/A              N/A             N/A
    Fourth Quarter                                 28.63          19.75              N/A              N/A             N/A

Fiscal Year Ended December 31, 1998
    Through March 26, 1998                     $   43.63      $   24.25      C$      N/A      C$      N/A             N/A
                                                                                                              (Continued)
</TABLE>



<PAGE>
                                       29



(1)  Effective  at the close of  trading  on August 2,  1996,  Holdings-Canada's
     Class A Common Shares  ceased  trading on the AMEX and the ICG Common Stock
     commenced trading on the AMEX on August 5, 1996.  Effective March 25, 1997,
     the ICG Common Stock ceased  trading on the AMEX and  commenced  trading on
     the  Nasdaq.  ICG  Common  Stock has never  traded on the VSE.  The Class A
     Common Shares traded on the VSE through March 12, 1997 and all  information
     reported  on the above  table  from  August 5, 1996 to March 12,  1997 with
     respect to the VSE relates only to the Class A Common Shares.

(2)  The Company  changed its fiscal year end to December 31 from  September 30,
     effective January 1, 1997.

     See the cover page of this Annual Report for a recent bid price and related
number of shares  outstanding of Common Stock. On March 26, 1998, there were 284
holders of record.

     The Company has never  declared or paid  dividends  on the Common Stock and
does not intend to pay cash  dividends  on the Common  Stock in the  foreseeable
future.  The Company intends to retain future  earnings,  if any, to finance the
development  and  expansion of its  business.  In  addition,  the payment of any
dividends  on the Common Stock is  effectively  prohibited  by the  restrictions
contained  in the  Company's  indentures  and in the Second Amended and Restated
Articles of Incorporation of Holdings,  which prohibits Holdings from making any
material  payment to the  Company.  Certain  of the  Company's  debt  facilities
contain  covenants  which also may  restrict the  Company's  ability to pay cash
dividends.

     In September and October 1997,  the Company's new wholly owned  subsidiary,
ICG Funding,  LLC, a Delaware  limited  liability  company,  completed a private
placement  of  $132.25  million  of 6  3/4%  Preferred  Securities.  The 6  3/4%
Preferred  Securities  are  mandatorily  redeemable  November  15,  2009  at the
liquidation  preference  of  $50.00  per  security,   plus  accrued  and  unpaid
dividends.  Dividends on the 6 3/4%  Preferred  Securities are cumulative at the
rate of 6 3/4% per annum and are payable in cash through  November 15, 2000 and,
thereafter,  in cash or shares of Common Stock at the option of ICG Funding. The
6 3/4% Preferred Securities are exchangeable,  at the option of the holder, into
Common Stock at an exchange  price of $24.025 per share,  subject to adjustment.
ICG Funding may, at its option,  redeem the 6 3/4%  Preferred  Securities at any
time on or after  November 18, 2000.  Prior to that time, ICG Funding may redeem
the 6 3/4%  Preferred  Securities  if the current  market  value of Common Stock
equals or exceeds the exchange  price,  for at least 20 days of any  consecutive
30-day trading period, by 170% prior to November 16, 1998; by 160% from November
16, 1998 through  November 15, 1999;  and by 150% from November 16, 1999 through
November 15, 2000. The 6 3/4% Preferred Securities and the Common Stock issuable
upon exchange of such securities have been registered  under the Securities Act.
The  6  3/4%  Preferred   Securities  are  guaranteed  by  ICG  on  a  full  and
unconditional basis.

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

ITEM 6.  SELECTED FINANCIAL DATA

     The selected  financial  data for each fiscal year in the four-year  period
ended  September  30, 1996,  the three  months  ended  December 31, 1996 and the
fiscal  year  ended  December  31,  1997  has  been  derived  from  the  audited
Consolidated  Financial  Statements of the Company.  The  information  set forth
below should be read in conjunction with the Consolidated  Financial  Statements
of the Company and the notes thereto  included  elsewhere in this Annual Report.
The Company's  development  and expansion  activities,  including  acquisitions,
during the periods shown below materially  affect the comparability of this data
from one  period to  another.  See  "Management's  Discussion  and  Analysis  of
Financial Condition and Results of Operations."

<PAGE>
                                       30


<TABLE>
<CAPTION>

                                                                                               Three Months       Fiscal
                                                                                                  Ended         Year Ended
                                               Fiscal Years Ended September 30,                December 31,    December 31,
                                  -----------------------------------------------------------
                                     1993            1994           1995            1996           1996            1997
                                  ------------    ------------   ------------    ------------   ------------    ------------
Statement of Operations Data:                            (in thousands, except per share amounts)
<S>                               <C>               <C>           <C>            <C>              <C>            <C>
Revenue:
   Telecom services (1)           $   4,803          14,854        32,330          87,681          34,787         177,690
   Network services                  21,006          36,019        58,778          60,116          15,981          65,678
   Satellite services(2)              3,520           8,121        20,502          21,297           6,188          29,986
   Other                                147             118             -               -               -               -
                                  ------------    ------------   ------------    ------------   ------------    ------------
     Total revenue                   29,476          59,112       111,610         169,094          56,956         273,354
                                  ------------    ------------   ------------    ------------   ------------    ------------

Operating costs                      18,961          38,165        78,846         135,253          49,929         246,418
Selling, general and
   administrative expenses           10,702          28,015        62,954          76,725          24,253         150,767
Depreciation and amortization         3,473           8,198        16,624          30,368           9,825          57,081
Net loss (gain) on disposal of
   long-lived assets                      -               -           241           5,128            (772)            671
Provision for impairment of
   long-lived assets                      -               -         7,000           9,994               -          11,950
                                  ------------    ------------   ------------    ------------    ------------   ------------
     Total operating costs and
     expenses                        33,136          74,378       165,665         257,468          83,235         466,887

     Operating loss                  (3,660)        (15,266)      (54,055)        (88,374)        (26,279)       (193,533)

Interest expense                     (2,523)         (8,481)      (24,368)        (85,714)        (24,454)       (117,545)
Other income, net                       325             925         3,639          15,423           5,898          21,247
                                  ------------    ------------   ------------    ------------   ------------    ------------
Loss before income taxes,
   minority interest, share of
   losses and cumulative effect
   of change in accounting           (5,858)        (22,822)      (74,784)       (158,665)        (44,835)       (289,831)
Income tax benefit                    1,552               -             -           5,131               -               -
                                  ------------    ------------   ------------    ------------   ------------    ------------
Loss before minority interest,
   share of losses and
   cumulative effect of
   change in accounting              (4,306)        (22,822)      (74,784)       (153,534)        (44,835)       (289,831)
Minority interests, including
   preferred dividends on
   preferred securities                (303)            435        (1,123)        (25,306)         (4,988)        (37,812)
Share of losses of joint
   venture and investment                 -          (1,481)         (741)         (1,814)              -               -
                                  ------------    ------------   ------------    ------------   ------------    ------------
Loss before cumulative effect
   of change in accounting           (4,609)        (23,868)      (76,648)       (180,654)        (49,823)       (327,643)
Cumulative effect of change in
     accounting (1)                       -               -             -          (3,453)              -               -
                                  ------------    ------------   ------------    ------------   ------------    ------------

     Net loss                     $  (4,609)        (23,868)      (76,648)       (184,107)        (49,823)       (327,643)
                                  ============    ============   ============    ============   ============    ============

     Loss per share - basic and
     diluted                      $   (0.39)          (1.56)        (3.25)          (6.83)          (1.56)         (10.11)
                                  ============    ============   ============    ============   ============    ============

     Weighted average number of
        shares of Common Stock
        outstanding - basic and
        diluted (3)                  11,671          15,342        23,604          26,955          31,840          32,399
                                  ============    ============   ============    ============   ============    ============
Other Data:
EBITDA (4)                        $    (187)         (7,068)      (30,190)         (42,884)       (17,226)       (123,831)
Net cash used by operating
   activities                        (2,839)         (7,532)      (42,798)         (43,357)        (8,636)       (126,954)
Net cash used by investing
   activities                       (13,401)        (51,452)      (71,583)       (135,204)        (82,342)       (429,867)
Net cash provided (used) by
   financing activities              30,382          49,428       377,772         360,227            (170)        315,721
Capital expenditures (5)             20,685          54,921        88,736         177,307          70,297         269,593
                                                                                                                (Continued)
</TABLE>


<PAGE>
                                       31



<TABLE>
<CAPTION>

                                                        At September 30,                                At December 31,
                                   -----------------------------------------------------------    ----------------------------
                                      1993            1994            1995            1996           1996            1997
                                   -----------     -----------    -------------    -----------    -----------     ------------
Balance Sheet Data:                                                     (in thousands)
<S>                                 <C>            <C>             <C>             <C>              <C>            <C>
Cash, cash equivalents and
   short-term investments
   available for sale                15,581           6,025         269,416         457,914          392,535         217,015
Working capital (deficit)             7,990          (8,563)        249,089         446,164          361,601         210,876
Property and equipment, net          52,203         118,875         202,004         336,137          403,676         632,167
Total assets                         95,196         201,991         583,553         939,351          944,133       1,107,664
Current portion of long-term
   debt and capital lease
   obligations                        7,657          23,118          27,310           8,282           25,500           7,421
Long-term debt and capital
   lease obligations, less
   current portion                   37,116         104,461         405,535         739,827          761,504         957,507
Redeemable preferred securities
   of subsidiaries                        -            -             14,986         153,318          159,120         420,171
Common stock and additional
   paid-in capital                   56,402          97,806         217,245         299,229          302,560         326,965
Accumulated deficit                 (21,650)        (58,024)       (134,710)       (318,817)        (368,640)       (696,283)

Stockholders' equity (deficit)       34,753          39,782          82,535         (19,588)         (66,080)       (369,318)
</TABLE>

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

(2)  Revenue  from  Satellite   Services  is  generated  through  the  Company's
     satellite  (voice  and data)  operations  and,  after  January  1995,  also
     includes  revenue  from  maritime  communications  operations.  The Company
     completed the sale of four of its teleports in March 1996, and has reported
     results of operations from these assets through December 31, 1995.

(3)  Weighted  average number of shares  outstanding for fiscal years 1993, 1994
     and 1995 represents  Holdings-Canada  common shares  outstanding.  Weighted
     average  number of shares  outstanding  for fiscal  1996,  the three months
     ended December 31, 1996 and fiscal 1997 represents  Holdings-Canada  common
     shares  outstanding  for the period October 1, 1995 through August 2, 1996,
     and represents ICG Common Stock and  Holdings-Canada  Class A common shares
     (not owned by ICG)  outstanding  for the  periods  subsequent  to August 5,
     1996.

(4)  EBITDA  consists of revenue less operating  costs and selling,  general and
     administrative  expenses.  EBITDA  is  provided  because  it  is a  measure
     commonly used in the  telecommunications  industry.  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  ("GAAP") for the periods
     indicated.  EBITDA is not a measurement  under GAAP and is not  necessarily
     comparable  with similarly  titled  measures of other  companies.  Net cash
     flows from  operating,  investing  and  financing  activities as determined
     using GAAP are also presented in Other Data.

(5)  Capital  expenditures  includes  assets  acquired  under capital leases and
     through  the  issuance  of debt or  warrants,  and  excludes  payments  for
     construction  of the Company's new  headquarters  which the Company sold in
     January 1998 and leased back under a long-term operating lease.



<PAGE>
                                       32


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

     The following discussion includes certain forward-looking  statements which
are affected by important factors  including,  but not limited to, dependence on
increased traffic on the Company's facilities,  the successful implementation of
the Company's strategy of offering an integrated  telecommunications  package of
local, long distance,  data and value-added  services,  continued development of
the Company's network  infrastructure  and actions of competitors and regulatory
authorities  that  could  cause  actual  results to differ  materially  from the
forward-looking  statements.  The results for the 12 months  ended  December 31,
1996 and the three  months  ended  December  31, 1995 have been derived from the
Company's  Consolidated  Financial  Statements included elsewhere herein and the
Company's unaudited  Consolidated Financial Statements included in the Company's
Forms  10-Q filed  with the SEC.  The  Company  changed  its fiscal  year end to
December 31 from September 30, effective January 1, 1997. All dollar amounts are
in U.S. dollars.

Company Overview

     The  Company is one of the  nation's  leading  competitive  ICPs,  based on
estimates of the industry's 1997 revenue. ICPs seek to provide an alternative to
ILECs, long distance carriers,  ISPs and other communications  service providers
for a full range of  communications  services  in the  increasingly  deregulated
telecommunications  industry.  Through its CLEC operations, the Company operates
networks in four regional clusters covering major metropolitan statistical areas
in California,  Colorado,  Ohio and the  Southeast.  The Company also provides a
wide range of network systems integration  services,  maritime and international
satellite transmission services and subsequent to January 21, 1998, a variety of
Internet connectivity and other value-added Internet services.  Network Services
consist of information  technology  services and selected  networking  products,
focusing on network design,  installation,  maintenance  and support.  Satellite
Services  consist of satellite  voice and data  services to major cruise  lines,
commercial  shipping vessels,  yachts, the U.S. Navy and offshore oil platforms.
The Company  intends to dispose of its Satellite  Services  operations to better
focus its efforts on its core Telecom Services unit, although it has not entered
into a formal arrangement for such disposition.  As a leading participant in the
rapidly growing competitive local  telecommunications  industry, the Company has
experienced significant growth, with total revenue increasing from approximately
$111.6 million for fiscal 1995 to approximately  $273.4 million for fiscal 1997.
The  Company's  rapid  growth  is  the  result  of  the  initial   installation,
acquisition  and  subsequent  expansion  of its  fiber  optic  networks  and the
expansion of its communication service offerings.

     Prior to fiscal  1996,  the  majority  of the  Company's  revenue  had been
derived from Network Services.  However,  the Company's Network Services revenue
(as well as Satellite  Service revenue) will continue to represent a diminishing
percentage of the  Company's  consolidated  revenue as the Company  continues to
emphasize its core Telecom  Services,  including  revenue generated by its newly
acquired  subsidiary,  NETCOM.  In March 1996, the Company completed the sale of
four of its  teleports  which  were  used in the  Company's  Satellite  Services
operations.
<PAGE>
                                       33


     The Telecommunications Act and pro-competitive state regulatory initiatives
have substantially changed the telecommunications  regulatory environment in the
United States. Due to these regulatory changes,  the Company is now permitted to
offer all interstate and intrastate  telephone services,  including  competitive
local dial tone.  The Company is marketing  and selling local dial tone services
in major metropolitan areas in the following  regions:  California,  which began
service in late January  1997,  followed by Ohio in February  1997,  Colorado in
March 1997 and the Southeast in May 1997.  During fiscal 1997,  the Company sold
178,470 local access lines,  of which 141,035 were in service as of December 31,
1997. In addition,  the Company's  operating  networks have grown from 627 fiber
route  miles at the end of fiscal 1995 to 3,043 fiber route miles as of December
31, 1997. The Company has 19 operating high capacity  digital voice switches and
15 data  communications  switches,  and plans to install additional  switches as
demand warrants. As a complement to its local exchange services, the Company has
begun marketing bundled service offerings which include long distance,  enhanced
telecommunications  services  and  data  services  and  plans to  intensify  the
offerings of such services in the near term.

     The  Company  will  continue to expand its  network  through  construction,
leased  facilities,  strategic  alliances  and  mergers  and  acquisitions.  For
example,  in January  1998,  the Company  completed  its merger with  NETCOM,  a
provider  of  Internet  connectivity  and Web site  hosting  services  and other
value-added services,  located in San Jose, California. For calendar years 1995,
1996 and 1997,  NETCOM  reported  revenue of $52.4  million,  $120.5 million and
$160.7  million,  respectively,  and EBITDA  losses of $(6.3)  million,  $(20.3)
million  and $(1.7)  million,  respectively.  The Company  will  account for the
business  combination  under the pooling of interests  method of accounting  and
accordingly,  the Company's financial statements will be restated to reflect the
operations  of NETCOM and the  Company on a  combined  basis for all  historical
periods.  Also, in two transactions  occurring  October 1997 and March 1998, the
Company purchased 100% of the capital stock of CBG, an Ohio based local exchange
and centrex reseller which had, at December 31, 1997,  48,256 local access lines
in service,  principally  pursuant to various resale and other  agreements  with
Ameritech,  the ILEC in the markets it serves.  Further,  for the calendar years
1995,  1996 and 1997,  CBG's  revenue was  approximately  $15.4  million,  $21.4
million and $33.8 million,  respectively,  and EBITDA losses were  approximately
$(1.3) million, $(1.0) million and $(3.2) million,  respectively. The operations
of CBG have been included in the Company's  operations for the period subsequent
to October 17, 1997,  the  acquisition  closing date.  In May 1997,  the Company
entered into an agreement  with a subsidiary of Southern  permitting the Company
to construct a 100-mile fiber optic network in the Atlanta metropolitan area. In
addition,  the Company  expanded its geographic  focus to include Texas (and may
also expand to Arkansas,  Louisiana and Oklahoma) through its strategic alliance
with CSW that will  develop and market  telecommunications  services,  including
local service,  in these markets.  In June 1997, the Company entered into an IRU
agreement  with Qwest for  approximately  1,800 miles of fiber optic network and
additional broadband capacity in California,  Colorado,  Ohio and the Southeast.
This new capacity will be used for the transmission of local,  long distance and
communications services in and between the Company's markets.

     Telecom  Services  revenue has increased from $32.3 million for fiscal 1995
to $177.7 million for fiscal 1997. The Company has experienced  declining prices
and increasing  price  competition for access services which, to date, have been
more than offset by increasing network usage. The Company expects to continue to
experience declining prices and increasing price competition for the foreseeable
future.
<PAGE>
                                       34


     In conjunction with the increase in its service offerings,  the Company has
and will  continue  to need to spend  significant  amounts on sales,  marketing,
customer  service,  engineering and support personnel prior to the generation of
corresponding  revenue.  This has and will continue to have an adverse effect on
operating   margins  until  such  time  as  sufficient   volumes  of  customers'
telecommunications  traffic are attained.  As the Company's customer base grows,
the Company  anticipates  that  operating  margins will  improve as  incremental
revenue   will   exceed   incremental   operating   expenses.    The   preceding
forward-looking statement is dependent upon the successful implementation of the
Company local dial tone,  data and long distance  services  strategy,  continued
development of the Company's  network  infrastructure,  increased traffic on the
Company's  facilities,  any or all of which may not occur,  and upon  actions of
competitors and regulatory authorities.

     Currently  the  Company has  experienced  and may  continue  to  experience
negative  operating  margins  from its  wholesale  switched  services  while its
networks are in the  development and  construction  phases and while the Company
relies  on ILEC  networks  to  carry a  significant  portion  of its  customers'
switched  traffic.  The Company expects overall  operating margins from switched
services  to improve as local dial tone,  local  toll,  long  distance  and data
communications  services become a relatively  larger portion of its business mix
and the Company de-emphasizes its wholesale switched services. In addition,  the
Company believes that the unbundling of ILEC services and the  implementation of
local telephone number portability, which are mandated by the Telecommunications
Act,  will  reduce  the  Company's  costs of  providing  switched  services  and
facilitate the marketing of local and other  services.  The Company has recently
raised prices on its  wholesale  switched  services  product in order to improve
margins  and free up  switch  port  capacity  for its  higher  margin  dial tone
product.

     The Company  believes that the  provisions of the  Telecommunications  Act,
including the opening of the local  telephone  services  market to  competition,
will  facilitate  the  Company's  plan to  provide a full  array of local,  long
distance  and data  communications  services.  In order to fully  implement  its
strategy,  the Company must make  significant  capital  expenditures  to provide
additional switching capacity, network infrastructure and electronic components.
The Company must also make significant  investments and expenditures to develop,
train and manage its marketing and sales personnel.

     The  continued  development,  construction  and  expansion of the Company's
business  requires  significant  capital,  a large  portion of which is expended
before related revenue is generated. The Company has experienced, and expects to
continue to experience,  negative cash flows over the near term and  significant
losses   while  it  expands   its   operations   to  provide  a  wide  range  of
telecommunications  services and  establishes  a  sufficient  revenue-generating
customer  base.  There  can be no  assurance  that the  Company  will be able to
establish or retain such a customer base.





<PAGE>
                                       35






Results of Operations

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

<TABLE>
<CAPTION>

                                                                                          Three Months
                                         Fiscal Years Ended September 30,              Ended December 31,
                                     -------------------------------------- ------------------------------------------
                                            1995                1996               1995                  1996
                                     ------------------ ------------------- ------------------- ----------------------
                                        $         %         $         %         $         %          $          %
                                     --------- -------- ---------- -------- ---------- --------- ----------- ---------
Statement of Operations Data:                                                            (Dollars in thousands)
<S>                                   <C>         <C>    <C>         <C>     <C>          <C>      <C>         <C>
Revenue:
  Telecom services (1)                 32,330      29     87,681      52      13,513       38       34,787      61
  Network services                     58,778      53     60,116      36      15,718       45       15,981      28
  Satellite services                   20,502      18     21,297      12       6,168       17        6,188      11
                                     --------- -------- ---------- -------- ---------- --------- ----------- ---------
    Total revenue                     111,610     100     169,094    100      35,399      100       56,956     100

Operating costs:
  Telecom services                     21,825              78,705             11,882                34,463
  Network services                     45,928              46,256             11,998                12,287
  Satellite services                   11,093              10,292              3,230                 3,179
                                     --------- -------- ---------- -------- ---------- --------- ----------- ---------
    Total operating costs              78,846      71     135,253     80      27,110       76       49,929      88

Selling, general and administrative    62,954      56      76,725     45      18,628       53       24,253      42
Depreciation and amortization          16,624      15      30,368     18       4,919       14        9,825      17
Net loss (gain) on disposal of
  long-lived assets                       241       *       5,128      3       1,030        3         (772)     (1)
Provision for impairment of
  long-lived assets                     7,000       6       9,994      6           -        -            -       -
                                     --------- -------- ---------- -------- ---------- --------- ----------- ---------
    Operating loss                    (54,055)    (48)    (88,374)   (52)    (16,288)     (46)     (26,279)    (46)

Other Data:
EBITDA(2)                              (30,190)   (27)    (42,884)   (25)    (10,339)     (29)     (17,226)    (30)
 Net cash used by operating activities (42,798)           (43,357)            (4,598)               (8,636)
 Net cash used by investing activities (71,583)          (135,204)           (25,242)              (82,342)
 Net cash (used) provided by
  financing activities                 377,772            360,227             (8,413)                 (170)
Capital expenditures                    88,736            177,307             26,882                70,297

*Less than 0.5%
</TABLE>

<PAGE>
                                       35



<TABLE>
<CAPTION>

                                     Twelve Months Ended   Fiscal Year Ended
                                        December 31,          December 31,
                                     -------------------  ------------------
                                            1996                1997
                                     -------------------  ------------------
                                        $         %         $         %
                                     --------- --------- ---------- --------
Statement of Operations Data:                (Dollars in thousands)
<S>                                   <C>         <C>   <C>          <C>
Revenue:
  Telecom services (1)                108,955      57    177,690      65
  Network services                     60,379      32     65,678      24
  Satellite services                   21,317      11     29,986      11
                                     --------- -------- ---------- --------
    Total revenue                     190,651     100    273,354     100

Operating costs:
  Telecom services                    101,286            175,829
  Network services                     46,545             53,911
  Satellite services                   10,241             16,678
                                     --------- -------- ---------- --------
    Total operating costs             158,072      83    246,418      90

Selling, general and administrative    82,350      43    150,767      55
Depreciation and amortization          35,274      19     57,081      21
Net loss (gain) on disposal of
  long-lived assets                     3,326       2        671       *
Provision for impairment of
  long-lived assets                     9,994       5     11,950       5
                                     --------- -------- ---------- --------
    Operating loss                    (98,365)    (52)  (193,533)    (71)

Other Data:
EBITDA(2)                              (49,771)   (26)  (123,831)    (45)
 Net cash used by operating
   activities                          (47,395)         (126,954)
 Net cash used by investing
   activities                         (192,304)         (429,867)
 Net cash (used) provided by
  financing activities                 368,470           315,721
Capital expenditures                   220,722           269,593
</TABLE>

*Less than 0.5%
<PAGE>
                                       36


(1)  During  fiscal  1996,  the  Company  changed its method of  accounting  for
     long-term  telecom services  contracts to recognize revenue as services are
     provided.  See "-Accounting  Changes." Other than the cumulative  effect of
     adopting  this new  method of  accounting,  the  effect  of this  change in
     accounting for the periods presented was not significant.

(2)  See note 4 under "Selected Financial Data" for the definition of EBITDA.


Fiscal 1997 Compared to 12 Months Ended December 31, 1996

     Revenue. Revenue for fiscal 1997 increased $82.7 million or 43% from the 12
months ended December 31, 1996. Telecom Services revenue increased 63% to $177.7
million due to an increase in network usage for both switched and special access
services, offset in part by a decline in average unit pricing. Switched services
revenue  increased from $48.1 million (44% of Telecom Services  revenue) for the
12 months  ended  December 31, 1996 to $93.9  million  (53% of Telecom  Services
revenue) for fiscal 1997.  Switched access  (terminating  long distance) revenue
represented  approximately  77%  of  the  Company's  switched  services  revenue
component for fiscal 1997, compared to 100% for the 12 months ended December 31,
1996.  Special  access  revenue  increased  from $39.4  million  (36% of Telecom
Services  revenue)  for the 12 months ended  December 31, 1996 to $55.4  million
(31% of Telecom  Services  revenue)  for fiscal 1997.  Also  included in Telecom
Services revenue for fiscal 1997 is $28.3 million  generated by Zycom,  compared
to $21.5  million for the same  12-month  period in 1996.  The increase in Zycom
revenue  for  fiscal  1997 as  compared  to the same  period in 1996  relates to
changes  in the  classification  of certain  operating  costs as a result of the
Company entering into long-term contracts with its major customers.  These costs
were netted against revenue through April 1996 due to the uncertainty of renewal
of short-term customer contracts.  At December 31, 1997, the Company had 141,035
access lines in service  compared to zero at December 31, 1996.  Special  access
network usage reflected in voice grade equivalents  ("VGEs")  increased 49% from
748,528 VGEs at December 31, 1996,  to 1,111,697  VGEs at December 31, 1997.  At
December 31,  1997,  the Company had 2,321  buildings  connected to its networks
compared to 2,069  buildings  connected  at  December  31,  1996.  Additionally,
switched  minutes of use increased 43% from  approximately  2.0 billion  minutes
during the 12 months  ended  December  31,  1996 to  approximately  2.9  billion
minutes during fiscal 1997. Revenue from long distance and data services did not
generate a material  portion of total  revenue  during  either  period.  Network
Services  revenue  increased 9% to $65.7  million for fiscal 1997 as compared to
$60.4 million for the 12 months ended December 31, 1996. The increase in Network
Services  revenue is due to a single  equipment sale during fiscal 1997 for $3.2
million  as well as general  increases  in volume.  Satellite  Services  revenue
increased  $8.7 million,  or 41%, to $30.0 million for fiscal 1997,  compared to
the 12 months ended  December 31, 1996.  This  increase is primarily  due to the
operations of MCN,  which  comprised  $6.3 million of total  Satellite  Services
revenue for fiscal 1997 compared to $1.8 million during the same 12-month period
in 1996.  The remaining  increase can be attributed to the general growth of MTN
and its increased sales of C-Band equipment to offshore oil and gas customers.
<PAGE>
                                       37


     Operating  costs.  Total  operating  costs for fiscal 1997 increased  $88.3
million,  or 56%, from the 12 months ended December 31, 1996.  Telecom  Services
operating  costs  increased  from  $101.3  million,  or 93% of Telecom  Services
revenue,  for the 12 months ended December 31, 1996 to $175.8 million, or 99% of
Telecom Services  revenue,  for fiscal 1997.  Telecom  Services  operating costs
consist  of  payments  to ILECs for the use of  network  facilities  to  support
special and switched access services, network operating costs, right of way fees
and other  costs.  The  increase  in  operating  costs in  absolute  dollars  is
attributable  to the  increase in switched  access  services and the addition of
engineering  and  operations  personnel  dedicated to the  development  of local
exchange  services.  The  increase in operating  costs as a percentage  of total
revenue is due primarily to the increase in switched  access  services  revenue,
and the investment in the  development of local  exchange  services  without the
benefit of  substantial  corresponding  revenue in the same period.  The Company
expects  that the Telecom  Services  ratio of  operating  costs to revenue  will
further  improve  as the  Company  provides  a greater  volume of higher  margin
services,  principally local exchange services,  carries more traffic on its own
facilities  rather than ILEC  facilities  and obtains the right to use unbundled
ILEC  facilities  on  satisfactory  terms,  any or all of which  may not  occur.
Network Services operating costs increased 16% to $53.9 million and increased as
a  percentage  of  Network  Services  revenue  from 77% for the 12 months  ended
December 31, 1996 to 82% for fiscal 1997. The increase is due to a substantially
lower margin earned on equipment  sales (which  constituted a larger  portion of
1997  revenue)  relative to other  services and certain  indirect  project costs
included in operating  costs  during  fiscal 1997 which were treated as selling,
general and  administrative  expenses  during the comparable  12-month period in
1996.  Network  Services  operating  costs  include the cost of equipment  sold,
direct  hourly  labor and  other  indirect  project  costs.  Satellite  Services
operating  costs  increased to $16.7 million for fiscal 1997, from $10.2 million
for the 12 months ended December 31, 1996. Satellite Services operating costs as
a percentage of Satellite  Services  revenue also  increased from 48% for the 12
months ended  December 31, 1996 to 56% for fiscal 1997.  This increase is due to
an increase in MCN's sales as well the increased volume of equipment sales, both
of which provide lower margins than other maritime services.  Satellite Services
operating  costs consist  primarily of  transponder  lease costs and the cost of
equipment sold.

     Selling,  general  and  administrative   expenses.   Selling,  general  and
administrative  ("SG&A")  expenses for fiscal 1997 increased  $68.4 million,  or
83%,  compared to the 12 months  ended  December  31,  1996.  This  increase was
principally  due to the  continued  rapid  expansion  of the  Company's  Telecom
Services networks and related significant  additions to the Company's management
information systems,  customer service,  marketing and sales staffs dedicated to
the  expansion of the  Company's  networks and  implementation  of the Company's
expanded services strategy, primarily the development of local and long distance
telephone  and data  communications  services.  SG&A expenses as a percentage of
total revenue  increased  from 43% for the 12 months ended  December 31, 1996 to
55% for fiscal 1997.  There is typically a period of higher  administrative  and
marketing  expense  prior to the  generation of  appreciable  revenue from newly
developed  networks or services.  The Company  expects SG&A expenses for Telecom
Services to increase slightly over the near term as a result of hiring new staff
to facilitate the marketing and development of local dial tone, local toll, long
distance and data transmission services.

     Depreciation and  amortization.  Depreciation  and  amortization  increased
$21.8 million, or 62%, for fiscal 1997, compared to the 12 months ended December
31, 1996, due to increased  investment in depreciable  assets resulting from the
continued expansion of the Company's networks and services.  The Company reports
high levels of depreciation  expense  relative to revenue during the early years
of operation of a new network  because the full cost of a network is depreciated
using the straight-line  method despite the low rate of capacity  utilization in
the early stages of network operation.
<PAGE>
                                       38


     Net loss  (gain) on  disposal  of  long-lived  assets.  Net loss  (gain) on
disposal of long-lived  assets decreased from a net loss of $3.3 million for the
12 months ended December 31, 1996 to a net gain of $0.7 million for fiscal 1997.
Net loss on disposal of long-lived  assets for the 12 months ended  December 31,
1996 includes the loss  recorded on the sale of four of the Company's  teleports
used in its Satellite Services  operations ($1.1 million),  the loss recorded on
the  disposal of other  operating  assets  ($2.7  million) and a write-off of an
investment ($0.3 million), offset by a gain on the sale on sale of the Company's
50% interest in the Phoenix  network joint venture  ($0.8  million).  For fiscal
1997,  net loss on disposal of  long-lived  assets  primarily  relates to losses
recorded on the disposal of the Company's investment in its Melbourne network.

     Provision for impairment of long-lived assets.  For fiscal 1997,  provision
for  impairment of long-lived  assets  includes the  write-down of the Company's
investment in StarCom International Optics Corporation, Inc. ($5.2 million), MCN
($2.9  million),  Zycom ($2.7  million) and Nova-Net ($0.9 million) as well as a
write-down of other operating assets ($0.3 million). Provision for impairment of
long-lived  assets for the 12 months ended December 31, 1996 includes  valuation
allowances for the amounts  receivable for advances made to the Phoenix  network
joint  venture  included  in  long-term  note  receivable  ($5.8  million),  the
investments in the Melbourne  network ($2.7 million) and the Satellite  Services
Mexico  subsidiary  ($0.1 million) and the note receivable  from NovoComm,  Inc.
($1.3 million). Provision for impairment of long-lived assets was recorded based
on management's  estimate of the net realizable value of the Company's assets at
December 31, 1996 and 1997.

     Interest  expense.  Interest  expense  increased $22.6 million,  from $95.0
million for the 12 months ended  December 31, 1996, to $117.5 million for fiscal
1997,  which  includes  $105.5 million of non-cash  interest.  This increase was
primarily  attributable to an increase in long-term debt,  primarily the 11 5/8%
Notes  issued  in March  1997.  In  addition,  the  Company's  interest  expense
increased,  and will continue to increase,  because the principal  amount of its
indebtedness  increases until the Company's  senior  indebtedness  begins to pay
interest in cash.

     Interest income. Interest income increased $0.4 million, from $21.5 million
for the 12 months ended  December 31, 1996 to $21.9 million for fiscal 1997. The
increase is attributable to the increase in cash and invested cash balances from
the proceeds from the issuances of the 11 5/8% Notes and 14% Preferred  Stock in
March 1997 and the 6 3/4% Preferred Securities in September and October 1997.

     Other,  net. Other,  net decreased from $3.9 million net expense for the 12
months  ended  December  31, 1996 to $0.7  million net expense for fiscal  1997.
Other  expense  recorded  for the 12 months  ended  December  31, 1996  consists
primarily  of the  write-off of deferred  financing  costs  associated  with the
conversion  or repayment of debt and  litigation  settlement  costs.  For fiscal
1997, other, net consists primarily of litigation  settlement costs and the loss
on disposal of non operating assets.
<PAGE>
                                       39


     Minority  interest  in share of  losses,  net of  accretion  and  preferred
dividends on preferred securities of subsidiaries. Minority interest in share of
losses,  net of accretion  and  preferred  dividends on preferred  securities of
subsidiaries increased $10.7 million, from $27.1 million for the 12 months ended
December  31,  1996 to $37.8  million  for  fiscal  1997.  The  increase  is due
primarily to the  issuances of the 14%  Preferred  Stock in March 1997 and the 6
3/4%  Preferred  Securities  in  September  and October  1997.  Offsetting  this
increase is $12.3 million  recorded during the 12 months ended December 31, 1996
for the  excess of the  redemption  price  over the  carrying  amount of the 12%
redeemable  preferred  stock of  Holdings  ("12%  Redeemable  Preferred  Stock")
redeemed in April 1996.  Minority interest in share of losses,  net of accretion
and preferred dividends on preferred securities of subsidiaries  recorded during
fiscal 1997  consists of the  accretion  of issue costs ($0.9  million)  and the
accrual of the preferred security dividends ($38.9 million)  associated with the
6  3/4%  Preferred  Securities,   the  14%  Preferred  Stock  and  the  14  1/4%
Exchangeable Preferred Stock Mandatorily Redeemable 2007 (the "14 1/4% Preferred
Stock"), offset by minority interest in losses of subsidiaries of $2.0 million.

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

     Net loss. Net loss increased  $128.4 million,  or 64%, due to the increases
in operating  costs,  SG&A  expense,  depreciation  and  amortization,  interest
expense and minority interest in share of losses, net of accretion and preferred
dividends on preferred securities of subsidiaries noted above.

Three Months Ended December 31, 1996 Compared to Three Months Ended
December 31, 1995

     Revenue.  Revenue for the three  months ended  December 31, 1996  increased
$21.6  million,  or 61%,  from the three  months ended  December  31, 1995.  The
increase in total revenue reflects continued growth in Telecom Services, Network
Services  and  Satellite  Services,  offset  slightly  by the  loss  in  revenue
resulting  from the sale of four of the  Company's  teleports  during the second
quarter of fiscal 1996. Telecom Services revenue increased 157% to $34.8 million
due to an  increase  in  network  usage for both  switched  and  special  access
services, offset in part by a decline in average unit pricing. Switched services
revenue  increased from $5.1 million (38% of Telecom  Services  revenue) for the
three months ended December 31, 1995, to $16.4 million (47% of Telecom  Services
revenue) for the three months ended December 31, 1996.  Switched  access revenue
represented  substantially  all  of  the  Company's  switched  services  revenue
component for the three months ended  December 31, 1996.  Special access revenue
increased  from $7.5  million  (56% of Telecom  Services  revenue) for the three
months  ended  December  31,  1995 to $10.9  million  (31% of  Telecom  Services
revenue) for the three months ended December 31, 1996. Also, included in Telecom
Services  revenue for the three months  ended  December 31, 1996 is $7.5 million
generated by Zycom, compared to $0.9 million for the three months ended December
31, 1995.  Approximately  $6.5 million of the increase in Zycom  revenue for the
three  months  ended  December  31,  1996 as compared to the same period in 1995
relates to changes in the  classification of certain operating costs as a result
of the Company  entering  into  long-term  contracts  with its major  customers.
Network  usage as reflected in VGEs  increased 53% from 488,403 VGEs on December
31, 1995 to 748,528 at December 31, 1996. On December 31, 1996,  the Company had
2,069 buildings  connected to its networks compared to 1,539 buildings connected
on December 31, 1995.  Consistent with  expectations,  Network  Services revenue
growth was  moderate,  increasing  from $15.7  million to $16.0  million for the
three months ended December 31, 1995 and 1996,  respectively,  while the Company
repositioned its systems and operations to improve operating results.  Satellite
Services  revenue  remained  relatively  stable between the three-month  periods
ended  December  31,  1995 and 1996 as a result  of the  offsetting  effects  of
increased  maritime minutes of use from cruise ships and no revenue in the three
months ended  December 31, 1996 from the four teleports sold in March 1996. On a
pro forma basis to reflect the sale of the  teleports,  the Company's  Satellite
Services  revenue for the three months ended December 31, 1995 and 1996 was $3.7
million and $6.2 million, respectively.
<PAGE>
                                       40


     Operating costs.  Total operating costs for the three months ended December
31, 1996 increased $22.8 million,  or 84%, from the same period in 1995. Telecom
Services  operating  costs  increased  from $11.9  million,  or 88%,  of Telecom
Services revenue for the three months ended December 31, 1995, to $34.5 million,
or 99%, of Telecom  Services  revenue for the three  months  ended  December 31,
1996. The increase in operating costs in absolute dollars is attributable to the
increase  in switched  access  services  and the  addition  of  engineering  and
operations  personnel  dedicated to the development of local exchange  services.
The increase in operating  costs as a percentage  of revenue is due primarily to
the increase in switched access services  revenue.  Network  Services  operating
costs increased 2% to $12.3 million for the three months ended December 31, 1996
and  increased as a percentage of Network  Services  revenue from 76% to 77% for
the  three  month  periods  ended  December  31,  1995 and  1996,  respectively.
Satellite  Services  operating  costs decreased 2% to $3.2 million for the three
months  ended  December  31,  1996.  Satellite  Services  operating  costs  as a
percentage of revenue  declined to 51% of Satellite  Services revenue during the
three  months ended  December  31, 1996,  from 52% during the three months ended
December 31, 1995.  The  decrease in  percentage  of revenue as well as absolute
dollars is  attributable  to the decline in revenue  resulting  from the sale of
four of the Company's  teleports in March 1996,  offset by an increase in higher
margin  maritime  services  revenue at MTN.  Revenue  from  teleport  operations
historically have yielded lower gross margins than maritime services revenue.

     Selling,  general and administrative  expense.  SG&A expenses for the three
months ended December 31, 1996 increased $5.6 million,  or 30%,  compared to the
three months ended December 31, 1995.  This increase was  principally due to the
continued rapid expansion of the Company's Telecom Services networks and related
significant additions to the Company's management information systems,  customer
service,  marketing and sales staffs dedicated to the expansion of the Company's
networks  and  implementation  of  the  Company's  expanded  services  strategy,
primarily the development of the Company's CLEC  operations.  SG&A expenses as a
percentage  of total  revenue was 43% for the three  months  ended  December 31,
1996,  compared to 53% for the same period in 1995.  SG&A  expenses  for Network
Services  decreased  both in  absolute  dollars and as a  percentage  of Network
Services  revenue due to approximately  $0.7 million in  non-recurring  charges,
primarily  legal  accruals,  recorded during the three months ended December 31,
1995.  Satellite  Services SG&A expenses  decreased in absolute dollars and as a
percentage  of Satellite  Services  revenue due to cost  control  efforts by the
Company's  management.  Other corporate expenses increased from $4.0 million, or
11% of total  revenue,  for the three  months  ended  December  31, 1995 to $5.7
million, or 10% of total revenue,  for the three months ended December 31, 1996.
This  increase  is  primarily   attributable   to  the  addition  of  employees,
principally  human  resources  and  regulatory  personnel,  for the  purpose  of
managing  the  Company's  growth and its  expansion  into new markets as allowed
under the Telecommunications Act.
<PAGE>
                                       41


     Depreciation  and  amortization  expense.   Depreciation  and  amortization
expense increased $4.9 million, or 100%, for the three months ended December 31,
1996,  as  compared  to the same period in 1995.  Depreciation  of fixed  assets
increased  by  approximately  $2.3  million  as a result  of the  shortening  of
estimated  depreciable  lives during fiscal 1996,  as discussed in  "-Accounting
Changes,"  and an  increase in  depreciable  fixed  assets due to the  continued
expansion of the Company's  networks.  The increase in depreciation  expense was
offset  slightly  due to the sale of four of the  Company's  teleports  in March
1996.

     Net loss  (gain) on  disposal  of  long-lived  assets.  Net loss  (gain) on
disposal of long-lived  assets decreased from a net loss of $1.0 million for the
three months ended December 31, 1995 to a net gain of $0.8 million for the three
months ended  December 31, 1996.  Net loss on disposal of long-lived  assets for
the three months  ended  December  31, 1995  includes  the  write-off of certain
operating  assets.  For the three  months ended  December 31, 1996,  net gain on
disposal of long-lived  assets consists of the gain on sale of the Company's 50%
interest in the Phoenix network joint venture.

     Interest expense.  Interest expense  increased by $9.3 million,  from $15.2
million for the three  months ended  December 31, 1995 to $24.5  million for the
three months ended  December 31, 1996,  which included $22.7 million of non-cash
interest.  This  increase was  attributable  to an increase in  long-term  debt,
primarily  the 12 1/2% Senior  Discount  Notes (the "12 1/2%  Notes")  issued in
April 1996 and an increase in capitalized  lease  obligations to finance Telecom
Services equipment used in the expansion of the Company's networks.

     Interest  income.  Interest  income  increased  $2.2 million from the three
months  ended  December  31,  1995 to $6.0  million for the three  months  ended
December 31, 1996. The increase is  attributable  to the interest  earned on the
proceeds from the issuance of the 12 1/2% Notes and the 14 1/4% Preferred  Stock
in April 1996.

     Share of losses of joint venture and investment. As a result of the sale of
the Company's 50% interest in the Phoenix  network  joint  venture,  no share of
losses in joint venture was recorded  during the three months ended December 31,
1996, as compared to the $0.2 million recorded during the same period in 1995.

     Other,  net.  Other,  net for the three months ended  December 31, 1996 was
$0.1  million net  expense as compared to a minor net gain for the three  months
ended December 31, 1995.  Other expense  recorded during the three-month  period
ended December 31, 1996 consists of miscellaneous other expenses.
<PAGE>
                                       42


     Minority  interest  in share of  losses,  net of  accretion  and  preferred
dividends on preferred securities of subsidiaries. Minority interest in share of
losses,  net of accretion  and  preferred  dividends on preferred  securities of
subsidiaries  increased  $1.8  million,  from $3.2  million for the three months
ended  December 31, 1995 to $5.0 million for the three months ended December 31,
1996.  The increase is due  primarily  to the issuance of the 14 1/4%  Preferred
Stock in April 1996.  Minority interest in share of losses, net of accretion and
preferred dividends on preferred securities of subsidiaries  recorded during the
current  three-month period ended December 31, 1996 consists of the accretion of
issue costs ($0.1 million) and the accrual of the preferred stock dividend ($5.7
million)  associated  with  the 14 1/4%  Preferred  Stock,  offset  by  minority
interest in losses of subsidiaries of $0.8 million.

     Cumulative  effect of change  in  accounting  for  revenue  from  long-term
telecom services  contracts.  The cumulative  effect of change in accounting for
revenue from long-term  telecom  services  contracts  recorded  during the three
months ended  December 31, 1995 is due to the change in accounting  principle as
described  in  "-Accounting  Changes." As the change in  accounting  was applied
retroactively as of October 1, 1995, no similar amounts were recorded during the
three months ended December 31, 1996.

     Net loss. Net loss increased $15.2 million,  or 44%, due to the increase in
operating  costs,  SG&A expenses,  depreciation  and  amortization  and interest
expense noted above.

Fiscal 1996 Compared to Fiscal 1995

     The following  information  reflects the results of  operations  for fiscal
1996 compared to the pro forma results of operations  for fiscal 1995,  assuming
the change in accounting for long-term telecom services  contracts  described in
"-Accounting Change" had been applied retroactively.

     Revenue.  Revenue for fiscal 1996  increased  $58.2  million,  or 52%, from
fiscal 1995. The increase in total revenue reflects  continued growth in Telecom
Services,  Network Services and Satellite Services,  offset slightly by the loss
in revenue resulting from the sale of four of the Company's  teleports.  Telecom
Services  revenue  increased 177% to $87.7 million due to an increase in network
usage for both switched and special access services, offset in part by a decline
in average unit prices. Switched services revenue, consisting solely of switched
access services,  increased from $5.8 million (18% of Telecom Services  revenue)
for fiscal 1995, to $36.7 million (42% of Telecom  Services  revenue) for fiscal
1996.  Special  access  revenue  increased  from $25.1  million  (78% of Telecom
Services  revenue)  for fiscal 1995 to $36.1  million  (41% of Telecom  Services
revenue) for fiscal 1996. Also included in Telecom  Services  revenue for fiscal
1996 is $14.9  million  generated  by Zycom,  compared to $1.4 million in fiscal
1995.  Approximately  $10.6 million of the increase in Zycom revenue  relates to
changes  in the  classification  of certain  operating  costs as a result of the
Company  entering into  long-term  contracts with its major  customers.  Network
usage as reflected  in VGEs  increased  47% from  430,535 VGEs on September  30,
1995, to 630,697 VGEs on September 30, 1996. On September 30, 1996,  the Company
had 2,067  buildings  connected  to its  networks  compared  to 1,375  buildings
connected on September 30, 1995. Consistent with expectations,  Network Services
revenue  growth was moderate,  increasing  from $58.8 million to $60.1  million,
while the Company  repositioned its systems and operations to improve  operating
results.  Satellite  Services  revenue  increased 4% to $21.3 million for fiscal
1996 primarily due to increased maritime minutes of use from cruise ships offset
in  part by the  decrease  resulting  from  the  sale  of four of the  Company's
teleports.  Satellite  Services revenue for fiscal 1995 and 1996, on a pro forma
basis to reflect the sale of  teleports,  was $11.4  million and $18.9  million,
respectively.  Satellite  Services revenue decreased $0.4 million from the third
quarter of fiscal 1996 to the fourth  quarter of fiscal  1996.  The  decrease in
revenue was primarily due to three Navy vessels being in "dry dock."
<PAGE>
                                       43


     Operating  costs.  Total  operating  costs for fiscal 1996 increased  $56.4
million,  or 72%, from fiscal 1995.  Telecom Services  operating costs increased
from $21.8 million, or 69% of Telecom Services revenue for fiscal 1995, to $78.7
million,  or 90% of Telecom  Services  revenue for fiscal 1996.  The increase in
operating costs in absolute  dollars is attributable to the increase in switched
access services and the expansion in off-net  special access service  offerings.
The  increase  in  operating  costs  as a  percentage  of total  revenue  is due
primarily to the increase in switched access services revenue.  Network Services
operating  costs  increased 1% to $46.3 million and decreased as a percentage of
Network  Services  revenue  from 78% for  fiscal  1995 to 77% for  fiscal  1996.
Satellite  Services  operating costs decreased to $10.3 million for fiscal 1996,
from $11.1  million for fiscal 1995.  Satellite  Services  operating  costs as a
percentage of revenue also declined to 48% for fiscal 1996,  compared to 54% for
fiscal  1995.  The  decrease  both in absolute  dollars and as a  percentage  of
revenue is  attributable  to the decline in revenue  resulting  from the sale of
four of the  Company's  teleports,  partially  offset by an  increase  in higher
margin maritime services revenue at MTN.

     Selling,  general and administrative expense. SG&A expenses for fiscal 1996
increased  $13.8  million,  or 22%,  compared to fiscal 1995.  This increase was
principally  due to the  continued  rapid  expansion  of the  Company's  Telecom
Services networks and related significant  additions to the Company's management
information systems, marketing and sales staff dedicated to the expansion of the
Company's  networks  and  implementation  of  the  Company's  switched  services
strategy and  development  of the Company's  CLEC  operations.  A portion of the
increase  was  also  attributable  to  approximately   $1.8  million  of  legal,
accounting,  and SEC filing  fees  incurred in the  incorporation  of a new U.S.
publicly traded holding company,  ICG  Communications,  Inc., and  approximately
$1.3  million  of  consulting  fees  related  to  various  process   improvement
initiatives.  SG&A  expenses as a percentage of total revenue was 45% for fiscal
1996,  compared to 57% for fiscal  1995.  SG&A  expenses  for  Network  Services
increased  due to increased  engineering,  marketing  and sales staff to support
growth  in  network  system  installations.  Satellite  Services  SG&A  expenses
increased primarily due to the growth of MTN and MCN.

     Depreciation and  amortization.  Depreciation  and  amortization  increased
$13.7 million, or 83%, for fiscal 1996 compared to fiscal 1995.  Depreciation of
fixed  assets  increased  by  approximately  $7.0  million  as a  result  of the
shortening of estimated  depreciable  lives discussed in "-Accounting  Changes,"
and an increase in  depreciable  fixed assets due to the continued  expansion of
the Company's networks. The increase in depreciation expense was offset slightly
due to the sale of four of the Company's teleports.

     Net loss  (gain) on  disposal  of  long-lived  assets.  Net loss  (gain) on
disposal of long-lived  assets increased to $5.1 million during fiscal 1996 from
$0.2 million during fiscal 1995.  Net loss on disposal of long-lived  assets for
fiscal 1996  includes  the loss  recorded  on the sale of four of the  Company's
teleports used in its Satellite  Services  operations  ($1.1 million),  the loss
recorded  on the  disposal  of  other  operating  assets  ($3.7  million)  and a
write-off of an investment ($0.3 million).
<PAGE>
                                       44


     Provision for impairment of long-lived assets.  Provision for impairment of
long-lived  assets  increased $3.0 million from fiscal 1995 to $10.0 million for
fiscal  1996.  The  amount  recorded  during  fiscal  1996  includes   valuation
allowances for the amounts  receivable for advances made to the Phoenix  network
joint  venture  included in  long-term  notes  receivable  ($5.8  million),  the
investment in the Melbourne  network ($2.7  million),  the note  receivable from
NovoComm, Inc. ($1.3 million) and the Satellite Services Mexico subsidiary ($0.2
million).  The fiscal 1995 amount includes an allowance for an investment  ($2.0
million) and a write-down in the goodwill  associated  with the  acquisition  of
Nova-Net  ($5.0  million).  Provision for  impairment  of long-lived  assets was
recorded  based on  management's  estimate  of the net  realizable  value of the
Company's assets at September 30, 1995 and 1996.

     Interest expense.  Interest expense increased by $61.3 million,  from $24.4
million for fiscal 1995 to $85.7 million for fiscal 1996,  which  included $66.5
million of non-cash  interest.  This increase was attributable to an increase in
long-term  debt,  primarily the 13 1/2% Senior  Discount Notes due 2005 (the "13
1/2%  Notes")  issued in August 1995 and the 12 1/2% Notes issued in April 1996,
and an increase in  capitalized  lease  obligations  to finance the  purchase of
Telecom  Services and Satellite  Services  equipment.  Also included in interest
expense is a charge of  approximately  $11.5  million for the  payments  made to
holders of the 13 1/2%  Notes with  respect to  consents  to  amendments  to the
indenture  governing the 13 1/2% Notes in order to permit the offering of the 13
1/2% Notes in April 1996.

     Interest income.  Interest income increased $15.1 million from fiscal 1995.
The  increase is  attributable  to the increase in cash from the proceeds of the
issuance  of the 13 1/2% Notes in August  1995 and the 12 1/2% Notes and 14 1/4%
Preferred Stock in April 1996.

     Share of losses of joint  venture  and  investment.  Share of losses in the
Phoenix network joint venture,  in which the Company held a 50% equity interest,
increased  $1.1  million,  or 145%,  from fiscal 1995 to $1.8 million for fiscal
1996  due to  increased  losses  resulting  from  the  continued  expansion  and
implementation of switched access services.

     Other,  net. Other,  net increased from $0.5 million net expense for fiscal
1995 to $3.9  million net expense for fiscal  1996.  Other  expense  recorded in
fiscal 1996 consists  primarily of settlement costs of certain  litigation ($1.2
million)  and the  write-off  of deferred  financing  costs upon  conversion  or
settlement of debt ($2.7 million).

     Minority  interest  in share of  losses,  net of  accretion  and  preferred
dividends on preferred securities of subsidiaries. Minority interest in share of
losses,  net of accretion  and  preferred  dividends on preferred  securities of
subsidiaries  increased  $24.2  million,  from $1.1  million  for fiscal 1995 to
approximately  $25.3  million  for  fiscal  1996.  The  increase  is  due to the
accretion of the unit warrants  issued in  connection  with the 13% Notes ($14.4
million) and issue costs ($1.1 million)  associated with the issuance of the 12%
Redeemable Preferred Stock, of Holdings (the "12% Preferred Stock") accretion of
issue costs associated with the 14 1/4% Preferred Stock ($0.3 million),  accrual
of the preferred  stock  dividend on the 12% Preferred  Stock ($2.1 million) and
the 14 1/4% Preferred Stock ($9.1 million) and the excess  redemption price over
the stated value of the convertible  Series B Preferred Stock of Holdings-Canada
($1.0  million),  partially  offset  by  the  minority  interest  in  losses  of
subsidiaries.
<PAGE>
                                       45


     Income tax  benefit.  Income tax benefit for fiscal 1996 was $5.1  million.
The income tax benefit is due to an  adjustment to the deferred tax liability as
a result of the change in estimated depreciable lives.

     Cumulative  effect of change  in  accounting  for  revenue  from  long-term
telecom  services  contracts.  The  increase in  cumulative  effect of change in
accounting for revenue from long-term  telecom services  contracts is due to the
change in accounting as described in "-Accounting Changes."

     Net loss. Net loss increased $107.5 million,  or 140%, due to the increases
in operating  costs,  SG&A expenses,  depreciation  and  amortization,  interest
expense and minority interest in share of losses, net of accretion and preferred
dividends on preferred securities of subsidiaries noted above.

Quarterly Results

     The following  table  presents  selected  unaudited  operating  results for
three-month  quarterly  periods,  beginning with the three months ended December
31, 1995 and through the three  months  ended  December  31,  1997.  The Company
believes that all necessary adjustments have been included in the amounts stated
below to present fairly the quarterly  results when read in conjunction with the
Company's Consolidated Financial Statements and related notes included elsewhere
in this Annual Report.  Results of operations for any particular quarter are not
necessarily indicative of results of operations for a full year or predictive of
future  periods.   ICG's   development  and  expansion   activities,   including
acquisitions, during the periods shown below materially affect the comparability
of this data from one period to another.



<PAGE>
                                       46



<TABLE>
<CAPTION>





                                                                          Three
                                                                          Months
                                   Three Months Ended                     Ended                   Three Months Ended
                    --------------------------------------------------              -----------------------------------------------
                      Dec. 31,     Mar. 31,     June 30,    Sept. 30,    Dec. 31,     Mar. 31,   June 30,   Sept.30,      Dec. 31,
                        1995         1996         1996        1996        1996         1997        1997       1997          1997
                    ------------ ------------ ------------ ----------- ------------ ----------- ---------- ----------- -------------
Statement of                                            (Dollars in thousands)
Operations Data:
<S>                 <C>            <C>          <C>          <C>         <C>         <C>         <C>       <C>        <C>
Revenue:
  Telecom services  $  13,513       17,635       24,371       32,162      34,787      38,280      41,243     43,664     54,503
  Network services     15,718       13,973       14,679       15,746      15,981      17,987      15,640     16,432     15,619
  Satellites
   services             6,168        4,336        5,596        5,197       6,188       6,783       7,883      7,640      7,680
                    ------------ ------------ ------------ ----------- ------------------------ ---------- ----------- -------------
     Total revenue     35,399       35,944       44,646       53,105      56,956      63,050      64,766     67,736     77,802

Operating loss        (15,258)     (15,823)     (20,262)     (37,031)    (26,279)    (40,915)    (46,592)   (46,543)   (59,483)
Net loss before
  cumulative effect
  of change in
  accounting          (31,189)     (26,939)     (64,721)     (57,805)    (49,823)    (66,781)    (77,570)   (80,047)  (103,245)
Cumulative effect
  of change in
  accounting (1)       (3,453)           -            -            -           -           -           -          -          -
                    ------------ ------------ ------------ ----------- ------------------------ ---------- ----------- -------------
     Net loss       $ (34,642)     (26,939)     (64,721)     (57,805)    (49,823)    (66,781)    (77,570)   (80,047)  (103,245)
                    ============ ============ ============ =========== ============================================== =============

Other Data:
EBITDA (2)            (10,339)      (8,381)     (11,207)     (12,957)    (17,226)    (29,901)    (33,791)   (31,699)   (28,440)
Net cash used by
  operating
  activities           (4,598)     (16,400)     (15,059)      (7,300)     (8,636)    (14,770)    (23,235)   (33,219)   (55,730)
Net cash used by
  investing
  activities          (25,242)     (51,322)     (10,729)     (47,911)    (82,342)    (60,219)    (50,733)  (193,587)  (125,328)
Net cash (used)
  provided by
  financing
  activities           (8,413)     (23,956)     400,467       (7,871)       (170)    174,343      (3,100)   111,943     32,535
Capital
expenditures (3)       26,882       76,433       29,882       44,110      70,297      58,578      64,412     64,489     82,114

Statistical Data(4):
Full time employees       998        1,061        1,173        1,323       1,424       1,606       1,854      2,083      2,219
Telecom services:
  Access lines in
   service (5)              -            -            -            -           -       5,371      20,108     50,551    141,035
  Buildings connected:
    On-net                304          327          384          478         522         545         560        590        596
    Hybrid (6)          1,235        1,401        1,493        1,589       1,547       1,550       1,704      1,726      1,725
                    ------------ ------------ ------------ ----------- ---------------------------------------------- -------------
    Total buildings
      connected         1,539        1,728        1,877        2,067       2,069       2,095       2,264      2,316      2,321
  Customer circuits
    in service
    (VGEs) (7)        488,403      510,755      551,881      630,697     748,528     816,238     917,656   1,006,916  1,111,697
  Operational
    switches:
    Voice                  13           13           13           14          14          16          17         18         19
    Data                    -            -            -            -           -          10          15         15         15
                    ------------ ------------ ------------ ----------- ---------------------------------------------- -------------
      Total
        operational
        switches           13           13           13           14          14          26          32         33         34
  Switched minutes
    of use (in
    millions)             235          362          475          563         607         682         742        788        660
  Fiber route
    miles (8)
    Operational           637          780          886        2,143       2,385       2,483       2,898      3,021      3,043
    Under
    construction            -            -            -            -           -           -           -          -      1,064
  Fiber strand
    miles (9)
    Operational        28,779       36,310       45,098       70,067      75,490      83,334     101,788    109,510    111,435
    Under
    construction            -            -            -            -           -           -           -          -     16,366
  Wireless
    miles (10)            545          582          483          491         506         511         511        511        511
Satellite services:
  VSATs                   633          658          659          835         860         875         895        934        957
  C-Band
    installations(11)      33           36           48           48          54          57          57         54         57
  L-Band
    installations(12)       -            3           53          109         204         355         671        768      1,239
-----------
</TABLE>

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

(2)  EBITDA  consists of revenue less operating  costs and selling,  general and
     administrative  expenses.  EBITDA  is  provided  because  it  is a  measure
     commonly used in the  telecommunications  industry.  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 GAAP for the periods indicated. EBITDA is not a measurement under GAAP
     and is not necessarily  comparable with similarly  titled measures of other
     companies.   Net  cash  flows  from  operating,   investing  and  financing
     activities as determined using GAAP are also presented in Other Data.
<PAGE>
                                       47


(3)  Capital  expenditures  includes  assets  acquired  under capital leases and
     excludes payments for construction of the Company's new headquarters  which
     the  Company  sold in  January  1998  and  leased  back  under a  long-term
     operating lease.

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

(5)  Access  lines in service at December 31, 1997  includes  66,346 lines which
     are  provisioned  through the  Company's  switch and 74,689 lines which are
     provisioned through resale and other agreements with various local exchange
     carriers.  Resale  lines  typically  generate  lower  margins  and are used
     primarily to obtain customers.  Although the Company plans to migrate lines
     from resale to higher margin on-switch lines,  there are no assurances that
     it will be successful in executing this strategy.

(6)  Hybrid buildings  connected  represent buildings connected to the Company's
     network via another carrier's  facilities.  Hybrid buildings  declined from
     September  30, 1996 to December  31, 1996 due to the sale of the  Company's
     50% interest in the Phoenix joint venture.

(7)  Customer  circuits  in service  are  measured  in voice  grade  equivalents
     ("VGEs").

(8)  Fiber  route  miles  refers to the  number of miles of fiber  optic  cable,
     including  leased  fiber.  As of December 31,  1997,  the Company had 3,043
     fiber  route  miles,  of which 171 fiber  route  miles  were  leased  under
     operating  leases.  Fiber route miles under  construction  represents fiber
     under construction which is expected to be operational within six months.

(9)  Fiber strand  miles  refers to the number of fiber route  miles,  including
     leased fiber, along a  telecommunications  path multiplied by the number of
     fiber  strands  along that path.  As of December 31, 1997,  the Company had
     111,435 fiber strand  miles,  of which 3,278 fiber strand miles were leased
     under operating leases.  Fiber strand miles under  construction  represents
     fiber under  construction  which is expected to be  operational  within six
     months.

(10) Wireless miles represents the total distance of the digital microwave paths
     between Company transmitters which are used in the Company's networks.

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

(12) L-Band  installations  service  smaller  maritime  installations,  and both
     mobile and fixed land-based units.


     The Company's  consolidated  revenue has increased  every quarter since the
first fiscal quarter of 1992,  primarily due to the installation and acquisition
of new  networks,  the  expansion of existing  networks and  increased  services
provided over existing networks. From the third quarter of fiscal 1993 until the
sale of four teleports in the second quarter of fiscal 1996,  Satellite Services
also contributed to the quarterly revenue growth.
<PAGE>
                                       48


     EBITDA,  operating  and net losses  have  generally  increased  immediately
preceding  and during  periods  of  relatively  rapid  network  acquisition  and
expansion  activity.  The increased  quarterly  losses from the first quarter of
fiscal  1995  through the  quarter  ended  December  31,  1997  resulted  from a
combination of increases in negative margin switched access services revenue and
increases in personnel  and other SG&A expenses to support the  acquisition  and
expansion of Telecom  Services  networks,  the  implementation  of the Company's
switched  access services  strategy and development of local exchange  services.
Since the quarter  ended June 30,  1996,  EBITDA  losses have  improved for each
consecutive  quarter.  As the Company provides a greater volume of higher margin
services,  principally local exchange services,  carries more traffic on its own
facilities  rather than ILEC  facilities  and obtains the right to use unbundled
ILEC  facilities,  while  experiencing  decelerating  increases in personnel and
other SG&A expenses  supporting  its Telecom  Services  networks,  any or all of
which may not occur, the Company anticipates that EBITDA losses will continue to
improve in the near term.

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

 Net Operating Loss Carryforwards

     As of December 31, 1997, the Company had net operating  loss  carryforwards
("NOLs") of  approximately  $353.0  million,  which  expire at various  times in
varying  amounts  through 2012.  However,  due to the provisions of Section 382,
Section 1502 and certain other  provisions of the Internal Revenue Code of 1986,
as  amended  (the  "Code"),  the  utilization  of a portion  of the NOLs will be
limited.  In addition,  the Company is also subject to certain  state income tax
laws which may also limit the utilization of NOLs for state income tax purposes.

     Section 382 of the Code provides annual restrictions on the use of NOLs, as
well as other tax attributes,  following  significant  changes in ownership of a
corporation's stock, as defined in the Code. Investors are cautioned that future
events beyond the control of the Company could reduce or eliminate the Company's
ability to utilize the tax benefits of its NOLs.  Future ownership changes under
Section  382 will  require a new  Section 382  computation  which could  further
restrict the use of the NOLs. In addition,  the Section 382 limitation  could be
reduced to zero if the  Company  fails to satisfy  the  continuity  of  business
enterprise requirement for the two-year period following an ownership change.

 Liquidity and Capital Resources

     The Company's growth has been funded through a combination of equity,  debt
and lease financing.  As of December 31, 1997, the Company had current assets of
$310.2  million,   including  $217.0  million  of  cash,  cash  equivalents  and
short-term investments available for sale, which exceeded current liabilities of
$99.3 million,  providing working capital of $210.9 million. The Company invests
excess funds in short-term,  interest-bearing  investment-grade securities until
such funds are used to fund the capital  investments  and operating needs of the
Company's business.  The Company's short term investment  objectives are safety,
liquidity and yield, in that order.
<PAGE>
                                       49


 Cash Used By Operating Activities

     The Company's operating  activities used $42.8 million and $43.4 million in
fiscal 1995 and 1996, respectively,  $4.6 million and $8.6 million for the three
months ended  December 31, 1995 and 1996,  respectively,  and $127.0 million for
fiscal 1997.  Cash used by operations is primarily due to net losses,  which are
partially  offset by non-cash  expenses,  such as depreciation  and amortization
expense, deferred interest expense,  preferred dividends on subsidiary preferred
securities and changes in working capital items.

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

 Cash Used By Investing Activities

     Cash used by investing activities was $71.6 million and $135.2 million (net
of $21.6  million  received  in  connection  with the sale of certain  satellite
equipment,  including  four  teleports)  in fiscal 1995 and 1996,  respectively,
$25.2   million  (net  of  $21.1  million   received  in  connection   with  the
aforementioned  equipment  sale) and $82.3  million for the three  months  ended
December 31, 1995 and 1996,  respectively,  and $429.9  million for fiscal 1997.
Cash used by investing  activities includes cash expended for the acquisition of
property,  equipment  and other assets of $50.1  million and $122.3  million for
fiscal 1995 and 1996, respectively,  and $26.8 million and $50.8 million for the
three months ended December 31, 1995 and 1996, respectively,  and $269.6 million
for  fiscal  1997.  Additionally,  cash used by  investing  activities  includes
payments for  construction  of the Company's new  headquarters  of $1.5 million,
$7.9 million and $29.4 million for fiscal 1996,  the three months ended December
31, 1996 and fiscal 1997, respectively. The Company will continue to use cash in
investing  activities in 1998 and subsequent periods for the construction of new
networks,  the expansion of existing  networks and potentially for acquisitions.
The Company  acquired  assets under  capital  leases and through the issuance of
debt or  warrants of $38.7  million  and $55.0  million in fiscal 1995 and 1996,
respectively, $0.1 million and $19.5 million for the three months ended December
31, 1995 and 1996, respectively, and zero for fiscal 1997.
<PAGE>
                                       50


 Cash Provided (Used) By Financing Activities

     Financing  activities  provided $377.8 million and $360.2 million in fiscal
1995 and 1996,  respectively,  used $8.4  million and $0.2  million in the three
months ended  December  31, 1995 and 1996,  respectively,  and  provided  $315.7
million in fiscal 1997. Cash provided by financing activities primarily includes
cash received in connection  with the private  placement of units  consisting of
the 13 1/2% Senior Discount Notes due 2005 (the "13 1/2% Notes") and warrants in
August 1995,  the 12 1/2% Notes and the 14 1/4%  Preferred  Stock in April 1996,
the 11 5/8%  Notes  and the 14%  Preferred  Stock in  March  1997 and the 6 3/4%
Preferred Securities in September and October 1997.  Historically,  the funds to
finance the  Company's  business  acquisitions,  capital  expenditures,  working
capital  requirements and operating losses have been obtained through public and
private  offerings  of  ICG  and  Holdings-Canada  common  shares,   convertible
subordinated notes,  convertible  preferred shares of  Holdings-Canada,  capital
lease  financings  and  various  working  capital   sources,   including  credit
facilities,  in addition to the private  placement of the securities  previously
mentioned.

     On March 11, 1997,  Holdings completed a private placement of 11 5/8% Notes
and 100,000  shares of 14%  Preferred  Stock for net  proceeds of  approximately
$192.4 million.  The Company believes the net proceeds of the private  placement
will improve its operating and financial  flexibility over the near term because
(a) the 11 5/8% Notes do not require the payment of cash interest until 2002 and
(b)  Holdings  has the option to pay  dividends  on the 14%  Preferred  Stock in
additional  shares of 14% Preferred  Stock prior to 2002 and the Preferred Stock
is not mandatorily redeemable until 2008.

     The 11 5/8% Notes are unsecured senior obligations of Holdings  (guaranteed
by ICG) that  mature  on March 15,  2007.  Interest  will  accrue at 11 5/8% per
annum,  beginning March 15, 2002, and is payable each March 15 and September 15,
commencing  September  15,  2002.  Dividends  on the  14%  Preferred  Stock  are
cumulative at a rate of 14% per annum and are payable  quarterly in arrears each
March 15, June 15,  September 15 and December 15,  commencing June 15, 1997. The
14%  Preferred  Stock has a  liquidation  preference  of $1,000 per share,  plus
accrued and unpaid  dividends,  and is  mandatorily  redeemable in 2008. The 14%
Preferred  Stock is  exchangeable,  at the option of  Holdings,  into 14% senior
subordinated  exchange  debentures  of Holdings due 2008,  at any time after the
exchange is permitted under certain indenture restrictions.

     On  September  24 and  October 3, 1997,  ICG  Funding  completed  a private
placement  (guaranteed by ICG) of 2,645,000 6 3/4% Preferred  Securities for net
proceeds,  after underwriting costs, of approximately $127.6 million.  Dividends
on the 6 3/4%  Preferred  Securities  are  payable  quarterly  in  arrears  each
February 15, May 15, August 15 and November 15, and commenced November 15, 1997.
The dividend is payable in cash through November 15, 2000, and in cash or shares
of ICG  common  stock,  at the  option of ICG  Funding,  thereafter.  The 6 3/4%
Preferred  Securities  have a liquidation  preference of $50 per security,  plus
accrued and unpaid dividends, and are mandatorily redeemable in 2009. The 6 3/4%
Preferred  Securities  are  exchangeable  at any time prior to November 15, 2009
into shares of ICG Common  Stock at a rate of 2.0812  shares of Common Stock per
preferred security or $24.025 per share.
<PAGE>
                                       51


     As of December 31, 1997,  an aggregate of  approximately  $60.2  million of
capitalized  lease  obligations  was due  prior  to  December  31,  2001  and an
aggregate  accreted value of approximately  $887.5 million was outstanding under
the 13 1/2% Notes,  the 12 1/2% Notes and the 11 5/8%  Notes.  The 13 1/2% Notes
require  payments of interest to be made in cash  commencing  March 15, 2001 and
mature on September 15, 2005. The 12 1/2% Notes require  payments of interest to
be made in cash  commencing  November 1, 2001 and mature on May 1, 2006.  The 11
5/8% Notes require  payments of interest to be made in cash commencing March 15,
2002 and  mature on March 15,  2007.  The 6 3/4%  Preferred  Securities  require
payments of  dividends to be made in cash and are being paid  currently  through
November  15,  2000.  In  addition,  the  14%  Preferred  Stock  and the 14 1/4%
Preferred Stock require payment of dividends to be made in cash commencing June
15, 2002 and August 1, 2001, respectively.  As of December 31, 1997, the Company
had $7.9 million of other  indebtedness  outstanding.  The Company may also have
additional  payment  obligations  prior to such time, the amount of which cannot
presently be determined.  The Company's cash on hand and amounts  expected to be
available through vendor financing  arrangements  will provide  sufficient funds
necessary for the Company to expand its Telecom  Services  business as currently
planned and to fund its  operating  deficits  through the first quarter of 1999.
With respect to  indebtedness  outstanding on December 31, 1997, the Company has
cash interest  payment  obligations  of  approximately  $113.3  million in 2001,
$158.0  million in 2002 and $168.1  million in 2003.  With  respect to preferred
securities currently  outstanding,  the Company has cash dividend obligations of
approximately  $8.9  million in each of 1998,  1999 and 2000,  $21.5  million in
2001, $57.0 million in 2002 and $70.9 million in 2003. Accordingly,  the Company
may  have  to  refinance  a  substantial   amount  of  indebtedness  and  obtain
substantial additional funds prior to March 2001. The Company's ability to do so
will  depend on,  among  other  things,  its  financial  condition  at the time,
restrictions in the instruments  governing its indebtedness,  and other factors,
including market conditions,  beyond the control of the Company. There can be no
assurance  that  the  Company  will  be  able to  refinance  such  indebtedness,
including such capitalized  leases,  or obtain such additional funds, and if the
Company is unable to effect such  refinancings or obtain  additional  funds, the
Company's ability to make principal and interest payments on its indebtedness or
make  payments  of cash  dividends  on,  or the  mandatory  redemption  of,  its
preferred securities, would be adversely affected.

     On February 12, 1998,  ICG  Services  completed a private  placement of 10%
Senior Discount Notes due 2008 for net proceeds,  after  underwriting  costs, of
approximately $291.6 million.  Interest will accrue at 10% per annum,  beginning
February 15, 2003,  and is payable  each  February 15 and August 15,  commencing
August 15, 2003. The Notes will be redeemable at the option of ICG Services,  in
whole or in  part,  on or after  February  15,  2003.

 Capital Expenditures

     The  Company  expects to  continue  to  generate  negative  cash flows from
operating  activities  over  the near  term  while  it  emphasizes  development,
construction  and expansion of its business and until the Company  establishes a
sufficient  revenue-generating customer base. The Company's capital expenditures
(including  assets  acquired  under capital  leases and  excluding  payments for
construction  of the Company's new  headquarters)  were $88.7 million and $177.3
million for fiscal 1995 and 1996, respectively,  $26.9 million and $70.3 million
for the three months ended December 31, 1995 and 1996, respectively,  and $269.6
million for fiscal 1997. The Company  anticipates that the expansion of existing
networks,  construction of new networks and further development of the Company's
products and services will require capital  expenditures of approximately $450.0
million during 1998,  including capital  expenditure  requirements of NETCOM. To
facilitate  the  expansion  of its services and networks the Company has entered
into equipment purchase  agreements with various vendors under which the Company
must  purchase a substantial  amount of equipment and other assets,  including a
full  range of  switching  systems,  fiber  optic  cable,  network  electronics,
software  and  services.  Actual  capital  expenditures  will depend on numerous
factors,  including certain factors beyond the Company's control.  These factors
include the nature of future expansion and acquisition  opportunities,  economic
conditions, competition, regulatory developments and the availability of equity,
debt and lease financing.
<PAGE>
                                       52


 Other Cash Commitments and Capital Requirements

     The  Company's  operations  have  required  and will  continue  to  require
significant capital  expenditures for development,  construction,  expansion and
acquisitions of  telecommunications  assets.  Significant amounts of capital are
required to be invested  before  revenue is generated,  which results in initial
negative cash flows. In addition to the Company's planned capitial expenditures,
it has other cash  commitments  as described in the  footnotes to the  Company's
audited Consolidated Financial Statements for the fiscal year ended December 31,
1997 included elsewhere herein.

     In view of the anticipated  negative cash flows from operating  activities,
the continuing development of the Company's products and services, the expansion
of  existing  networks  and  the  construction,  leasing  and  licensing  of new
networks, the Company will require additional amounts of cash in the future from
outside sources. Management believes that the Company's cash on hand and amounts
expected to be available  through  vendor  financing  arrangements  will provide
sufficient  funds  necessary  for the  Company  to expand its  Telecom  Services
business as currently  planned and to fund its  operating  deficits  through the
first quarter of 1999. Additional sources of cash may include public and private
equity and debt financings,  sales of non-strategic  assets,  capitalized leases
and other financing arrangements.  The Company may require additional amounts of
equity  capital  in the near term.  In the past,  the  Company  has been able to
secure sufficient  amounts of financing to meet its capital  expenditure  needs.
There can be no assurance  that  additional  financing  will be available to the
Company or, if  available,  that it can be obtained on terms  acceptable  to the
Company.

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

Year 2000 Compliance

     While the Company  believes  that its software  applications  are year 2000
complaint, there can be no assurance until the year 2000 occurs that all systems
will then function  adequately.  Further, if the software  applications of local
exchange  carriers,  long  distance  carriers  or others on whose  services  the
Company  depends are not year 2000 complaint,  it could have a material  adverse
effect on the Company's financial condition and results of operations.
<PAGE>
                                       53

Accounting Change

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

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

 New Accounting Standard

     In February 1997, the Financial Accounting Standards Board issued Statement
No. 128,  "Earnings Per Share" ("SFAS 128") which  revises the  calculation  and
presentation   of   Accounting   Principles   Board   Opinion  15  and   related
interpretations.  The  Company  adopted  SFAS  128 for the  fiscal  year  ending
December 31, 1997,  including the requirement for retroactive  application.  The
adoption of SFAS 128 had no effect on the Company's reported loss per share.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The consolidated  financial statements of the Company appear on page F-1 of
this Annual Report.  The financial  statement schedule required under Regulation
S-X is filed pursuant to Item 14 of this Annual Report,  and appears on page S-1
of this Annual Report.
<PAGE>
                                       54

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

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

     None.



<PAGE>
                                       55


                                    PART III

 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANTS

     ICG's corporate charter provides that Directors serve staggered  three-year
terms. The Directors of ICG will hold office until the designated annual meeting
of  stockholders  and until their  successors have been elected and qualified or
until their death, resignation or removal.

     There are  currently  four  committees  of the Board of  Directors  of ICG:
Executive Committee,  Audit Committee,  Compensation  Committee and Stock Option
Committee.  The Executive  Committee provides Board oversight for the operations
of the Company between Board meetings.  The Audit Committee reviews the services
provided by the Company's  independent  auditors,  consults with the independent
auditors on audits and proposed  audits of the Company,  reviews certain filings
with the  Securities  and Exchange  Commission,  and reviews  internal  auditing
procedures and the adequacy of internal  controls.  The  Compensation  Committee
determines  compensation for most executives and reviews  transactions,  if any,
with affiliates.  The Stock Option Committee determines stock option awards. The
officers of ICG are  elected by the Board of  Directors  and hold  office  until
their  successors are chosen and qualified or until their death,  resignation or
removal.

     Set  forth  below  are the  names,  ages and  positions  of  Directors  and
executive officers of ICG.

Name                                Age  Position
---------------------------------- ----- ---------------------------------------
William J. Laggett (2)(4)(5)(6)(7)  68        Chairman of the Board of Directors
J. Shelby Bryan (2)(6)              52        President, Chief Executive Officer
                                              and Director
Douglas I. Falk                     48        Executive Vice President -
                                              Satellite and President of ICG
                                              Satellite Services, Inc.
David W. Garrison (3)(4)            42        Director and President and Chief
                                              Executive Officer of NETCOM
James D. Grenfell                   46        Executive Vice President and Chief
                                              Financial Officer
John Kane                           45        Executive Vice President - Network
                                              and President of FOTI
Marc E. Maassen                     47        Executive Vice President -
                                              Strategic Planning
Sheldon S. Ohringer                 40        Executive Vice President - Telecom
                                              and President of ICG Telecom Group
                                              Inc.
H. Don Teague                       55        Executive Vice President, General
                                              Counsel and Secretary
Harry R. Herbst (3)(4)(5)(7)        46        Director
Leontis Teryazos (1)(5)(7)          55        Director
Walter Threadgill (1)(5)(7)         52        Director


(1)  Term expires at annual meeting of stockholders in 1998.

(2)  Term expires at annual meeting of stockholders in 1999.

(3)  Term expires at annual meeting of stockholders in 2000.

(4)  Member of Audit Committee.

(5)  Member of Compensation Committee.

(6)  Member of Executive Committee.

(7)  Member of Stock Option Committee.
<PAGE>
                                       56


Executive Officers of ICG

J. Shelby Bryan was appointed President,  Chief Executive Officer and a Director
in May 1995. He has 18 years of experience in the  telecommunications  industry,
primarily  in  the  cellular  business.  He  co-founded  Millicom  International
Cellular S.A.  ("Millicom"),  a publicly owned  corporation  providing  cellular
service  internationally,  served as its President and Chief  Executive  Officer
from 1985 to 1994 and has served as a Director through the present.

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

James D. Grenfell,  Executive Vice President and Chief Financial Officer, joined
the Company in November 1995.  Previously,  Mr.  Grenfell  served as Director of
Financial  Planning for BellSouth  Corporation  and Vice President and Assistant
Treasurer of BellSouth  Capital  Funding.  A Chartered  Financial  Analyst,  Mr.
Grenfell has been a telephone industry financial executive for over 16 years. He
was with  BellSouth  from 1985 through  November  1996,  serving  previously  as
Finance Manager of Mergers and Acquisitions.  He handled  BellSouth's  financing
strategies,  including  capital  market  financings  as well as public  debt and
banking  relationships.  Prior to BellSouth,  Mr.  Grenfell spent two years as a
Project  Manager with Utility  Financial  Services and six years with GTE of the
South,  a  subsidiary  of GTE  Corporation,  including  four years as  Assistant
Treasurer.

John Kane has been  Executive  Vice  President - Network and  President of Fiber
Optic  Technologies,  Inc. since March 1998.  Prior to joining the Company,  Mr.
Kane had 25 years of industry experience.  Most recently, Mr. Kane was Executive
Vice   President   Business   Development   for   AMNEX,   Inc.,   a   specialty
telecommunications services company. From 1992 to 1995, Mr. Kane was Senior Vice
President for WCT  Communications,  Inc.  where he built a national  fiber optic
long  distance  network.  Mr.  Kane has also  served as  President  of  Americas
Carriers  Telecommunications  Association  (ACTA) and is a  frequent  speaker at
industry conferences.

Marc E. Maassen has been  Executive  Vice  President - Strategic  Planning since
August 1996. Prior to this position,  Mr. Maassen was Executive Vice President -
Network  of ICG  beginning  in  October  1995,  and  President  of  Fiber  Optic
Technologies, Inc. in April 1995. Mr. Maassen joined the Company in 1991 as Vice
President of Sales and Marketing. Prior to joining the Company, Mr. Maassen held
senior sales  management  positions at TelWatch,  Inc.,  an  integrated  network
management software company.  Mr. Maassen previously worked for First Interstate
as Director of Telecom and for AT&T Information  Systems as an Account Executive
and for U S WEST as a Major Accounts Manager.
<PAGE>
                                       57


Sheldon S.  Ohringer  has been  Executive  Vice  President  - Telecom of ICG and
President  of ICG  Telecom  Group,  Inc.  since  September  1997.  Prior to this
position,  Mr.  Ohringer was Senior Vice President of Business  Development  and
Strategic  Planning for ICG Telecom Group,  Inc.  since November 1994.  Prior to
joining  the  Company,  Mr.  Ohringer  was Senior  Vice  President  of Sales and
Business Development for US Long Distance from May 1991 until October 1994. From
May 1984 until August 1990,  Mr.  Ohringer  held key  management  and  executive
positions with Telecom* USA, a major long distance carrier which was acquired by
MCI in 1990.

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

Directors of  ICG

William J. Laggett has been  Chairman of the Board of Directors  since June 1995
and a Director  since  January  1995.  Mr.  Laggett was the  President of Centel
Cellular  Company from 1988 until his retirement in 1993. From 1970 to 1988, Mr.
Laggett  held  a  variety  of  management  positions  with  Centel  Corporation,
including Group Vice President-Products  Group,  President-Centel  Services, and
Senior Vice President-Centel  Corporation.  Prior to joining Centel, Mr. Laggett
worked for New York Telephone Company.

David W.  Garrison has been a Director of the Company  since  January  1998.  In
March 1996,  Mr.  Garrison was  appointed  Chairman of the Board of Directors of
NETCOM and,  since April 1995, Mr.  Garrison has been NETCOM's  Chief  Executive
Officer.  He has served as its President and a Director since February 1995. Mr.
Garrison also served as NETCOM's Chief  Operating  Officer from February 1995 to
April 1995.  Mr.  Garrison  also serves on the Board of Directors of  Ameritrade
Holding  Corporation,   Traveling  Software,   Inc.  and  the  Internet  Service
Association. From December 1990 to September 1994, Mr. Garrison was President of
SkyTel,  a division  of Mobile  Telecommunications,  Inc.  ("MTEL").  During his
association with MTEL (1990 to 1994), Mr. Garrison also held positions as Senior
Vice  President  and Vice  President.  From 1986 to 1990,  Mr.  Garrison  served
successively as Chief Operating Officer,  President, Chief Executive Officer and
Chairman for Dial Page, a regional  paging  carrier based in  Greenville,  South
Carolina.

Harry R.  Herbst  has  been a  Director  since  October  1995 and has been  Vice
President of Finance and Strategic  Planning of Gulf Canada Resources Ltd. since
November 1995 and Vice  President and  Treasurer of Gulf Canada  Resources  Ltd.
from January to November  1995.  Previously,  Mr.  Herbst was Vice  President of
Taxation for Torch Energy  Advisors Inc. from 1991 to 1994,  and tax manager for
Apache Corp.  from 1987 to 1990.  Mr. Herbst is a certified  public  accountant,
formerly with Coopers & Lybrand.
<PAGE>
                                       58


Leontis Teryazos has been a Director since June 1995. Mr.  Teryazos,  a Canadian
resident,  has headed Letmic Management Inc., a financial consulting firm, since
1993, and Letmic  Management  Reg'd.,  a real estate  development and management
company, since 1985.

Walter  Threadgill  has been a Director  since December 1997 and is the Managing
General Partner of Atlantic Coastal Ventures,  L.P.  Previously,  Mr. Threadgill
was the President and CEO of Multimedia  Broadcast  Investment  Corporation.  He
also held tenures as Divisional Vice President of Fiduciary Trust Company in New
York, and as Sr. Vice President and Chief  Operating  Officer of United National
Bank in Washington D.C. Mr. Threadgill  chaired the Presidential  Small Business
Advisory Committee and served the National  Association of Investment  Companies
as Director,  Treasurer, and Legislative Committee Chairman. Mr. Threadgill is a
member of the Federal Communications Bar Association.

Directors and Executive Officers of ICG Funding, Holdings-Canada and Holdings

     The   Directors   and   executive   officers   of  each  of  ICG   Funding,
Holdings-Canada  and  Holdings  are set forth  below.  Biographical  information
regarding  each  individual  is set forth above  (except as to Mr.  Gregory C.K.
Smith, whose biographical information appears below).

ICG Funding

     Common Member and Manager - ICG Communications, Inc.

Holdings-Canada

     The Directors of Holdings-Canada are:

         William J. Laggett (Chairman)
         J. Shelby Bryan
         Harry R. Herbst
         Gregory C.K. Smith
         Leontis Teryazos

     The executive officers of Holdings-Canada are:

         J. Shelby Bryan - President and Chief Executive Officer
         Douglas I. Falk - Executive Vice President - Satellite
         James D. Grenfell - Executive Vice President and Chief Financial
                             Officer
         John Kane - Executive Vice President - Network
         Marc E. Maassen - Executive Vice President - Strategic Planning
         Sheldon S. Ohringer - Executive Vice President - Telecom
         H. Don Teague - Executive Vice President, General Counsel and Secretary

<PAGE>
                                       59




Gregory C.K. Smith, 39, has been a Director of Holdings-Canada since April 1994.
Mr.  Smith,  a lawyer,  is a partner  of Tupper  Jonsson & Yeadon in  Vancouver,
British Columbia. Mr. Smith was an associate employed by Tupper Jonsson & Yeadon
from June 1986 until he joined the partnership in April 1991.

Holdings

     The Directors of Holdings are:

          J. Shelby Bryan (Chairman)
          James D. Grenfell
          John Kane
          Mark E. Maassen
          Sheldon S. Ohringer

     The executive officers of Holdings are:

          J. Shelby Bryan - President and Chief Executive Officer
          Douglas I. Falk - Executive Vice President - Satellite
          James D. Grenfell - Executive Vice President and Chief
                              Financial Officer
          John Kane - Executive Vice President - Network
          Marc E. Maassen - Executive Vice President - Strategic Planning
          Sheldon S. Ohringer - Executive Vice President - Telecom
          H. Don Teague - Executive Vice President, General Counsel and
                          Secretary

Compliance With Section 16(a) of the Exchange Act

         The following table lists the Directors, officers and beneficial owners
of more than 10% of the  outstanding  Common Stock (each a  "Reporting  Person")
that failed to file on a timely basis  reports  required by Section 16(a) of the
Exchange Act during the most recent fiscal year, the number of late reports, the
number of  transactions  that were not  reported on a timely basis and any known
failure to file a required Form by each Reporting Person.
<TABLE>
<CAPTION>

                                    Transactions Untimely  Known Failures to File
Reporting Person     Late Reports   Reported               Required Forms
-------------------- -------------- ---------------------  ----------------------
<S>                  <C>            <C>                    <C>
Walter Threadgill    1 (Form 3)     1                      None
Mark S. Helwege (1)  1 (Form 5)     3                      None
</TABLE>

(1)  Former Executive Vice President - Network and President of FOTI


<PAGE>
                                       60




ITEM 11.  EXECUTIVE COMPENSATION

Director Compensation

     ICG compensates its non-employee Directors $250 for telephonic meetings and
$2,500 for each Board of Directors'  meeting or committee meeting  attended,  or
$500 for committee  meetings  attended in conjunction with a Board of Directors'
meeting, plus reimbursement of expenses. In addition,  the Chairman of the Board
receives an annual fee of $80,000 payable in quarterly  installments.  In fiscal
1996, all non-employee  Directors of ICG were granted options to purchase 20,000
shares of Common  Stock  under  ICG's 1995  Stock  Option  Plan,  and during the
transition   period  from  October  1,  1996  through  December  31,  1996,  all
non-employee  Directors of ICG were granted  options to purchase 5,000 shares of
Common Stock under ICG's 1996 Stock Option Plan (the "1996 Plan"). On January 1,
1997, all non-employee  Directors of ICG were granted options to purchase 20,000
shares of Common  Stock under the 1996 Plan,  which vested as to 5,000 shares at
the end of each fiscal quarter. On June 17, 1997, all non-employee  Directors of
ICG were granted an additional  option to purchase  5,000 shares of Common Stock
under the 1996 Plan. On January 1, 1998, all non-employee  Directors of ICG were
granted  options to purchase  20,000 shares of Common Stock under the 1996 Plan,
which vest as to 5,000 shares at the end of each fiscal quarter.

Compensation Committee Interlocks and Insider Participation

     The  Compensation   Committee   presently  consists  of  four  non-employee
Directors:  William J.  Laggett,  Chairman of the Board of  Directors,  Harry R.
Herbst, Walter Threadgill and Leontis Teryazos.

Board Compensation Committee Report on Executive Compensation

     The  Compensation  Committee  of the Board of Directors of the Company (the
"Compensation Committee") evaluates compensation levels of senior management and
evaluates the various factors  affecting  compensation of the Company's  highest
paid officers.  The  Compensation  Committee  believes that  compensation to the
Company's  executive  officers  should  be  designed  to  encourage  and  reward
management's  efforts to further strengthen the Company's business and to create
added value for stockholders.  Such a compensation  program helps to achieve the
Company's business and financial  objectives and also provides incentives needed
to attract  and retain  well-qualified  executives.  The  Company  operates in a
competitive  marketplace and needs to attract and retain highly qualified senior
management and executive personnel in order for the Company to achieve its goals
of  continuing  to develop new services and expanding  into new  businesses  and
markets.  The  Compensation  Committee  attributes a substantial  portion of the
Company's overall  performance,  as well as the individual  contributions of the
executive officers, to the executive officers' compensation.
<PAGE>
                                       61

     The  Company  has  employment  agreements  with  several  of its  executive
officers.  See  "Executive  Employment  Contracts"  for  descriptions  of  those
agreements.  All senior  management,  except for J. Shelby Bryan,  President and
Chief Executive  Officer,  are  compensated  with a base salary and an incentive
bonus.  The base salaries are intended to compensate  these executives for their
ongoing leadership skills and management  responsibility.  The incentive bonuses
are dependent  upon  individual  performance.  For purposes of  determining  the
bonuses, the Compensation Committee evaluates the accomplishment of goals set at
the start of each fiscal year and compares  the  Company's  performance  in each
year to the prior year. Based on the progress of the Company during fiscal 1997,
Chairman Laggett recommended,  and the Compensation Committee approved,  bonuses
for the named  executive  officers of the  Company.  See  "Summary  Compensation
Table" for the bonuses paid to executive officers.

     The compensation of the Company's President and Chief Executive Officer, J.
Shelby  Bryan,  is set  forth in his  employment  contract.  His base  salary is
computed  as: the sum of (x) one percent (1%) of the increase in Revenues of the
Company for such month over  Revenues of the Company for the  immediately  prior
month and (y) three  percent  (3%) of the  increase  in Earnings  Before  Income
Taxes,  Depreciation and  Amortization  ("EBITDA") of the Company for such month
over EBITDA of the Company for the  immediately  prior month.  In addition,  Mr.
Bryan receives other benefits. See "Summary Compensation Table" for the type and
amount  of  these  payments.   The  Compensation  Committee  believes  that  the
compensation paid to Mr. Bryan is a suitable  compensation  package based on Mr.
Bryan's experience in the  communications  industry and because his compensation
is directly tied to the performance of the Company.

     In addition,  the Stock Option  Committee  awarded stock options to certain
employees  of the  Company,  including  executive  officers.  These  grants were
related to the executive officers'  performance in fiscal 1996 and as incentives
for continued  efforts and success and were based on individual  performance and
responsibility.  The Compensation Committee believes that stock options serve as
important  long-term  incentives  for executive  officers by  encouraging  their
continued   employment  and  commitment  to  the  Company's   performance.   The
Compensation  and Stock Option  Committees do not consider the number of options
currently  held by all  executive  officers  in  determining  individual  grants
because such  consideration  could  create an incentive to exercise  options and
sell the  underlying  stock.  See  "Summary  Compensation  Table"  for the stock
options granted to the executive officers.

     The  Compensation  Committee has reviewed the compensation of the Company's
executive  officers and has concluded that their  compensation was reasonable in
view of the Company's  performance.  The  Compensation  Committee  observed that
revenue increased $82.7 million,  approximately  43%, in fiscal 1997 as compared
with the 12 months ended  December 31, 1996.  The Company's  networks have grown
from  approximately  2,385  operational  fiber route  miles at December  1996 to
approximately  3,043  operational  miles at the end of fiscal 1997.  The Company
also  raised net  proceeds of $320.0  million  from the  issuance  of  preferred
securities  and notes during  fiscal 1997.  These  accomplishments  exceeded the
Company's  objectives for fiscal 1997. The Compensation  Committee believes that
the Company  appropriately  awarded its executive  officers for their short- and
long-term efforts.
<PAGE>
                                       62

     The Compensation  Committee  continually  evaluates the compensation of the
Company's  executive  officers,  including  assessing  compensation  reports for
comparable companies and for the  telecommunications  industry. The Compensation
Committee believes that maintaining suitable executive  compensation programs is
necessary  to  support  the  future  development  of the  Company  and growth in
stockholder value.

                                     William J. Laggett
                                     Harry R. Herbst
                                     Leontis Teryazos
                                     Walter Threadgill
                                     (Members of the Compensation Committee)

Executive Compensation

     The  following  table  provides  certain  summary  information   concerning
compensation  paid or  accrued by the  Company  and its  subsidiaries,  to or on
behalf of J. Shelby Bryan, the Company's  President and Chief Executive Officer,
the four other most highly compensated executive officers of the Company and one
additional officer for whom disclosure would have been required but for the fact
that the  individual  was not serving as executive  officer at December 31, 1997
(the "Named  Officers") for the fiscal years ended December 31, 1997,  September
30,  1996 and 1995.  Due to the  Company's  change in year end during  1996 from
September 30 to December 31,  additional  amounts are shown below in the Summary
Compensation Table for the 12 months ended December 31, 1996 and are referred to
in such  tables  as  "1996T."  The  Company  has not  maintained  any  long-term
incentive plans and the Company has not granted stock appreciation rights.


<PAGE>
                                       63




<TABLE>
<CAPTION>

                                              Summary Compensation Table


                                                      Annual Compensation                     Long-term Compensation
                                         -----------------------------------------------    ---------------------------
                               Fiscal                                     Other Annual        Securities Underlying
 Name and Principal Position     Year     Salary ($)     Bonus ($)      Compensation ($)             Options
------------------------------ --------- ------------- --------------- ------------------- ----------------------------
<S>                             <C>         <C>            <C>               <C>                  <C>
J. Shelby Bryan                  1997       473,065 (1)          -            86,095 (2)                  -
President and Chief             1996T       161,178 (1)          -            91,812 (3)                  -
Executive Officer                1996       221,196 (1)          -            78,919 (4)            450,000
                                 1995        30,728              -                  -             1,550,000

James D. Grenfell                1997       200,000         68,000            26,600 (5)             47,500 (6)
Executive Vice President and    1996T       181,250         71,665 (7)       145,360 (8)             40,000
Chief Financial Officer          1996       148,526         46,665           138,435 (9)             50,000
                                 1995             -              -                 -                      -

Sheldon S. Ohringer              1997       164,792         73,245            15,112 (10)            17,500 (6)
Executive Vice President -      1996T       135,000         42,865 (11)        9,687 (12)             7,500
Telecom and President of ICG     1996       130,000         28,945             3,600                 40,000
Telecom Group, Inc.              1995       110,000              -             3,600                 15,000

Marc E. Maassen                  1997       165,000         56,332            30,723 (13)            10,500 (6)
Executive Vice President -      1996T       156,244         43,125 (14)       25,244 (15)             7,000
Strategic Planning               1996       147,092         22,500            25,341 (16)            40,000
                                 1995       131,933         60,000             9,291 (17)            15,000

Henry R. Carabelli               1997       178,333         58,984           14,605 (18)             50,000 (6)
Executive Vice President        1996T       113,462         91,105 (19)      77,637 (20)             35,000
and Chief of Operations of       1996             -              -                -                       -
ICG Telecom Group, Inc.          1995             -              -                -                       -

William J. Maxwell               1997       222,727         69,480           47,977 (21)             50,000 (6)
Former President of             1996T       228,750        147,880 (22)      29,322 (23)             25,000
ICG Enterprises Division         1996       222,917        117,160           18,632 (24)             75,000
                                 1995       205,475         75,000            8,288 (17)             75,000

</TABLE>

(1)  Consists  of amount  earned  pursuant  to the  compensation  formula in Mr.
     Bryan's employment agreement.
(2)  Consists of $40,777 for car  allowance,  $44,422 for housing  expenses  and
     Company  contributions to 401(k) Defined Contribution Plan in the amount of
     $896.
(3)  Consists of $30,236 for car  allowance,  $49,683 for housing  expenses  and
     Company  contributions to 401(k) Defined Contribution Plan in the amount of
     $11,893.
(4)  Consists of $25,991 for car  allowance,  $43,428 for housing  expenses  and
     Company  contributions to 401(k) Defined Contribution Plan in the amount of
     $9,500.
(5)  Consists of $15,292 for car allowance and Company  contributions  to 401(k)
     Defined Contribution Plan in the amount of $11,308.
(6)  Includes  options  regranted as a result of the  repricing of the Company's
     options on April 16, 1997. See "-Ten-Year Option/SAR Repricings."
(7)  Consists of bonus  earned  during  fiscal 1996  ($46,665)  and bonus earned
     during the three months ended December 31, 1996 ($25,000).
(8)  Consists of relocation expense in the amount of $121,600,  car allowance of
     $12,067 and Company  contributions to 401(k) Defined  Contribution  Plan in
     the amount of $11,693.
(9)  Consists of relocation expenses in the amount of $117,295, car allowance of
     $11,640 and Company  contributions to 401(k) Defined  Contribution  Plan in
     the amount of $9,500.
(10) Consists  of  $7,000  for car  allowance,  $234 for club  dues and  Company
     contributions to 401(k) Defined Contribution Plan in the amount of $7,878.
(11) Consists of bonus  earned  during  fiscal 1996  ($28,945)  and bonus earned
     during the three months ended December 31, 1996 ($13,920).

<PAGE>
                                       64

(12) Consists of $3,600 for car  allowance and Company  contributions  to 401(k)
     Defined Contribution Plan in the amount of $6,087.
(13) Consists of $21,394 for car allowance and Company  contributions  to 401(k)
     Defined Contribution Plan in the amount of $9,329.
(14) Consists of bonus  earned  during  fiscal 1996  ($22,500)  and bonus earned
     during the three months ended December 31, 1996 ($20,625).
(15) Consists of $18,072 for car allowance and Company  contributions  to 401(k)
     Defined Contribution Plan in the amount of $7,172.
(16) Consists of $16,428 for car allowance and Company  contributions  to 401(k)
     Defined Contribution Plan in the amount of $8,913.
(17) Consists of Company contributions to 401(k) Defined Contribution Plan.
(18) Consists of $7,500 for car  allowance and Company  contributions  to 401(k)
     Defined Contribution Plan in the amount of $7,105.
(19) Consists of bonus earned during fiscal 1996 ($47,625),  bonus earned during
     the three  months  ended  December  31,  1996  ($18,480)  and hiring  bonus
     ($25,000).
(20) Consists of relocation  expense of $65,973,  car  allowance of $2,932,  and
     Company  contributions to 401(k) Defined Contribution Plan in the amount of
     $8,732.
(21) Consists of $11,000 for car  allowance,  $23,076 for  vacation  and Company
     contributions to 401(k) Defined Contribution Plan in the amount of $13,901.
(22) Consists of bonus earned  during  fiscal 1996  ($117,160)  and bonus earned
     during the three months ended December 31, 1996 ($30,720).
(23) Consists of $11,300 for car allowance and Company  contributions  to 401(k)
     Defined Contribution Plan in the amount of $18,022.
(24) Consists of $9,200 for car  allowance and Company  contributions  to 401(k)
     Defined Contribution Plan in the amount of $9,432.
<PAGE>
                                       65

                      Option/SAR Grants in Last Fiscal Year

     The Company granted no stock appreciation  rights during fiscal 1997 to the
Named officers or to other employees.  The following table provides  information
on option grants during fiscal 1997 to the Named Officers:

<TABLE>
<CAPTION>

                                                                                        Potential realizable
                                                                                          value at assumed
                                   Individual grants                                   annual rates of stock
                        --------------------------------------                         price appreciation for
                             Number of      Percent of total   Exercise                     option term
                            securities       options granted   or base                ------------------------
                             underlying       to employees in   price     Expiration
  Name                    options granted       fiscal year      ($/Sh)      date        5% ($)      10% ($)
                                (#)
----------------------- -------------------- ------------------ --------- ------------ ----------- ------------
 <S>                           <C>                   <C>        <C>        <C>          <C>          <C>
 J. Shelby Bryan                    -                  -             -           -            -            -

 James D. Grenfell             40,000                2.9        10.375(1)  10/22/06     245,273      613,054
                                7,500                0.5        10.375      4/16/07      48,936      124,013

 Sheldon S. Ohringer            7,500                0.5        10.375(1)  10/22/06      45,989      114,948
                               10,000                0.7        10.375      4/16/07      65,248      165,351

 Marc E. Maassen                7,000                0.5        10.375(1)  10/22/06      42.923      107,284
                                3,500                0.3        10.375      4/16/07      22,837       57,873

 Henry R. Carabelli            20,000                1.5        10.375(1)    3/7/06     112,684      276,690
                               15,000                1.1        10.375(1)  10/22/06      91,978      229,895
                               15,000                1.1        10.375      4/16/07      97,871      248,026

 William J. Maxwell            25,000 (2)            1.8        10.375(1)  10/22/06     153,296      383,158
                               25,000 (2)            1.8        10.375      4/16/07     163,120      413,377

</TABLE>

(1)  In  order to  continue  to  provide  non-cash  incentives  and  retain  key
     employees,  all employee  stock options  outstanding on April 16, 1997 with
     exercise  prices at or in  excess of  $15.875  were  repriced  by the Stock
     Option  Committee  of the  Company's  Board of  Directors  to $10.375,  the
     closing  price of the  Common  Stock  on April  16,  1997.  See  "-Ten-Year
     Option/SAR Repricings."

(2)  As a result of Mr. Maxwell's resignation on December 3, 1997, 43,750 of the
     options granted during fiscal 1997 have been canceled.
<PAGE>
                                       66


              Aggregated Option Exercises in Last Fiscal Year and
                         Fiscal Year End Option Values

     The following table provides information on options exercised during fiscal
1997 by the Named Officers and the value of such officers'  unexercised  options
at December 31, 1997:
<TABLE>
<CAPTION>

                                                        Number of securities           Value of unexercised
                                                                                              in-the-
                                                       underlying unexercised            money options at
                       Shares                       options at fiscal year end (#)   fiscal year end ($)(1) (2)
                       acquired on      Value      -------------------------------  ----------------------------
Name                   exercise (#)  realized ($)   Exercisable    Unexercisable    Exercisable  Unexercisable
----------------------------------------------------------------------------------------------------------------
<S>                                                    <C>                <C>          <C>             <C>
J. Shelby Bryan             -              -           1,775,000          225,000      33,815,625      3,881,250

James D. Grenfell           -              -              35,000           62,500         600,000      1,064,063

Sheldon S. Ohringer         -              -              36,875           35,625         586,641        608,672

Marc E. Maassen             -              -              52,750           32,750         834,515        555,152

Henry R. Carabelli          -              -               8,750           41,250         147,656        696,094

William J. Maxwell          -              -             294,750                -       5,258,248              -
</TABLE>


(1)  Based on the closing price of Common Stock of $27.25 on December 31, 1997.

(2)  Options  granted prior to fiscal 1994 contained  exercise  prices stated in
     Canadian  dollars;  value listed is based on the exchange rate of 1.4296 in
     effect on December 31, 1997.


                         Ten-Year Option/SAR Repricings

Report on Repricing of Options/SARs

     The Stock  Option  Committee  of the Board of Directors of the Company (the
"Committee") is responsible for  administering the Company's Stock Option Plans,
as well as granting any stock options  thereunder.  The Committee is composed of
four independent, non-employee directors.

     In 1996, the Company  established  the 1996 Stock Option Plan (the "Plan").
Prior to that time, the Plan was known as the IntelCom  Group Inc.  Restated and
Amended 1995 Stock Option Plan (the "IntelCom Plan").  Effective as of August 2,
1996, the Company assumed sponsorship of, and immediately thereafter amended and
restated, the IntelCom Plan. The Plan constitutes a continuation of the IntelCom
Plan, as assumed by the Company.

     The purpose of the Plan is to promote  success and enhance the value of the
Company by linking the personal interest of participants to those of the Company
stockholders  by  providing  participants  with  an  incentive  for  outstanding
performance.  The Plan is further  intended to assist the Company in its ability
to  motivate,  and retain the services of,  participants  upon whose  judgement,
interest and special effort the successful  conduct of its operations is largely
dependent.  Stock options are awarded by the Committee according to the terms of
the Plan. Up to an aggregate number of 2,500,000 shares may be granted under the
Plan, reduced by the number of Common Shares of IntelCom  represented by options
granted to  individuals  under the IntelCom  Plan prior to August 2, 1996.  When
awarding stock options,  the Committee takes into consideration the individual's
past performance and contribution to the Company, as well as future potential.
<PAGE>
                                       67

     In April 1997, the Committee  considered  repricing  certain existing stock
options  that, as a result of recent stock  declines in the Company's  industry,
had an exercise  price in excess of the then fair market value of the  Company's
Common Stock. Specifically, approximately 154,000 stock options granted on March
7, 1996 as part of employee bonus compensation had an exercise price of $15.875,
approximately  219,000  options  granted in connection with recent new hires had
exercise prices ranging from $16.25 to $26.25, and approximately 225,000 options
granted  as part of  employee  bonus  compensation  on October  22,  1996 had an
exercise  price of $19.125 per share.  At those prices,  the Committee  believed
that the  options  were  not able to  effectively  serve as  incentives  for the
employees and that, in the current  competitive market place, the Company needed
to have a strong  incentive  compensation  program  in place in order to retain,
keep and motivate its employees.

     Consequently,  the  Committee  approved the  repricing  of all  outstanding
employee  stock options  previously  granted under the stock option plans of the
Company  (and  its   predecessor,   IntelCom  Group  Inc.)  which  options  were
exercisable  at  prices  at or in excess of  $15.875  per share  (the  "Eligible
Options").  The  repricing was  accomplished  through an offer to all holders of
Eligible  Options to exchange  the Eligible  Options for new stock  options (the
"Repriced  Options"),  as of April 19, 1997, under the same terms and conditions
(including vesting) contained in the stock option plan as originally granted the
Eligible Option.  The Repriced Options are exercisable at a price of $10.375 per
share,  which was the closing price of a common share of Common Stock,  $.01 par
value, of the company on the Nasdaq National Market on April 19, 1997.

                                     William J. Laggett
                                     Harry R. Herbst
                                     Leontis Teryazos
                                     Walter Threadgill
                                     (Members of the Stock Option Committee)


<PAGE>
                                       68




     The following provides information on the repricing of stock options of the
Named Officers:
<TABLE>
<CAPTION>

                                        Number of
                                       securities                                                          Length of original
                                       underlying      Market price of   Exercise price                       option term
                                         options      stock at time of     at time of                      remaining at date
                                       repriced or      repricing or      repricing or     New exercise     of repricing or
Name                        Date       amended (#)      amendment ($)     amendment ($)     price ($)          amendment
------------------------- ---------- ---------------- ------------------ ---------------- --------------- ---------------------
<S>                       <C>             <C>               <C>                <C>           <C>    <C>       <C>
J. Shelby Bryan           4/16/97             -                -                  -             -                  -
President and
Chief Executive Officer

James D. Grenfell         4/16/97         40,000            10.375             19.125        10.375 (1)       113 months
Executive Vice
President and Chief
Financial Officer

Sheldon S. Ohringer       4/16/97          7,500            10.375             19.125        10.375 (1)       113 months
Executive Vice
President - Telecom and
President of ICG
Telecom Group, Inc.

Marc E. Maassen           4/16/97          7,000            10.375             19.125        10.375 (1)       113 months
Executive Vice
President - Strategic
Planning

Henry R. Carabelli        4/16/97         15,000            10.375             19.125        10.375 (1)       113 months
Executive Vice                            20,000            10.375             15.875        10.375 (1)       107 months
President and Chief of
Operations of ICG
Telecom Group, Inc.

William J. Maxwell        4/16/97         25,000            10.375             19.125        10.375 (1)       113 months
Former President of ICG
Enterprises Division

</TABLE>

(1)  Represents the closing price of the Common Stock on April 16, 1997.

Executive Employment Contracts

     The Company and its subsidiaries have employment agreements with Messrs. J.
Shelby Bryan,  Douglas I. Falk, David W. Garrison,  James D. Grenfell and H. Don
Teague.

     The Company's  amended  employment  agreement with Mr. Bryan provides for a
term of two years,  which commenced June 1, 1997. As  compensation,  the Company
will pay Mr.  Bryan a  salary  equal to the sum of one  percent  of the  monthly
increase in Company revenue and three percent of the monthly increase in EBITDA.
If Mr.  Bryan's  salary  exceeds  $1,500,000 in any fiscal year, the Company may
elect to pay such excess in unregistered ICG Common Stock. Mr. Bryan is entitled
to benefits as are generally  provided to executive  officers of ICG,  including
options under stock option plans, a leased  automobile,  private club membership
fees and reimbursement of reasonable  out-of-pocket  expenses incurred on behalf
of the Company.  The employment  agreement may be terminated by the Company with
or without cause or after a disability  continuing  for a six-month  consecutive
period,  or by Mr.  Bryan  for  cause,  including  breach  of the  agreement  or
reduction in status or responsibilities, or change of control. If the employment
agreement  is  terminated  for any reason  other than for cause,  the Company is
obligated to pay Mr.  Bryan a lump sum of $2.5 million and to continue  benefits
for a period equal to the greater of the remainder of the employment  term or 18
months. After termination of the employment agreement, Mr. Bryan is subject to a
confidentiality covenant and a one-year non-competition commitment.
<PAGE>
                                       69


     The Company's  employment  agreement with Mr. Falk,  dated August 14, 1996,
has an initial  one-year  term  commencing  August 26, 1996 and  continues  from
month-to-month  thereafter  until  either  party  provides  30  days  notice  of
termination.  The agreement  provides for an annual base salary and an incentive
bonus determined by the Board of Directors. Mr. Falk also receives stock options
under the stock option plans. If the Company terminates the employment agreement
without cause or if the Company or Mr. Falk terminates the employment  agreement
upon the occurrence of a major transaction  involving the Company, then Mr. Falk
will  receive  his  salary  and  insurance  benefits  for a period  of 12 months
following  the date of  termination.  Mr.  Falk is subject to a  confidentiality
covenant and to a one-year non-competition  commitment following the termination
of his employment.

     NETCOM's  employment  agreement with Mr.  Garrison which  commenced June 1,
1997 provides for an annual base salary and an incentive bonus determined by the
Board of Directors.  Mr.  Garrison is entitled to such other benefits  including
stock  options  under the  Company's  stock  option  plans,  car  allowance  and
reimbursement or direct payment of reasonable out-of-pocket expenses incurred on
behalf of the Company. The Company may terminate the employment agreement at any
time and for any reason upon written  notice.  Mr.  Garrison may  terminate  the
employment  agreement  for any  reason by giving  the  Company  30 days  written
notice.  If  termination  without  cause  occurs  six  months  after a change of
control, Mr. Garrison will receive his salary, insurance benefits and his annual
incentive  bonus  earned on a  quarterly  basis for a period  of 12  months.  If
termination  without  cause occurs  within six months after a change in control,
Mr. Garrison will receive two times his salary, 200% of the greater of his prior
year's incentive bonus or his annual incentive bonus earned on a quarterly basis
and two years of life insurance.  Mr.  Garrison is subject to a  confidentiality
covenant.

     The Company's  employment  agreement with Mr. Grenfell  originally provided
for an initial  two-year term which commenced  November 1, 1995. Upon completion
of the first 12 months of the initial term, the agreement  automatically renewed
and will continue to automatically renew from month-to-month such that 12 months
remain in the term. The agreement may be terminated  upon 30 days written notice
from  either  party or by the  Company if Mr.  Grenfell is unable to perform his
duties for 140 days in any  180-day  period due to  illness or  incapacity.  Mr.
Grenfell  is  entitled  to such other  benefits  as are  generally  provided  to
executive  officers of the Company,  including options under the Company's stock
option  plans,  use of a company  car and  reimbursement  or direct  payment  of
reasonable  out-of-pocket  expenses  incurred  on  behalf  of the  Company.  The
agreement  provides for an annual base salary and an incentive bonus  determined
by the Board of Directors.  If the  employment  agreement is terminated  without
cause by the  Company  or by either  party  upon the  occurrence  of a change of
control involving the Company, Mr. Grenfell will receive a termination fee equal
to his current monthly salary times the number of months  remaining in the term.
Mr.  Grenfell  is also  subject to a  ten-year  confidentiality  covenant  and a
one-year non-competition commitment.
<PAGE>
                                       70


     The Company's  employment agreement with Mr. Teague provides for an initial
two-year  term which  commenced  May 19, 1997.  Upon  completion of the first 12
months  of  the  initial   term,   the  agreement   automatically   renews  from
month-to-month  such that 12 months remain in the term.  The agreement  provides
for an annual  base salary and an  incentive  bonus  determined  by the Board of
Directors.  Mr. Teague is also entitled to such other  benefits as are generally
provided to  executive  officers of the  Company,  including  options  under the
Company's  stock option plans, a car allowance and  reimbursement  of reasonable
out-of-pocket  expenses incurred on behalf of the Company.  The agreement may be
terminated by the Company upon 30 days written notice if Mr. Teague is unable to
perform  his  duties  for 140  days in any  180-day  period  due to  illness  or
incapacity.  The  agreement  may also be terminated by the Company or Mr. Teague
upon 30 days written  notice in certain other  circumstances.  If the employment
agreement is terminated as a result of illness or incapacity or without cause by
the  Company  or by either  party  upon the  occurrence  of a change of  control
involving the Company,  Mr.  Teague will receive a termination  fee equal to his
current  monthly  salary times the number of months  remaining in the term.  Mr.
Teague is also  subject to a ten-year  confidentiality  covenant  and a one-year
non-competition commitment.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The  following  table sets forth,  as of February 28,  1998,  the number of
shares of Common  Stock owned by all  executive  officers  and  Directors of ICG
individually and as a group,  and each person who owned of record,  or was known
to own beneficially, more than 5% of the outstanding shares of Common Stock. The
persons  named in the table  below have sole  voting and  investment  power with
respect to all of the shares of Common  Stock  owned by them,  unless  otherwise
noted.
<PAGE>
                                       71


<TABLE>
<CAPTION>

                                                                          Amount/Nature of
                                                                        Beneficial Ownership
 Name and Address of Beneficial Owner                                                                    Percent (1)
 -----------------------------------------------------------------     -----------------------     ------------------------
<S>                                                                         <C>                             <C>
 Montgomery Asset Management, L.P. . . . . . . . . . . . . . . .            4,158,000                       9.3%
 101 California Street
 San Francisco, CA 94111

 FMR Corporation . . . . . . . . . . . . . . . . . . . . . . . .            3,245,923                       7.3%
 82 Devonshire Street
 Boston, MA  02109

 Franklin Advisers, Inc.  . . . . . . . . . . . . . . . . . . .             3,182,130 (2)                   7.2%
 777 Mariners Island Boulevard
 San Mateo, CA 94404

 William J. Laggett  . . . . . . . . . . . . . . . . . . . . . .               80,297 (3)                     *
 Chairman of the Board

 J. Shelby Bryan  . . . . . . . . . . . . . . . . . . . . . . .             1,795,736 (4)                   3.9%
 President, Chief Executive Officer and Director

 Douglas I. Falk  . . . . . . . . . . . . . . . . . . . . . . .                 8,079 (5)                     *
 Executive Vice President - Satellite and President of ICG
 Satellite Services, Inc.

 David W. Garrison   . . . . . . . . . . . . . . . . . . . . . .              263,209 (6)                     *
 Director and President and Chief Executive Officer of NETCOM

 James D. Grenfell  . . . . . . . . . . . . . . . . . . . . . .                37,964 (7)                     *
 Executive Vice President and Chief Financial Officer

 Mark S. Helwege  .. . . . . . . . . . . . . . . . . . . . . . .                3,258 (8)                     *
 Former Executive Vice President - Network and President of FOTI

 Marc E. Maassen   . . . . . . . . . . . . . . . . . . . . . . .               57,531 (9)                     *
 Executive Vice President - Strategic Planning

 Sheldon S. Ohringer  . . . . . . . . . . . . . . . . . . . . .                62,475 (10)                    *
 Executive Vice President - Telecom and President of ICG Telecom
 Group, Inc.

 H. Don Teague   . . . . . . . . . . . . . . . . . . . . . . . .               12,500 (3)                     *
 Executive Vice President, General Counsel and Secretary

 Harry R. Herbst   . . . . . . . . . . . . . . . . . . . . . . .               55,934 (3)                     *
 Director

 Leontis Teryazos  . . . . . . . . . . . . . . . . . . . . . . .               75,000 (3)                     *
 Director
                                                                                                               (Continued)
</TABLE>


<PAGE>
                                       72
<TABLE>
<CAPTION>
                                                                          Amount/Nature of
                                                                        Beneficial Ownership
 Name and Address of Beneficial Owner                                                                    Percent (1)
 -----------------------------------------------------------------     -----------------------     ------------------------
<S>                                                                             <C>                         <C>
 Walter Threadgill  . . . . . . . . . . . . . . . . . . . . . .                 5,000 (3)                     *
 Director

 All executive officers and Directors as a group (12 persons)               2,456,983 (11)                  5.2%
</TABLE>

------------------
*Less than one percent of the outstanding shares of Common Stock.

(1)  Based on  44,476,632  issued  and  outstanding  shares of  Common  Stock on
     February 28, 1998, plus shares of Common Stock which may be acquired by the
     person or group indicated pursuant to any options and warrants exercisable,
     or pursuant to any shares vesting under the Company's 401(k) Plan within 60
     days.

(2)  Franklin  Advisers,  Inc.  has  reported  on  Schedule  13G that its parent
     holding company,  Franklin Resources,  Inc. ("FRI"), and Charles B. Johnson
     and Rupert H. Johnson, Jr., principal shareholders of FRI, beneficially own
     the shares reflected in this table.

(3)  Represents  shares  which  may be  acquired  pursuant  to the  exercise  of
     outstanding stock options.

(4)  Includes  15,000 shares of Common Stock held by Mr. Bryan,  2,000 shares of
     Common  Stock  held in Mr.  Bryan's  spouse's  name  for  which  Mr.  Bryan
     disclaims  beneficial  ownership,  3,736  shares of Common  Stock held by a
     401(k) Plan in Mr. Bryan's name and 1,775,000  shares of Common Stock which
     may be acquired pursuant to the exercise of outstanding stock options.

(5)  Includes  475 shares of Common  Stock held by Mr.  Falk,  729  unrestricted
     shares of Common Stock held by an Employee  Stock  Purchase  Plan and 6,875
     shares of Common  Stock which may be acquired  pursuant to the  exercise of
     outstanding stock options.

(6)  Includes  17,256 shares of Common Stock held  directly by Mr.  Garrison and
     245,953  shares  of Common  Stock  which may be  acquired  pursuant  to the
     exercise of outstanding stock options.

(7)  Includes 662 shares of Common Stock held by a 401(k) Plan, 427 unrestricted
     shares of Common Stock held by an Employee  Stock  Purchase Plan and 36,875
     shares of Common  Stock which may be acquired  pursuant to the  exercise of
     outstanding stock options.

(8)  Includes 436 shares of Common Stock held by a 401(k) Plan, 322 unrestricted
     shares of Common Stock held by an Employee  Stock  Purchase  Plan and 2,500
     shares of Common  Stock which may be acquired  pursuant to the  exercise of
     outstanding stock options.

(9)  Includes  3,572  shares  of  Common  Stock  held  by  a  401(k)  Plan,  334
     unrestricted shares of Common Stock held by an Employee Stock Purchase Plan
     and 53,625  shares of Common  Stock which may be  acquired  pursuant to the
     exercise of outstanding stock options.

(10) Includes 20,800 shares of Common Stock held directly by Mr. Ohringer, 1,057
     shares of Common Stock held by a 401(k) Plan, 1,243 unrestricted  shares of
     Common Stock held by an Employee  Stock  Purchase Plan and 39,375 shares of
     Common Stock which may be acquired  pursuant to the exercise of outstanding
     stock options.

(11) Includes  55,531  shares of Common  Stock held  directly  by the  executive
     officers and Directors of ICG as a group, 9,463 shares of Common Stock held
     by a 401(k) Plan,  3,055  shares of Common Stock held by an Employee  Stock
     Purchase  Plan and  2,388,934  shares of Common Stock which may be acquired
     pursuant to the exercise of outstanding stock options.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     To facilitate the  acquisition of certain  competitive  access networks and
satellite  services  businesses which held common carrier radio licenses subject
<PAGE>
                                       73

to foreign  ownership  restrictions,  the common  carrier  licenses  used by the
Company's   teleports  and  the  wireless   competitive   access  networks  were
controlled,  prior to November 30, 1997, by Teleport Transmissions Holdings Inc.
("TTH"),  a corporation owned one-third each by U.S. Director William J. Laggett
and two former Directors.  TTH's  subsidiaries gave 15-year  promissory notes to
ICG to acquire the FCC  licenses.  After  receipt of approval  from the FCC, the
Company  exercised  its option on November  30, 1997 to have the common  carrier
licenses transferred back to the Company. Upon completion of the transfer of the
licenses,  the promissory notes were canceled.  In fiscal 1997, the Company paid
or accrued  approximately  $0.6 million to TTH's subsidiaries for common carrier
services,  and the Company received from TTH's  subsidiaries  approximately $2.4
million  as  payment  in  full on the  promissory  notes,  management  services,
equipment leases and technical support. In addition,  approximately $1.1 million
of the  note  balances  were  canceled  due  to the  sale  of  the  licenses  in
conjunction   with  the   sale  of  four  of  the   Company's   teleports.   See
"Business-Regulation."

     Holdings-Canada and International  Communications Consulting,  Inc. ("ICC")
have  entered into a three-year  consulting  agreement  whereby ICC will provide
various consulting services to the Company through December 1999 in exchange for
approximately  $4.2 million in consulting fees to be paid during the term of the
agreement.  During  fiscal  1997,  the Company paid  approximately  $1.1 million
related to this consulting  agreement.  William W. Becker, a former Director and
stockholder of the Company, is President and Chief Executive Officer of ICC.

     As part of a resolution  and  settlement  of certain  transactions  in 1995
between the Company and the Becker Group of Companies  (the "Becker  Group"),  a
company founded by William W. Becker, the Company was assigned a note receivable
in the amount of $200,000,  which had previously been advanced to John D. Field,
a former  executive  officer  of the  Company,  by the  Becker  Group.  The note
receivable  is  evidenced  by a  promissory  note from Mr.  Field to the Company
payable on demand, which bears interest at a rate of 7% per annum.

     In order to  facilitate  the  relocation  of William J.  Maxwell,  a former
executive  officer of the Company,  the Company advanced $200,000 to Mr. Maxwell
in April 1994  pursuant  to a  promissory  note  payable on demand  which  bears
interest  at a rate of 7% per annum.  In March 1998,  the April 1994  promissory
note was replaced with a new  promissory  note for $125,000 which is due in full
on September 30, 1998.



<PAGE>
                                       74





                                     PART IV

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

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

                                                                        Page

         Independent Auditors' Report . . . . . . . . . . . . . . . .    F-2
         Consolidated Balance Sheets, December 31, 1996 and 1997. . .    F-3
         Consolidated Statements of Operations, Fiscal Years Ended
           September 30, 1995 and 1996, the Three Months Ended
           December 31, 1995(unaudited) and 1996, and Fiscal Year
           Ended December 31, 1997 . . . . . . . . . . . . . . . . . .   F-5
         Consolidated Statements of Stockholders' Equity (Deficit),
           Fiscal Years Ended September 30, 1995 and 1996, the
           Three Months Ended December 31, 1996, and Fiscal Year
           Ended December 31, 1997 . . . . . . . . . . . . . . . . . .   F-7
         Consolidated Statements of Cash Flows, Fiscal Years Ended
           September 30, 1995 and 1996, the Three Months Ended
           December 31, 1995 (unaudited) and 1996, and Fiscal Year
           Ended December 31, 1997 . . . . . . . . . . . . . . . . . .   F-9
         Notes to Consolidated Financial Statements, December 31,
           1996 and 1997 . . . . . . . . . . . . . . . . . . . . . . .  F-12

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

         Independent Auditors' Report  . . . . . . . . . . . . . . . .   S-2
         Schedule II: Valuation and Qualifying Accounts  . . . . . . .   S-3

    (3)  List of Exhibits.

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

          2.1: Plan of  Arrangement  under  Section  192 of the Canada  Business
               Corporations  Act.  [Incorporated  by reference to Exhibit 2.1 to
               Registration  Statement on Form S-4 of ICG  Communications,  Inc.
               (Commission File No. 333-4226)].
<PAGE>
                                       75


     (3)  Corporate Organization.

          3.1: Memorandum and Articles of IntelCom Group Inc., as amended, filed
               with the  Registrar of Companies,  Province of British  Columbia,
               Canada [Incorporated by reference to IntelCom Group Inc.'s Annual
               Report on Form 20-F for the year ended September 30, 1992].

          3.2: Altered  Memorandum  and  Articles  of IntelCom  Group  Inc.,  as
               amended by Special  Resolution passed October 7, 1994, filed with
               the Registrar of Companies,  Province of British Columbia, Canada
               [Incorporated by reference to IntelCom Group Inc.'s Annual Report
               on Form  10-K  for the  year  ended  September  30,  1994].

          3.3: Certificate of Incorporation,  as amended,  from the Registrar of
               Companies,  Province of British Columbia, Canada [Incorporated by
               reference to IntelCom Group Inc.'s Annual Report on Form 20-F for
               the year ended September 30, 1992].

          3.4: Certificate  of  Change  of Name  (under  the B.C.  Act) from the
               Registrar  of  Companies,  Province of British  Columbia,  Canada
               [Incorporated by reference to IntelCom Group Inc.'s Annual Report
               on Form 20-F for the year ended  September  30, 1993, as filed on
               September  30,  1994].

          3.5: Certificate of Continuance  from Industry  Canada,  dated October
               30, 1995.  [Incorporated  by reference to Exhibit 3.5 to IntelCom
               Group  Inc.'s  Annual  Report  on Form  10-K for the  year  ended
               September 30, 1995].

          3.6: Certificate of  Incorporation of ICG  Communications,  Inc. dated
               April 11,  1996.  [Incorporated  by  reference  to Exhibit 3.1 to
               Registration  Statement on Form S-4 of ICG Communications,  Inc.,
               File No.  333-4226].

          3.7: By-laws of ICG Communications, Inc. [Incorporated by reference to
               Exhibit  3.2  to  Registration  Statement  on  Form  S-4  of  ICG
               Communications, Inc., File No. 333-4226].

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

          4.1: Memorandum  of  Articles  for  the  Registrant,   Certificate  of
               Incorporation  and copies of all Amendments  thereto,  filed with
               the Registrar of Companies for the Province of British  Columbia,
               Canada  [Incorporated  by  reference  to Exhibit  (i) to IntelCom
               Group Inc.'s Form 20-F for the fiscal year ending  September  30,
               1991].

          4.2: Note Purchase Agreement dated September 16, 1993 [Incorporated by
               reference to IntelCom Group Inc.'s Annual Report on Form 20-F for
               the year ended  September  30, 1993,  as filed on  September  30,
               1994].

          4.3: Note Purchase  Agreement dated October 27, 1993  [Incorporated by
               reference to IntelCom Group Inc.'s Annual Report on Form 20-F for
               the year ended  September  30, 1993,  as filed on  September  30,
               1994].
<PAGE>
                                       76


          4.4: Form of Indenture  between  IntelCom Group Inc. and Bankers Trust
               Company for 7% Convertible Subordinated Redeemable Notes due 1998
               [Incorporated   by  reference  to  Exhibit  4.3  to  Registration
               Statement on Form S-1 of IntelCom Group Inc., File No. 33-75636].

          4.5: Form of Indenture  between  IntelCom Group Inc. and Bankers Trust
               Company   for  7%  Simple   Interest   Convertible   Subordinated
               Redeemable  Notes due 1998  [Incorporated by reference to Exhibit
               4.4 to Registration Statement on Form S-1 of IntelCom Group Inc.,
               File No. 33-75636].

          4.6: Note  Purchase  Agreement,  dated as of July 14, 1995,  among the
               Registrant,  IntelCom Group (U.S.A.),  Inc., Morgan Stanley Group
               Inc.,  Princes Gate Investors,  L.P., Acorn  Partnership I, L.P.,
               PGI Investments  Limited, PGI Investments Limited, PGI Sweden AB,
               and Gregor von Opel and Morgan Stanley Group,  Inc., as Agent for
               the Purchasers  [Incorporated by reference to Exhibit 4.1 to Form
               8-K of IntelCom Group Inc., dated July 18, 1995].

          4.7: Warrant  Agreement,   dated  as  of  July  14,  1995,  among  the
               Registrant,   the  Committed   Purchasers,   and  IntelCom  Group
               (U.S.A.),  Inc., as Warrant Agent  [Incorporated  by reference to
               Exhibit  4.2 to Form 8-K of IntelCom  Group Inc.,  dated July 18,
               1995].

          4.8: First  Amended  and  Restated  Articles of  Incorporation  of ICG
               Holdings,  Inc.  [Incorporated  by  reference  to Exhibit  3.1 to
               Registration  Statement on Form S-4 of IntelCom  Group  (U.S.A.),
               Inc., File No. 333-04569].

          4.9: Articles of Continuation of IntelCom Group Inc.  [Incorporated by
               reference to Exhibit 4.1 to Registration Statement on Form S-4 of
               ICG Communications, Inc., File No. 333-4226].

          4.10:Indenture,  dated August 8, 1995,  among  IntelCom Group (U.S.A.)
               Inc.,  IntelCom  Group Inc. and Norwest Bank  Colorado,  National
               Association   [Incorporated   by  reference  to  Exhibit  4.6  to
               Registration  Statement  on Form S-4 of IntelCom  Group  (U.S.A.)
               Inc., File Number 33-96540].

          4.11:Indenture,  dated April 30, 1996,  among  IntelCom Group (U.S.A.)
               Inc.,  IntelCom  Group Inc. and Norwest Bank  Colorado,  National
               Association   [Incorporated  by  reference  to  Exhibit  4.14  to
               Registration  Statement  on Form S-4 of IntelCom  Group  (U.S.A.)
               Inc., File No. 333-04569].

          4.12:Indenture,  dated March 11, 1997,  among ICG Holdings,  Inc., ICG
               Communications,   Inc.  and  Norwest  Bank   Colorado,   National
               Association   [Incorporated  by  reference  to  Exhibit  4.15  to
               Registration  Statement on Form S-4 of ICG Communications,  Inc.,
               File No. 333-24359].

          4.13:Written  Action of the Manager of ICG Funding,  LLC,  dated as of
               September  24,  1997,  with  respect  to the  terms of the 6 3/4%
               Exchangeable   Limited  Liability  Company  Preferred  Securities
               [Incorporated   by  reference  to  Exhibit  4.8  to  Registration
               Statement on Form S-3 of ICG Funding, LLC, File No. 333-40495].
<PAGE>
                                       77

          4.14:Amended and Restated Limited  Liability  Company Agreement of ICG
               Funding,  LLC,  dated as of September 23, 1997  [Incorporated  by
               reference to Exhibit 4.4 to Registration Statement on Form S-3 of
               ICG Funding, LLC, File No. 333-40495].

     (9)  Voting Trust Agreement. None.

     (10) Material Contracts.

          10.1:Arrangement  and Support  Agreement  dated June 27, 1996  between
               ICG Communications, Inc. and IntelCom Group Inc. [Incorporated by
               reference to Exhibit 2.1 to Registration Statement on Form S-4 of
               ICG Communications, Inc. (Commission File No. 333-4226)].

          10.2:Stock Purchase  Agreement and Accord and  Satisfaction  Agreement
               dated June 24,  1993,  between  Joseph T. Buck III and William A.
               Byrd  and TDI  [Incorporated  by  reference  to  Exhibit  3.28 to
               IntelCom  Group Inc.'s  Annual Report on Form 20-F for the fiscal
               year ended September 30, 1993].

          10.3:Full  Payout  Net  Lease  dated  June  7,  1993  between  Applied
               Telecommunications  Technologies,  Inc. and Teleport Denver, Inc.
               [Incorporated  by  reference  to Exhibit  3.34 to IntelCom  Group
               Inc.'s  Annual  Report on Form  20-F for the  fiscal  year  ended
               September 30, 1993.]

          10.4:Full  Payout  Net  Lease  dated  June 18,  1993  between  Applied
               Telecommunications  Technologies,  Inc. and Teleport Denver, Inc.
               [Incorporated  by  reference  to Exhibit  3.35 to IntelCom  Group
               Inc.'s  Annual  Report on Form  20-F for the  fiscal  year  ended
               September 30, 1993].

          10.5:Full  Payout  Net  Lease  dated  July 16,  1993  between  Applied
               Telecommunications  Technologies,  Inc. and Teleport Denver, Inc.
               [Incorporated  by  reference  to Exhibit  3.36 to IntelCom  Group
               Inc.'s  Annual  Report on Form  20-F for the  fiscal  year  ended
               September 30, 1993].

          10.6:Full Payout Net Lease dated  November  10, 1993  between  Applied
               Telecommunications  Technologies,  Inc. and Teleport Denver, Inc.
               [Incorporated  by  reference  to Exhibit  3.37 to IntelCom  Group
               Inc.'s  Annual  Report on Form  20-F for the  fiscal  year  ended
               September 30, 1993].

          10.7:Stock  Purchase  Agreement  dated August 23, 1993,  between Cliff
               Arellano,  Nancy Arellano and TDI  [Incorporated  by reference to
               Exhibit 3.29 to IntelCom  Group Inc.'s Annual Report on Form 20-F
               for the fiscal year ended September 30, 1993].
  <PAGE>
                                       78

          10.8:Asset Purchase  Agreement  dated November 18, 1993,  between Mtel
               Digital Services,  Inc. and IntelCom Group Inc.  [Incorporated by
               reference to Exhibit 3.30 to IntelCom  Group Inc.'s Annual Report
               on Form 20-F for the fiscal year ended September 30, 1993].

          10.9: Stock  Purchase  Agreement  dated  November 18,  1993,  between
               IntelCom Group Inc.,  TDI,  Pacific Telecom Inc., PTI Harbor Bay,
               Inc.,   Bay  Area  Teleport,   Inc.,   and  Upsouth   Corporation
               [Incorporated  by  reference  to Exhibit  3.31 to IntelCom  Group
               Inc.'s  Annual  Report on Form  20-F for the  fiscal  year  ended
               September 30, 1993].

          10.10: Agreement  and Plan of Merger dated May 24, 1994,  by and among
               IntelCom Group Inc., IntelCom Group (U.S.A.),  Inc. and FiberCAP,
               Inc.   [Incorporated   by  reference  to  Exhibit  10.69  to  the
               Registration  Statement on Form S-1,  Amendment No. 4 of IntelCom
               Group Inc., File No. 33-76568, filed August 26, 1994].

          10.11: Note Sale and Purchase  Agreement  dated August 3, 1994, by and
               between  IntelCom Group Inc., ICG Wireless  Services,  Inc., Noon
               Investments Ltd., Melco Investments Ltd. and Polera Overseas Inc.
               [Incorporated  by reference to Exhibit 10.70 to the  Registration
               Statement on Form S-1,  Amendment  No. 4 of IntelCom  Group Inc.,
               File No. 33-76568, filed August 26, 1994].

          10.12: Agreement  and Plan of Merger dated July 22, 1994, by and among
               IntelCom  Group Inc.,  IntelCom  Group  (U.S.A.),  Inc.,  DataCom
               Integrated  Systems   Corporation,   Larry  DiGioia  and  Richard
               Williams  [Incorporated  by  reference  to  Exhibit  10.71 to the
               Registration  Statement on Form S-1,  Amendment No. 4 of IntelCom
               Group Inc., File No. 33-76568, filed August 26, 1994].

          10.13: Share Exchange Agreement,  dated May 31, 1994, between IntelCom
               Group  Inc.  and   Worldwide   Condominium   Developments,   Inc.
               [Incorporated  by reference to Exhibit 10.71 to the  Registration
               Statement on Form S-1,  Amendment  No. 7 of IntelCom  Group Inc.,
               File No. 33-76568, filed October 17, 1994.]

          10.14: Incentive  Stock Option Plan #2  [Incorporated  by reference to
               Exhibit 4.1 to the Registration Statement on Form S-8 of IntelCom
               Group Inc., File No. 33-86346, filed November 14, 1994].

          10.15: Form of Stock Option  Agreement for Incentive Stock Option Plan
               #2  [Incorporated by reference to Exhibit 4.2 to the Registration
               Statement on Form S-8 of IntelCom Group Inc., File No.  33-86346,
               filed November 14, 1994].

          10.16: Incentive  Stock Option Plan #3  [Incorporated  by reference to
               Exhibit 4.3 to the Registration Statement on Form S-8 of IntelCom
               Group Inc., File No. 33-86346, filed November 14, 1994].

          10.17: Form of Stock Option  Agreement for Incentive Stock Option Plan
               #3  [Incorporated by reference to Exhibit 4.4 to the Registration
               Statement on Form S-8 of IntelCom Group Inc., File No.  33-86346,
               filed November 14, 1994].
<PAGE>
                                       79

          10.18: 1994 Employee Stock Option Plan  [Incorporated  by reference to
               Exhibit 4.5 to the Registration Statement on Form S-8 of IntelCom
               Group Inc., File No. 33-86346, filed November 14, 1994].

          10.19: Form of Stock Option  Agreement for 1994 Employee  Stock Option
               Plan   [Incorporated   by   reference   to  Exhibit  4.6  to  the
               Registration  Statement on Form S-8 of IntelCom Group Inc.,  File
               No. 33-86346, filed November 14, 1994].

          10.20: PEDTS Acquisition Note 1994-1, dated April 29, 1994, by Pacific
               &  Eastern  Digital  Transmission  Services,  Inc.  ("PEDTS")  to
               IntelCom  Group  (U.S.A.),   Inc.  ("ICG"),   in  the  amount  of
               $2,928,591   [Incorporated  by  reference  to  Exhibit  10.27  to
               IntelCom  Group Inc.'s  Annual Report on Form 10-K for the fiscal
               year ended September 30, 1994].

          10.21: PEDTS  Acquisition Note 1994-2,  dated April 29, 1994, by PEDTS
               to ICG, in the amount of $1,230,475 [Incorporated by reference to
               Exhibit 10.28 to IntelCom Group Inc.'s Annual Report on Form 10-K
               for the fiscal year ended September 30, 1994].

          10.22: PEDTS  Acquisition Note 1994-3,  dated April 29, 1994, by PEDTS
               to ICG, in the amount of $932,239  [Incorporated  by reference to
               Exhibit 10.29 to IntelCom Group Inc.'s Annual Report on Form 10-K
               for the fiscal year ended September 30, 1994].

          10.23: TTC  Acquisition  Note,  dated  November  3, 1994,  by Teleport
               Transmission Holdings,  Inc. to ICG, in the amount of $125,242.33
               [Incorporated  by  reference to Exhibit  10.30 to IntelCom  Group
               Inc.'s  Annual  Report on Form  10-K for the  fiscal  year  ended
               September 30, 1994].

          10.24: Agreement  and  Assignment,  dated July 24,  1995,  by Teleport
               Transmission  Holdings,  Inc.,  IntelCom  Group  (U.S.A.),  Inc.,
               William W. Becker,  Michael L. Glaser, William J. Laggett, Jay E.
               Ricks and Gary  Bryson.  [Incorporated  by  reference  to Exhibit
               10.26 to IntelCom Group Inc.'s Annual Report on Form 10-K for the
               fiscal year ended September 30, 1995].

          10.25:  Employment  Agreement,  dated  as of  May  30,  1995,  between
               IntelCom  Group  Inc.  and  J.  Shelby  Bryan   [Incorporated  by
               reference to Exhibit 10.5 to Form 8-K of IntelCom  Group Inc., as
               filed on August 2, 1995].

          10.26:  Stock  Option  Agreement,  dated as of May 30,  1995,  between
               IntelCom  Group  Inc.  and  J.  Shelby  Bryan   [Incorporated  by
               reference to Exhibit 10.6 to Form 8-K of IntelCom  Group Inc., as
               filed on August 2, 1995].

          10.27:  Indemnification  Agreement,  dated as of May 30, 1995, between
               IntelCom  Group  Inc.  and  J.  Shelby  Bryan   [Incorporated  by
               reference to Exhibit 10.7 to Form 8-K of IntelCom  Group Inc., as
               filed on August 2, 1995].

          10.28: Letter Agreement,  dated July 12, 1995,  between IntelCom Group
               Inc.  and Larry L. Becker  [Incorporated  by reference to Exhibit
               10.8 to Form 8-K of IntelCom  Group  Inc.,  as filed on August 2,
               1995].
<PAGE>
                                       80

          10.29: Agreement and General  Release,  made  effective July 12, 1995,
               between IntelCom Group Inc. and Larry L. Becker  [Incorporated by
               reference to Exhibit 10.9 to Form 8-K of IntelCom  Group Inc., as
               filed on August 2, 1995].

          10.30: Subscription and Exchange Agreement, dated as of July 14, 1995,
               among IntelCom Group Inc., IntelCom Group (U.S.A.), Inc., Princes
               Gate Investors,  L.P., Acorn Partnership I, L.P., PGI Investments
               Limited,  PGI Sweden AB,  and  Gregor von Opel  [Incorporated  by
               reference to Exhibit 10.4 to Form 8-K of IntelCom  Group Inc., as
               filed on August 2, 1995].

          10.31: Security  Agreement,  dated July 18, 1995,  from IntelCom Group
               (U.S.A.),  Inc. as issuer,  and the Grantors  named  therein,  as
               grantors,  to MS Group,  as agent  [Incorporated  by reference to
               Exhibit  10.1 to Form 8-K of  IntelCom  Group  Inc.,  as filed on
               August 2, 1995].

          10.32: Pledge  Agreement,  dated July 18, 1995,  from  IntelCom  Group
               Inc.,  as a  pledgor,  to MS  Group,  as agent  [Incorporated  by
               reference to Exhibit 10.2 to Form 8-K of IntelCom  Group Inc., as
               filed on August 2, 1995].

          10.33: Subsidiary Guarantee, dated July 18, 1995, from the persons set
               forth on the signature pages thereof, as guarantors,  in favor of
               the  purchasers  to  the  Note  Purchase  Agreement  referred  to
               therein,  and MS Group,  as agent  [Incorporated  by reference to
               Exhibit  10.3 to Form 8-K of  IntelCom  Group  Inc.,  as filed on
               August 2, 1995].

          10.34: Placement Agreement, dated as of August 3, 1995, among IntelCom
               Group Inc., IntelCom Group (U.S.A.),  Inc., certain  subsidiaries
               of  IntelCom  Group  (U.S.A.),  Inc.  and  Morgan  Stanley  & Co.
               Incorporated  [Incorporated  by reference to Exhibit 10.1 to Form
               8-K of IntelCom Group Inc., as filed on August 9, 1995].

          10.35:  Form  of  Exchange  Agent  Agreement  between  IntelCom  Group
               (U.S.A.),  Inc. and Norwest Banks  [Incorporated  by reference to
               Exhibit 10.11 to  Registration  Statement on Form S-4 of IntelCom
               Group (U.S.A.), Inc., File No. 33-96540].

          10.36: Employment  Agreement  between IntelCom Group Inc. and James D.
               Grenfell,  dated November 1, 1995.  [Incorporated by reference to
               Exhibit  10.38 to IntelCom  Group  Inc.'s  Annual  Report on Form
               10-K/A for the fiscal year ended September 30, 1995].

          10.37: Employment Agreement between Fiber Optic Technologies, Inc. and
               Mark S. Helwege, dated July 8, 1996 [Incorporated by reference to
               Exhibit 10.39 to ICG Communications, Inc.'s Annual Report on Form
               10-K/A for the fiscal year ended September 30, 1996.]

          10.38: Purchase and Sale  Agreement,  dated as of October 19, 1995, by
               and among ICG Wireless Services,  Inc.,  IntelCom Group (U.S.A.),
               Inc.,  UpSouth  Corporation  and  Vyvx,  Inc.   [Incorporated  by
               reference to Exhibit 10.40 to IntelCom Group Inc.'s Annual Report
               on Form 10-K for the fiscal year ended September 30, 1995].
<PAGE>
                                       81

          10.39: Employment  Agreement between ICG Satellite Services,  Inc. and
               Douglas I. Falk, dated August 14, 1996 [Incorporated by reference
               to Exhibit 10.41 to ICG  Communications,  Inc.'s Annual Report on
               Form 10-K/A for the fiscal year ended September 30, 1996.]

          10.40:  ICG   Communications,   Inc.,   401(k)  Wrap  Around  Deferred
               Compensation Plan. [Incorporated by reference to Exhibit 10.42 to
               ICG  Communications,  Inc.'s Annual Report on Form 10-K/A for the
               fiscal year ended September 30, 1996.]

          10.41: ICG  Communications,  Inc. 1996 Employee  Stock  Purchase Plan.
               [Incorporated by reference to the Registration  Statement on Form
               S-8 of ICG  Communications,  Inc.,  File No.  33-14127,  filed on
               October 14, 1996].

          10.42: Consulting  Services  Agreement,  by and between IntelCom Group
               Inc. and International Communications Consulting, Inc., effective
               January 1, 1996  [Incorporated  by reference to Exhibit  10.44 to
               ICG  Communications,  Inc.'s Transition Report on Form 10-K/A for
               the three months ended December 31, 1996].

          10.43:  Confidential  General Release and Convenant Not to Sue, by and
               between  ICG  Communications,  Inc.  and  John  D.  Field,  dated
               November 5, 1996  [Incorporated  by reference to Exhibit 10.45 to
               ICG  Communications,  Inc.'s Transition Report on Form 10-K/A for
               the three months ended December 31, 1996].

          10.44:   Amendment,   dated  as  of  March  26,   1997,   between  ICG
               Communications,   Inc.  and  J.  Shelby   Bryan,   to  Employment
               Agreement,  dated as of May 30, 1995, between IntelCom Group Inc.
               and J. Shelby Bryan  [Incorporated  by reference to Exhibit 10 to
               ICG Communications,  Inc.'s Quarterly Report on Form 10-Q for the
               quarterly period ended March 31, 1997].

          10.45: 1996 Stock  Option Plan  [Incorporated  by reference to Exhibit
               4.6  to  the   Registration   Statement   on  Form   S-8  of  ICG
               Communications,  Inc.,  File No.  333-25957,  filed on April  28,
               1997].

          10.46:  Amendment  No. 1 to the ICG  Communications,  Inc.  1996 Stock
               Option Plan.

          10.47:  Consulting  Agreement,  dated as of May 12, 1997,  between ICG
               Communications,  Inc. and Jay E. Ricks [Incorporated by reference
               to Exhibit 10.1 to ICG Communications, Inc.'s Quarterly Report on
               Form 10-Q for the quarterly period ended June 30, 1997].

          10.48: Employment  Agreement,  dated as of April 22, 1997, between ICG
               Communications, Inc. and Don Teague [Incorporated by reference to
               Exhibit 10.2 to ICG  Communications,  Inc.'s  Quarterly Report on
               Form 10-Q for the quarterly period ended June 30, 1997].

          10.49:  Amendment  No. 2 to the ICG  Communications,  Inc.  1996 Stock
               Option Plan  [Incorporated  by  reference  to Exhibit 10.1 to ICG
               Communications,  Inc.'s  Quarterly  Report  on Form  10-Q for the
               quarterly period ended September 30, 1997].

          10.50:  Employment   Agreement,   dated  October  17,  1997,   between
               Communications  Buying Group, Inc. and Robert Daly  [Incorporated
               by  reference  to  Exhibit  10.2  to ICG  Communications,  Inc.'s
               Quarterly  Report on Form  10-Q for the  quarterly  period  ended
               September 30, 1997].
<PAGE>
                                       82

          10.51:  Employment  Agreement,  dated  June 1,  1997,  between  NETCOM
               On-Line Communication Services, Inc. and David W. Garrison.

          10.52a:  Purchase  Agreement  between ICG  Holdings,  Inc.  and TriNet
               Corporate Realty  Trust,  Inc., dated December 9, 1997.

          10.52b: First  Amendment  to  Purchase  Agreement, by and  between ICG
               Holdings,  Inc. and TriNet  Essential  Facilities X, Inc.,  dated
               January 15, 1998.

          10.52c:  Assignment  of  Purchase  Agreement,  by and  between  TriNet
               Corporate Realty Trust, Inc., dated January 15, 1998.

          10.52d: Commercial Lease - Net between TriNet Essential  Facilities X,
               Inc. and ICG Holdings, Inc., dated January 15, 1998.

          10.52e: Continuing  Lease  Guaranty,  by ICG  Communications,  Inc. to
               TriNet Essential Facilities X, Inc., dated January 20, 1998.

          10.52f: Continuing Lease Guaranty,  by ICG Holdings (Canada),  Inc. to
               TriNet Essential Facilities X, Inc., dated January 20, 1998.

          10.53: Agreement  and Plan of Merger,  dated  October 12, 1997, by and
               among ICG Communications,  Inc., ICG Acquisition, Inc. and NETCOM
               On-Line Communication  Services,  Inc. [Incorporated by reference
               to Exhibit 2.1 to Form 8-K, dated January 21, 1998].

          10.54: Amendment to Agreement and Plan of Merger,  dated  December 15,
               1997, by and among ICG  Communications,  Inc.,  ICG  Acquisition,
               Inc.   and   NETCOM   On-Line   Communication    Services,   Inc.
               [Incorporated  by  reference  to Exhibit  2.2 to Form 8-K,  dated
               January 21, 1998].

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

     (12) Statement re Computation of Ratios.
          Not Applicable

     (13) Annual Report to Security Holders.
          Not Applicable

     (18) Letter re Change in Accounting Principles. Letter dated March 22, 1996
          from KPMG Peat Marwick LLP to the Company  [Incorporated  by reference
          to Exhibit 18 to IntelCom Group Inc.'s Quarterly Report on Form 10-Q/A
          for the quarter ended December 31, 1995].

     (21) Subsidiaries of the Registrant.

     (22) Published Report re Matters Submitted to Vote of Security Holders.
          Not Applicable
<PAGE>
                                       83

     (23) Consent.

          23.1: Consent of KPMG Peat Marwick LLP.

     (24) Power of Attorney.
          Not Applicable

     (27) Financial Data Schedule.

     (99) Additional Exhibits.

          99.1:Report by the FCC on  Preliminary  Statistics  of  Communications
               Common  Carriers  (1993  Edition) (pp.  39-40)  [Incorporated  by
               reference to Exhibit 99.8 to the  Registration  Statement on Form
               S-1,  Amendment No. 4 of IntelCom Group Inc., File No.  33-76568,
               filed August 26, 1994].

          99.2:In re  Expanded  Interconnection  with  Local  Telephone  Company
               Facilities (Phases I & II) (FCC 1992)  [Incorporated by reference
               to Exhibit 3.46 to IntelCom  Group Inc.'s  Annual  Report on Form
               20-F for the fiscal year ended September 30, 1993].

          99.3:In re Teleport  Transmission  Holdings,  (FCC 1993) [Incorporated
               by  reference to Exhibit  3.49 to IntelCom  Group  Inc.'s  Annual
               Report on Form  20-F for the  fiscal  year  ended  September  30,
               1993].

(B)  Report  on Form  8-K.  The  following  report  on Form 8-K was filed by the
     Registrants during the fiscal quarter ended December 31, 1997:

     ICG Communications, Inc.       Current Report on Form 8-K dated October
     ICG Holdings (Canada), Inc.    21, 1997,  announcing the proposed merger
     ICG Holdings, Inc.:            between ICG Communications, Inc. and NETCOM
                                    On-Line  Communication  Services, Inc.

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

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


<PAGE>
                                       F-1


                              FINANCIAL STATEMENTS

                                                                     Page

Independent Auditors' Report . . . . . . . . . . . . . . . . . . .    F-2

Consolidated Balance Sheets, December 31, 1996 and 1997  . . . . .    F-3

Consolidated Statements of Operations, Fiscal Years Ended
  September 30, 1995 and 1996, the Three Months Ended
  December 31, 1995 (unaudited) and 1996, and Fiscal
  Year Ended December  31, 1997  . . . . . . . . . . . . . . . . .    F-5

Consolidated Statements of Stockholders' Equity (Deficit),
  Fiscal Years Ended September 1994, 1995 and 1996,
  the Three Months Ended  December 31, 1996, and Fiscal Year
  Ended December 31, 1997 . . . . . . . . . . . . . . . . . . . . .   F-7

Consolidated Statements of Cash Flows, Fiscal Years Ended
  September 30, 1995 and 1996, the Three Months Ended
  December 31, 1995 (unaudited) and 1996, and Fiscal Year Ended
  December 31, 1997 . . . . . . . . . . . . . . . . . . . . . . . .   F-9

Notes to Consolidated Financial Statements, December 31,
  1996 and 1997 . . . . . . . . . . . . . . . . . . . . . . . . . .  F-12




<PAGE>
                                       F-2





                          Independent Auditors' Report




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

We  have  audited  the   accompanying   consolidated   balance   sheets  of  ICG
Communications,  Inc. and  subsidiaries as of December 31, 1996 and 1997 and the
related consolidated  statements of operations,  stockholders' equity (deficit),
and cash flows for the fiscal  years  ended  September  30,  1995 and 1996,  the
three-month  period ended  December 31, 1996, and the fiscal year ended December
31, 1997. These consolidated  financial statements are the responsibility of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
consolidated financial statements based on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects,  the financial position of ICG Communications,
Inc. and subsidiaries as of December 31, 1996 and 1997, and the results of their
operations  and their cash flows for the fiscal years ended  September  30, 1995
and 1996,  the  three-month  period ended December 31, 1996, and the fiscal year
ended  December 31, 1997,  in  conformity  with  generally  accepted  accounting
principles.

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



                                             KPMG Peat Marwick LLP


Denver, Colorado
February 19, 1998



<PAGE>
                                      F-3




ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

Consolidated Balance Sheets
December 31, 1996 and 1997

--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                                                   December 31,
                                                                  ------------------------------------------------
Assets                                                                     1996                    1997
------
                                                                  ------------------------ ----------------------
                                                                                  (in thousands)
Current assets:
<S>                                                                    <C>                        <C>
    Cash and cash equivalents                                          $   359,934                  118,834
    Short-term investments available for sale (note 4)                      32,601                   98,181
    Receivables:
      Trade, net of allowance of $2,515 and $5,376 at
        December 31, 1996 and 1997, respectively                            41,131                   59,042
      Revenue earned, but unbilled                                           6,053                    8,599
      Due from affiliate (note 5)                                                -                    9,384
      Other (note 8)                                                         1,440                    1,696
                                                                  ------------------------ ----------------------
                                                                            48,624                   78,721
                                                                  ------------------------ ----------------------

    Inventory                                                                2,845                    3,901
    Prepaid expenses and deposits                                            5,019                   10,543
    Notes receivable, net                                                      200                        -
                                                                  ------------------------ ----------------------

       Total current assets                                                449,223                  310,180
                                                                  ------------------------ ----------------------

Property and equipment (notes 6, 9 and 10)                                 460,221                  738,488
    Less accumulated depreciation                                          (56,545)                (106,321)
                                                                  ------------------------ ----------------------
       Net property and equipment                                          403,676                  632,167
                                                                  ------------------------ ----------------------

Investments (note 3)                                                         5,170                        -
Long-term notes receivable from affiliate and others,
  net(note 5)                                                                  623                   10,375
Restricted cash (notes 11 and 14)                                           13,333                   38,749
Other assets, net of accumulated amortization:
    Goodwill (note 3)                                                       31,881                   77,562
    Deferred financing costs (note 10)                                      21,963                   23,196
    Transmission and other licenses                                          8,526                    6,031
    Other (note 7)                                                           9,738                    9,404
                                                                  ------------------------ ----------------------
                                                                            72,108                  116,193
                                                                  ------------------------ ----------------------

                                                                       $   944,133                1,107,664
                                                                  ======================== ======================
                                                                                                (Continued)
</TABLE>

<PAGE>
                                       F-4




ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

Consolidated Balance Sheets, Continued

--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                                                              December 31,
                                                                              ----------------------------------------------
Liabilities and Stockholders' Deficit                                                  1996                    1997
-------------------------------------
                                                                              ------------------------ ---------------------
                                                                                             (in thousands)
Current liabilities:
<S>                                                                                 <C>                        <C>
    Accounts payable                                                                $    24,813                   29,143
    Accrued liabilities                                                                  31,890                   57,691
    Deferred revenue                                                                      5,419                    5,049
    Current portion of capital lease obligations (notes 9 and 14)                        24,683                    5,637
    Current portion of long-term debt (note 10)                                             817                    1,784
                                                                              ------------------------ ---------------------
          Total current liabilities                                                      87,622                   99,304
                                                                              ------------------------ ---------------------

Capital lease obligations, less current portion (note 9)                                 71,146                   66,939
Long-term debt, net of discount, less current portion (note 10)                         690,358                  890,568
                                                                              ------------------------ ---------------------

    Total liabilities                                                                   849,126                1,056,811
                                                                              ------------------------ ---------------------

Minority interests                                                                        1,967                        -

Redeemable  preferred  stock of subsidiary  ($164.8  million and $301.2  million
    liquidation value at December 31, 1996 and 1997, respectively) (notes 10
    and 11)                                                                             159,120                  292,442
Company-obligated mandatorily redeemable preferred securities of subsidiary
    limited liability company which holds solely Company preferred stock ($133.4
    million liquidation value at December 31, 1997) (note 11)
                                                                                              -                  127,729

Stockholders' deficit:
     Common stock (notes 1 and 12)                                                        8,088                      647
     Additional paid-in capital                                                         294,472                  326,318
     Accumulated deficit                                                               (368,640)                (696,283)
                                                                              ------------------------ ---------------------
          Total stockholders' deficit                                                   (66,080)                (369,318)
                                                                              ------------------------ ---------------------

Commitments and contingencies (notes 8, 9, 10, 11 and 14)
                                                                                    $   944,133                1,107,664
                                                                              ======================== =====================
</TABLE>

          See accompanying notes to consolidated financial statements.


<PAGE>
                                       F-5

ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

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

--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                               Fiscal years ended           Three months ended       Fiscal year ended
                                                 September 30,                 December 31,             December 31,

                                          ----------------------------- ---------------------------
                                              1995           1996           1995          1996              1997
                                          -------------- -------------- ------------- -------------   ------------------
                                                                         (unaudited)
                                                              (in thousands, except per share data)
Revenue:
<S>                                       <C>               <C>             <C>           <C>             <C>
  Telecom services (note 2)               $     32,330        87,681         13,513        34,787          177,690
  Network services (note 17)                    58,778        60,116         15,718        15,981           65,678
  Satellite services (note 13)                  20,502        21,297          6,168         6,188           29,986
                                          -------------- -------------- ------------- -------------   ------------------

     Total revenue                             111,610       169,094         35,399        56,956          273,354
                                          -------------- -------------- ------------- -------------   ------------------

Operating costs and expenses:
  Operating costs                               78,846       135,253         27,110        49,929          246,418
  Selling, general and administrative
    expenses                                    62,954        76,725         18,628        24,253          150,767
  Depreciation and amortization (note 2)        16,624        30,368          4,919         9,825           57,081
  Net loss (gain) on disposal of
    long-lived assets (note 3)                     241         5,128          1,030          (772)             671
  Provision for impairment of
    long-lived assets (note 3)                   7,000         9,994              -             -           11,950
                                          -------------- -------------- ------------- -------------   ------------------
     Total operating costs and expenses        165,665       257,468         51,687        83,235          466,887
                                          -------------- -------------- ------------- -------------   ------------------

     Operating loss                            (54,055)      (88,374)       (16,288)      (26,279)        (193,533)

Other income (expense):
  Interest expense (note 10)                   (24,368)      (85,714)       (15,215)      (24,454)        (117,545)
  Interest income                                4,162        19,300          3,750         5,962           21,907
  Other, net (note 10)                            (523)       (3,877)             7           (64)            (660)
                                          -------------- -------------- ------------- -------------   ------------------
                                               (20,729)      (70,291)       (11,458)      (18,556)         (96,298)
                                          -------------- -------------- ------------- -------------   ------------------
Loss before income taxes, minority
  interest, share of losses and
  cumulative effect of change in
  accounting                                   (74,784)     (158,665)       (27,746)      (44,835)        (289,831)
Income tax benefit (note 15)                         -         5,131              -             -                -
                                          -------------- -------------- ------------- -------------   ------------------
Loss before minority interest, share of
  losses and cumulative effect of
  change in accounting                         (74,784)     (153,534)       (27,746)      (44,835)        (289,831)
Minority interest in share of losses, net
  of accretion and preferred dividends
  on preferred securities of subsidiaries
  (note 11)                                     (1,123)      (25,306)        (3,215)       (4,988)         (37,812)
Share of losses of joint venture and
  investment (note 3)                             (741)       (1,814)          (228)            -                -
                                          -------------- -------------- ------------- -------------   ------------------
Loss before cumulative effect of change
  in accounting                                (76,648)     (180,654)       (31,189)      (49,823)        (327,643)
Cumulative effect of change in accounting            -        (3,453)        (3,453)            -                -
                                          -------------- -------------- ------------- -------------   ------------------
      Net loss                            $    (76,648)     (184,107)       (34,642)      (49,823)        (327,643)
                                          ============== ============== ============= =============   ==================
                                                                                                       (Continued)
</TABLE>
<PAGE>
                                       F-6





ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

Consolidated Statements of Operations, Continued

--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                              Fiscal years ended            Three months ended         Fiscal year ended
                                                September 30,                  December 31,              December 31,
                                         ----------------------------- ------------------------------
                                             1995           1996            1995           1996              1997
                                         -------------- -------------- --------------- --------------  ------------------
                                                                         (unaudited)
                                                                   (in thousands, except per share data)
<S>                                      <C>                 <C>             <C>            <C>               <C>
Loss per share - basic and diluted:
  Loss before cumulative effect of
    change in accounting                 $      (3.25)       (6.70)           (1.24)        (1.56)            (10.11)
  Cumulative effect of change in
    accounting                                      -        (0.13)           (0.14)            -                 -
                                         ============== ============== =============== ==============  ==================
    Loss per share - basic and
      diluted                                   (3.25)       (6.83)           (1.38)        (1.56)            (10.11)
                                         ============== ============== =============== ==============  ==================

Weighted average number of shares
  outstanding - basic and diluted              23,604        26,955          25,139         31,840            32,399
                                         ============== ============== =============== ==============  ==================

            See accompanying notes to consolidated financial statements.
</TABLE>



<PAGE>
                                       F-7





ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

Consolidated Statements of Stockholders' Equity (Deficit)
Fiscal Years Ended September 30, 1995 and 1996, the
Three Months Ended December 31, 1996, and Fiscal Year Ended December 31, 1997

--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

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

<S>                                                     <C>         <C>                <C>           <C>            <C>
Balances at October 1, 1994                             17,047      $    95,606        2,200         (58,024)       39,782
  Shares issued for cash (note 12):
    Public offering and private placements               6,312         84,498              -               -        84,498
    Public offering and private placement costs              -         (6,162)             -               -        (6,162)
    Exercise of options and warrants                       338          1,471              -               -         1,471
  Shares issued as repayment of debt and related
    accrued interest(note 10)                              683          9,482              -               -         9,482
  Shares issued in connection with business
    combinations (note 3)                                  130          1,737              -               -         1,737
  Conversion of ICG Holdings (Canada), Inc.
    preferred shares                                       302          2,000              -               -         2,000
  Shares issued as contribution to 401(k) plan
    (note 16)                                               38            490              -               -           490
  Warrants issued in connection with offerings
    (notes 10, 11 and 12)                                    -              -         24,134               -        24,134
  Change in foreign currency translation adjustment          -              -              -             (38)          (38)
  Compensation expense related to issuance of
    common stock options                                     -              -            158               -           158
  Shares issued in exchange for investments and
    other assets                                           123          1,398              -               -         1,398
  Shares issued as payment of trade payables                18            233              -               -           233
  Net loss                                                   -              -              -         (76,648)      (76,648)
                                                     ------------- -------------- -------------- -------------  --------------
Balances at September 30, 1995                          24,991         190,753        26,492        (134,710)       82,535
  Shares issued for cash in connection with the
    exercise of options and warrants                     1,522           1,742           152               -         1,894
  Shares issued as repayment of debt and related
    accrued interest (note 10)                             130            687              -               -           687
  Shares issued in connection with business
    combinations (note 3)                                   64            749              -               -           749
  Conversion of ICG Holdings (Canada), Inc.
    preferred shares                                       496          3,780              -               -         3,780
  Shares issued as contribution to 401(k) plan
    (note 16)                                               87            856            300               -         1,156
  Shares issued upon conversion of subordinated
    notes (note 10)                                      4,413         76,336              -               -        76,336
  Repurchase of warrants                                     -              -         (2,671)              -        (2,671)
  Compensation expense related to issuance of
    common stock options                                     -              -             53               -            53
  Exchange of ICG Holdings (Canada), Inc. common
    shares for ICG common stock                              -       (248,682)       248,682               -             -
  Net loss                                                   -              -              -        (184,107)     (184,107)
                                                      ------------- -------------- -------------- -------------  --------------
Balances at September 30, 1996                          31,703      $    26,221      273,008        (318,817)      (19,588)
                                                                                                                 (Continued)
</TABLE>



<PAGE>
                                       F-8






ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

Consolidated Statements of Stockholders' Equity (Deficit), Continued

--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                                                    Additional                     Total
                                                            Common stock             paid-in      Accumulated    stockholders'
                                                        Shares         Amount        capital        deficit        equity
                                                                                                                  (deficit)
                                                     -------------  -------------  ------------- -------------- --------------
                                                                                  (in thousands)
<S>                                                      <C>         <C>              <C>           <C>           <C>
  Shares issued for cash in connection with the
    exercise of options and warrants                        132      $    1,800           284              -         2,084
  Shares issued in connection with business
    combination (note 3)                                     18               -           350              -           350
  Shares issued as contribution to 401(k) plan
    (note 16)                                                19               -           480              -           480
  Shares issued upon conversion of subordinated
    notes (note 10)                                          23             417             -              -           417
  Exchange of ICG Holdings (Canada), Inc. common
    shares for ICG common stock                               -         (20,350)       20,350              -             -
  Net loss                                                    -               -             -        (49,823)      (49,823)
                                                     -------------  -------------  ------------- -------------- --------------
Balances at December 31, 1996                            31,895           8,088       294,472       (368,640)      (66,080)
  Shares issued for cash in connection with the
    exercise of options and warrants                        938               5         4,111              -         4,116
  Shares issued in connection with business
    combination (note 3)                                    687               7        15,953              -        15,960
  Shares issued for cash in connection with
    employee stock purchase plan                            109               1         1,318              -         1,319
  Shares issued as contribution to 401(k)
    plan (note 16)                                          179               2         3,008              -         3,010
  Exchange of ICG Holdings (Canada), Inc. common
    shares for ICG common stock                               -          (7,456)        7,456              -             -
  Net loss                                                    -               -             -       (327,643)     (327,643)
                                                     -------------  -------------  ------------- -------------- --------------
Balances at December 31, 1997                            33,808      $        647     326,318       (696,283)     (369,318)
                                                     =============  =============  ============= ============== ==============

                              See accompanying notes to consolidated financial statements.
</TABLE>


<PAGE>
                                       F-9





ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

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

--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                        Fiscal years ended          Three months ended      Fiscal year ended
                                                          September 30,                December 31,            December 31,
                                                    --------------------------- ----------------------------
                                                        1995          1996          1995          1996             1997
                                                    ------------- ------------- ------------- ---------------------------------
                                                                                   (unaudited)
                                                                                  (in thousands)
Cash flows from operating activities:
<S>                                                  <C>             <C>           <C>           <C>             <C>
  Net loss                                           $ (76,648)      (184,107)     (34,642)      (49,823)        (327,643)
  Adjustments to reconcile net loss to net cash
    used by operating activities:
    Cumulative effect of change in accounting                -          3,453        3,453             -                -
    Share of losses of joint venture and investment        741          1,814          228             -                -
    Minority interest in share of losses, net of
      accretion and non-cash preferred dividends
      on preferred securities of subsidiaries              656         24,279        2,188         4,988           35,457
    Depreciation and amortization                       16,624         30,368        4,919         9,825           57,081
    Compensation expense related to issuance of
      common stock options                                 158             53           14             -                -
    Interest expense deferred and included in
      long-term debt                                    14,068         63,951       12,004        22,087          102,947
    Amortization of deferred financing costs
      included in interest expense                         989          2,573          527           612            2,514
    Write-off of non operating assets                        -          2,650            -             -              200
    Contribution to 401(k) plan through issuance
      of common shares                                     490          1,156          405           480            3,010
    Deferred income tax benefit                              -         (5,329)           -             -                -
    Provision for impairment of long-lived assets        7,000          9,994            -             -           11,950
    Net loss (gain) on disposal of long-lived
      assets                                               241          5,128        1,030          (772)             671
    Change in operating assets and liabilities,
      excluding the effects of business acquisitions,
      dispositions and non-cash transactions:
        Receivables                                     (6,092)       (13,293)      (3,742)       (7,790)         (24,452)
        Inventory                                         (447)        (1,200)        (272)          361           (2,822)
        Prepaid expenses and deposits                   (2,482)        (2,975)        (459)         (910)          (5,405)
        Accounts payable and accrued liabilities           514         16,674        8,970         9,731           19,908
        Deferred revenue                                 1,390          1,454          779         2,575             (370)
                                                    -------------  ------------ -------------  -------------- -----------------

          Net cash used by operating activities    $   (42,798)      (43,357)      (4,598)       (8,636)        (126,954)
                                                    ------------- ------------- -------------  -------------- -----------------
                                                                                                               (Continued)

</TABLE>



<PAGE>
                                       F-10





ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

Consolidated Statements of Cash Flows, Continued

--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                         Fiscal years ended          Three months ended        Fiscal year
                                                            September 30,               December 31,         ended December
                                                                                                                   31,
                                                      --------------------------  -------------------------
                                                        1995          1996           1995          1996            1997
                                                     ------------  ------------  -------------  -----------  ------------------
                                                                                   (unaudited)
                                                                                   (in thousands)
<S>                                                 <C>           <C>             <C>             <C>           <C>
Cash flows from investing activities:
  (Increase) decrease in notes receivable from
     affiliate and others                           $      348           4         (1,263)            133         (9,552)
  Advances to affiliates                                (2,184)       (109)           (15)              -              -
  Investment in and advances to joint venture           (5,452)     (4,308)             -               -              -
  Payments for business acquisitions, net of cash
    acquired                                            (8,168)     (8,441)             -               -        (45,861)
  Acquisition of property, equipment and other
    assets                                             (50,066)   (122,277)       (26,798)        (50,818)      (269,593)
  Payments for construction of new headquarters              -      (1,501)             -          (7,945)       (29,432)
  Proceeds from disposition of property, equipment
    and other assets                                         -      21,593         21,146           2,057         15,567
  Purchase of short-term investments                         -      (6,832)        (4,979)        (25,769)       (65,580)
  Increase in restricted cash                                -     (13,333)       (13,333)              -        (25,416)
  Other investments                                     (6,061)          -              -               -              -
                                                     ------------  ------------  -------------  -----------  ------------------
    Net cash used by investing activities              (71,583)   (135,204)       (25,242)        (82,342)      (429,867)
                                                     ------------  ------------  -------------  -----------  ------------------
Cash flows from financing activities:
  Proceeds from issuance of common stock:
    Common stock offering                               84,498           -              -               -              -
    Business combination (note 3)                            -           -              -               -         15,960
    Exercise of stock options and warrants               1,471       1,894            101           2,084          4,116
    Employee stock purchase plan                             -           -              -               -          1,319
  Proceeds from issuance of redeemable preferred
    securities of subsidiaries, net of issuance
    costs                                               28,800     144,000              -               -        223,628
  Proceeds from issuance of convertible preferred
    stock of subsidiary                                 16,000           -              -               -              -
  Offering costs related to common and preferred
    stock offerings                                     (5,565)          -              -               -              -
  Redemption of preferred shares                        (3,800)     (5,570)        (5,570)              -              -
  Repurchase of redeemable preferred stock of
    subsidiary and payment of accrued dividend               -     (32,629)             -               -              -
  Repurchase of redeemable warrants                          -      (2,671)             -               -              -
  Proceeds from issuance of short-term debt                  -      17,500         17,500               -              -
  Principal payments on short-term debt                      -     (21,192)        (3,692)              -              -
  Proceeds from issuance of long-term debt             305,613     300,034              -               -         99,908
  Deferred debt issuance costs                         (13,641)    (11,915)             -               -         (3,554)
  Principal payments on long-term debt                 (29,333)    (16,920)       (13,761)           (279)        (1,598)
  Principal payments on capital lease obligations       (6,271)    (12,304)        (2,991)         (1,975)       (24,058)
                                                     ------------   -----------  -------------  -----------  ------------------
    Net cash provided (used) by financing
      activities                                       377,772      360,227        (8,413)           (170)       315,721
                                                     ------------   -----------  -------------  -----------  ------------------
    Net (decrease) increase in cash and cash
      equivalents                                      263,391      181,666       (38,253)        (91,148)      (241,100)
Cash and cash equivalents, beginning of period           6,025      269,416       269,416         451,082        359,934
                                                     ------------   -----------  -------------  -----------  ------------------
Cash and cash equivalents, end of period              $269,416      451,082       231,163         359,934        118,834
                                                     ------------   -----------  -------------  -----------  ------------------
                                                                                                              (Continued)
</TABLE>

<PAGE>
                                       F-11


ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

Consolidated Statements of Cash Flows, Continued

--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                        Fiscal years ended          Three months ended      Fiscal year ended
                                                          September 30,                December 31,           December 31,
                                                     -------------------------  -------------------------
                                                          1995        1996          1995          1996              1997
                                                     ------------  -----------  -----------  ------------   -------------------
                                                                                (unaudited)
                                                                              (in thousands)
Supplemental disclosure of cash flows information:
<S>                                                   <C>              <C>          <C>         <C>                <C>
  Cash paid for interest                              $   9,311        19,190       2,684        1,755              12,084
                                                     ============  ===========  ===========  ============   ===================

Supplemental schedule of non-cash investing and
  financing activities:
    Common shares issued in connection with
      business combinations, repayment of debt or
      conversion of liabilities to equity             $  11,452        77,772           -          350                   -
                                                     ============  ===========  ===========  ============   ===================
    Common shares issued in exchange for notes
      receivable, investments and other assets        $   1,398             -           -            -                   -
                                                     ============  ===========  ===========  ============   ===================
    Assets acquired under capital leases and
      through the issuance of debt or warrants
      (note 14)                                       $  38,670        55,030          84       19,479                   -
                                                     ============  ===========  ===========  ============   ===================
    Reclassification of investment in joint
      venture to long-term notes receivable           $   6,882             -           -            -                   -
                                                     ============  ===========  ===========  ============   ===================
    Conversion of notes receivable related to
      business combinations                           $   6,330             -           -            -                   -
                                                     ============  ===========  ===========  ============   ===================
      Capitalized interest on assets under
      construction                                    $       -         4,916           -        1,966               3,179
                                                     ============  ===========  ===========  ============   ===================

                         See accompanying notes to consolidated financial statements.

</TABLE>


<PAGE>
                                       F-12



ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements
December 31, 1996 and 1997
-------------------------------------------------------------------------------

(1)  Organization and Nature of Business

     ICG Communications,  Inc., a Delaware corporation ("ICG"), was incorporated
     on April 11, 1996, for the purpose of becoming the new publicly-traded U.S.
     parent  company  of  ICG  Holdings  (Canada),   Inc.,  a  Canadian  federal
     corporation ("Holdings-Canada"), ICG Holdings, Inc., a Colorado corporation
     ("Holdings"), and its subsidiaries.  Pursuant to a Plan of Arrangement (the
     "Arrangement"),  which was approved by Holdings-Canada shareholders on July
     30,  1996,  and by the  Ontario  Court of Justice  on August 2, 1996,  each
     shareholder  of   Holdings-Canada   exchanged  their  common  shares  on  a
     one-for-one  basis for either (i) shares of $.01 par value  common stock of
     ICG (the "Common Stock"),  or (ii) Class A common shares of Holdings-Canada
     (which are  exchangeable at any time on a one-for-one  basis into shares of
     ICG Common Stock). On August 2, 1996, 28,795,132,  or approximately 98%, of
     the total issued and  outstanding  common  shares of  Holdings-Canada  were
     exchanged  for an equal  number  of  shares  of  Common  Stock  of ICG.  In
     accordance with generally accepted accounting  principles,  the Arrangement
     was accounted for in a manner  similar to a pooling of interests  since ICG
     and  Holdings-Canada  had  common  shareholders,  and the  number of shares
     outstanding and the weighted average number of shares  outstanding  reflect
     the equivalent shares outstanding for the combined companies.  On September
     17, 1997,  ICG formed a new special  purpose  entity,  ICG Funding,  LLC, a
     Delaware limited liability company and wholly owned subsidiary of ICG ("ICG
     Funding").  ICG and its subsidiaries  are  collectively  referred to as the
     "Company."

     The Company's principal business activity is  telecommunications  services,
     including Telecom Services, Network Services and Satellite Services, and as
     of January 21, 1998, the Company also began  providing  Internet  Services,
     through its recently  acquired  subsidiary,  NETCOM  On-Line  Communication
     Services,  Inc.  ("NETCOM").  Telecom  Services  consists of the  Company's
     competitive  local exchange  carrier  operations  which provide services to
     business end users, long distance carriers and resellers.  Network Services
     supplies information  technology services and selected networking products,
     focusing on network  design,  installation,  maintenance  and support for a
     variety  of end  users,  including  Fortune  1000  firms  and  other  large
     businesses and  telecommunications  companies.  Satellite Services provides
     satellite  voice  and  data  services  to  major  cruise  ship  lines,  the
     commercial  shipping  industry,  yachts,  the U.S.  Navy and  offshore  oil
     platforms.  The  Company  intends  to  dispose  of its  Satellite  Services
     operations to better focus on its core Telecom  Services unit,  although it
     has not entered into a formal arrangement for such dispostion. Beginning in
     1998, the Company's Internet Services


<PAGE>
                                       F-13



ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements
December 31, 1996 and 1997
-------------------------------------------------------------------------------

(1)  Organization and Nature of Business

     includes Internet access,  World Wide Web (the "Web") site hosting services
     and other value-added  connectivity services,  which are primarily targeted
     to small and medium-sized  business customers in the United States,  Canada
     and the United Kingdom.

(2)  Summary of Significant Accounting Policies

     (a)  Basis of Presentation

          The accompanying  consolidated financial statements have been prepared
          in accordance with  accounting  principles  generally  accepted in the
          United  States,  and  include  the  accounts  of the  Company  and its
          majority and wholly owned subsidiaries. Financial information prior to
          the  completion of the  Arrangement  on August 2, 1996  represents the
          financial  position and results of operations of  Holdings-Canada  and
          Holdings, which are considered to be predecessor entities to ICG.

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

     (b)  Change in Fiscal Year End

          The Company  changed its fiscal year end to December 31 from September
          30,  effective  January 1, 1997.  References to fiscal 1995,  1996 and
          1997  relate  to the  years  ended  September  30,  1995  and 1996 and
          December 31, 1997, respectively.

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



<PAGE>
                                       F-14


ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

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

(2)  Summary of Significant Accounting Policies (continued)

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

          The Company  considers  all highly  liquid  investments  with original
          maturities of three months or less to be cash equivalents. The Company
          invests  primarily in high grade short-term  investments which consist
          of  money  market  instruments,   commercial  paper,  certificates  of
          deposit,  government obligations and corporate bonds, all of which are
          considered to be available for sale and generally  have  maturities of
          one year or less. The Company's short-term  investment  objectives are
          safety,  liquidity and yield,  in that order.  The Company carries all
          cash   equivalents   and  short-term   investments   at  cost,   which
          approximates fair value.

     (d)  Inventory

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

     (e)  Investments

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



<PAGE>
                                       F-15


ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

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

(2)  Summary of Significant Accounting Policies (continued)

     (f)  Property and Equipment

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

          Estimated  useful lives of major  categories of property and equipment
          are as follows:  Office furniture and equipment 3 to 7 years Buildings
          and  improvements  31.5 years  Machinery  and  equipment  3 to 8 years
          Switch equipment 10 years Fiber optic transmission system 20 years

          The  Company   capitalizes  the  direct  costs   associated  with  the
          installation of dial tone customers'  service,  including labor and an
          allocation  of  overhead  costs,  and  amortizes  these costs over two
          years, the estimated average customer contract term.

     (g)  Other Assets

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

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

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

<PAGE>
                                       F-16


ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

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

(2)  Summary of Significant Accounting Policies (continued)

     (h)  Use of Estimates

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

     (i)  Revenue Recognition

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

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

          Prior to January 1, 1996,  the  Company  recognized  Telecom  Services
          revenue  in an  amount  equal  to the  non-cancelable  portion  of the
          contract,  which is a minimum  of one year on a  three-year  or longer
          contract,  at the  inception of the contract  and upon  activation  of
          service  to the  customer  to the  extent of direct  installation  and
          selling expenses incurred in obtaining  customers during the period in
          which such revenue


<PAGE>
                                       F-17


ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

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

(2)  Summary of Significant Accounting Policies (continued)

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

     (j)  Income Taxes

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

     (k)  Loss Per Share

          Loss per share is  calculated by dividing the net loss by the weighted
          average  number  of shares  outstanding.  Weighted  average  number of
          shares  outstanding  for fiscal year 1995 and the three  months  ended
          December  31,  1995  represents  outstanding   Holdings-Canada  common
          shares. Weighted average number of shares outstanding for fiscal 1996,
          the three  months ended  December 31, 1996 and fiscal 1997  represents
          Holdings-Canada common shares outstanding for the period October 1,


<PAGE>
                                       F-18


ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

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

(2)  Summary of Significant Accounting Policies (continued)

          1995  through  August 2,  1996,  and  combined  ICG  Common  Stock and
          Holdings-Canada  Class A common  shares  outstanding  for the  periods
          subsequent to August 5, 1996.

          In February  1997,  the Financial  Accounting  Standards  Board issued
          Statement  No. 128,  Earnings Per Share ("SFAS 128") which revises the
          calculation and presentation provisions of Accounting Principles Board
          Opinion No. 15 and related interpretations. Under SFAS 128, basic loss
          per share is computed on the basis of weighted  average  common shares
          outstanding.  Diluted loss per share considers  potential common stock
          instruments in the  calculation.  The Company adopted SFAS 128 for its
          fiscal year ending  December 31, 1997,  including the  requirement for
          retroactive application. The adoption of SFAS 128 had no effect on the
          Company's  previously reported loss per share.  Potential common stock
          instruments,   which  include   options,   warrants  and   convertible
          subordinated notes and preferred  securities,  are not included in the
          loss per share calculation as their effect is anti-dilutive.

     (l)  Stock-Based Compensation

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

     (m)  Impairment of Long-Lived Assets

          The Company provides for the impairment of long-lived  assets pursuant
          to Statement of Financial Accounting Standards No. 121, Accounting for
          the Impairment of Long-Lived  Assets and for  Long-Lived  Assets to Be
          Disposed Of ("SFAS 121") which  requires  that  long-lived  assets and
          certain identifiable intangibles held and used by an


<PAGE>
                                       F-19


ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

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

(2)  Summary of Significant Accounting Policies (continued)

          entity be  reviewed  for  impairment  whenever  events or  changes  in
          circumstances  indicate that the carrying value of an asset may not be
          recoverable.   An  impairment   loss  is  recognized   when  estimated
          undiscounted  future cash flows  expected to be generated by the asset
          is less than its carrying value. Measurement of the impairment loss is
          based on the fair value of the asset,  which is  generally  determined
          using  valuation  techniques  such as the discounted  present value of
          expected future cash flows.

     (n)  Reclassifications

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

(3)  Business Combinations and Investments

     (a)  Acquisition During Fiscal 1997

          On October 17, 1997, the Company  purchased  approximately  91% of the
          outstanding  capital  stock  of  Communications   Buying  Group,  Inc.
          ("CBG"),  an Ohio based  local  exchange  and  centrex  reseller.  The
          Company paid total consideration of approximately $46.5 million,  plus
          the  assumption  of certain  liabilities.  Separately,  on October 17,
          1997,   the  Company   sold   687,221   shares  of  Common  Stock  for
          approximately $16.0 million to certain shareholders of CBG. Subsequent
          to December 31,1997, the Company purchased the remaining approximately
          9% interest in CBG for approximately $2.9 million in cash.

          The Company  has  accounted  for the  acquisition  under the  purchase
          method of accounting, and accordingly, the operations of CBG have been
          included in the Company's  operations since the acquisition  date. The
          excess  of  the  purchase  price  over  the  fair  value  of  the  net
          identifiable  assets  acquired of $48.8  million has been  recorded as
          goodwill  and is being  amortized  on a  straight-line  basis over six
          years.  Revenue,  net loss and loss per share on a pro forma  combined
          basis are not  significantly  different from the Company's  historical
          results for the periods presented herein.


<PAGE>
                                       F-20


ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

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

(3)  Business Combinations and Investments (continued)

     (b)  Acquisitions and Investments During Fiscal 1996

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

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

          In March 1996, the Company acquired a 90% equity interest in MarineSat
          Communications  Network,  Inc.  ("MCN"),  (formally  Maritime Cellular
          Tele-network,   Inc.),  a  Florida-based   provider  of  cellular  and
          satellite   communications  for  commercial  ships,  private  vessels,
          offshore oil platforms and land-based  mobile units, for approximately
          $0.7 million in cash and  approximately  $0.1 million of assumed debt,
          for total  consideration of approximately $0.8 million. In April 1997,
          the Company  received  the  remaining  10%  interest in MCN as partial
          consideration  for the sale of its investment in Mexico. In the fourth
          quarter  of  fiscal  1997,  the  Company   recorded  a  provision  for
          impairment of $2.9 million of its investment in MCN.

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


<PAGE>
                                       F-21


ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

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

(3)  Business Combinations and Investments (continued)

          The  acquisitions  described  above have been  accounted for using the
          purchase  method of accounting  and,  accordingly,  the net assets and
          results of  operations  are  included  in the  consolidated  financial
          statements from the respective dates of acquisition. Revenue, net loss
          and  loss  per  share  on a pro  forma  basis  are  not  significantly
          different  from  the  Company's  historical  results  for the  periods
          presented   herein.   The  aggregate   purchase   price  of  the  1996
          acquisitions,  in which the Company  obtained a controlling  interest,
          was allocated  based on fair values of the underlying  assets acquired
          as follows (in thousands):

          Current assets                                     $   6,563
          Property and equipment                                 7,542
          Other assets, including goodwill                      10,647
          Current liabilities                                     (775)
          Long-term liabilities                                 (6,314)
          Minority interest                                     (1,422)
                                                          ===================
                                                              $ 16,241
                                                          ===================

     (c)  Acquisitions and Investments During Fiscal 1995

          In  January  1995,  the  Company  and an  unaffiliated  entity  formed
          Maritime  Telecommunications Network, Inc. ("MTN") to provide wireless
          communications  through  satellites to the maritime  cruise  industry,
          U.S. Navy vessels and offshore oil platforms. The Company acquired (i)
          approximately  64% of MTN,  (ii)  approximately  $4.4 million in notes
          receivable from MTN and (iii)  consulting and  non-compete  agreements
          valued at an aggregate of  approximately  $0.3 million in exchange for
          (i)  approximately  $9.0  million  in  cash,  (ii) the  surrender  and
          cancellation  of a note to the Company  from the other entity for $0.6
          million plus  interest,  (iii) 408,347  Holdings-Canada  common shares
          valued at  approximately  $5.1 million (of which 256,303 common shares
          were  issued  in the  fourth  quarter  of fiscal  1994),  and (iv) the
          Company's commitment to provide additional convertible working capital
          advances  to MTN as  required  by MTN.  The other  shareholder  of MTN
          contributed the assets of a predecessor business to MTN.

          MTN also assumed  approximately  $2.1 million of  obligations  of such
          predecessor  business.  The Company paid a $0.5  million  finder's fee
          obligation of the  predecessor to a third party.  As part of the terms
          of the original purchase agreement, the


<PAGE>
                                       F-22


ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

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

(3)  Business Combinations and Investments (continued)

          Company agreed to purchase, at fair market value, all of the shares of
          MTN that were owned by the minority  shareholders,  upon demand of the
          minority  shareholders,  if  a  transaction  was  not  effected  which
          converted the minority shares into publicly traded  securities or cash
          by January 3, 1998.  As of the current  date,  no such demand has been
          made by the minority shareholders.

          During  fiscal  1995,  the Company  purchased a 58%  interest in Zycom
          Corporation ("Zycom"), an Alberta, Canada corporation whose shares are
          traded on the Alberta Stock Exchange.  Consideration  for the purchase
          was approximately $0.8 million in cash, the conversion of $2.0 million
          in notes receivable,  and the assumption of approximately $0.7 million
          in debt for total  consideration  of  approximately  $3.5 million.  In
          March 1996, the Company acquired an additional  approximate 12% equity
          interest in Zycom by  converting  a $3.2 million  receivable  due from
          Zycom into common  stock.  In the fourth  quarter of fiscal 1997,  the
          Company  recorded a provision  for  impairment  of $2.7 million of its
          investment in Zycom.

          The acquisitions described above were accounted for using the purchase
          method of accounting, and accordingly,  the net assets and the results
          of operations are included in the  consolidated  financial  statements
          from the respective dates of acquisition.  Revenue,  net loss and loss
          per share on a pro forma basis are not  significantly  different  from
          the Company's historical results for the periods presented herein. The
          aggregate  purchase  price of the  1995  acquisitions,  in  which  the
          Company obtained a controlling  interest,  was allocated based on fair
          values of the underlying assets acquired as follows (in thousands):

          Current assets                                    $       1,835
          Property and equipment                                    9,086
          Other assets, including goodwill                         16,986
          Current liabilities                                      (2,764)
          Long-term liabilities                                    (6,779)
          Minority interest                                        (4,850)
                                                         ----------------------
                                                             $     13,514
                                                         ======================


<PAGE>
                                       F-23


ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

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

(3)  Business Combinations and Investments (continued)

          During fiscal 1995, the Company  invested  approximately  $5.2 million
          ($3.9   million   in  cash,   $1.1   million   in  common   shares  of
          Holdings-Canada,  and the conversion of approximately  $0.2 million in
          notes  receivable)  in  StarCom   International   Optics   Corporation
          ("StarCom"),  for which the Company  received a 25% equity interest in
          each of Starcom's  wholly owned  operating  subsidiaries.  In December
          1997, a senior secured  creditor of StarCom  notified the Company that
          it intended to foreclose on its collateral in StarCom,  and in January
          1998, StarCom commenced bankruptcy proceedings.  Based on management's
          estimate of the net realizable  value of its  investment,  the Company
          recorded a provision for  impairment of its investment of $5.2 million
          in fiscal 1997.

     (d)  Investments in Joint Venture and Affiliate

          In September 1992, the Company entered into a joint venture  agreement
          with Greenstar  Technologies  Inc. (now GST  Telecommunications,  Inc.
          ("GST")) to design, construct and operate a competitive access network
          in Phoenix.  The Company and GST each had a 50% equity interest in the
          joint  venture.  All  financing  provided to the joint  venture by the
          Company,  as well as the  recognition  of the  Company's  share of the
          joint venture's losses,  were recorded  according to the equity method
          of accounting.  During fiscal 1996,  the Company  recorded a valuation
          allowance of  approximately  $5.8  million for the amounts  receivable
          arising from advances made to the Phoenix network joint venture, based
          on  management's   estimate  of  the  net  realizable   value  of  the
          receivable.

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



<PAGE>
                                       F-24


ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

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

(3)  Business Combinations and Investments (continued)

     (e)  Merger Subsequent to December 31, 1997

          On January  21,  1998,  the Company  completed  a merger with  NETCOM.
          Located  in San Jose,  California,  NETCOM is a provider  of  Internet
          connectivity  and Web site  hosting  services  and  other  value-added
          Internet  services.   At  the  effective  time  of  the  merger,  each
          outstanding   share  of  NETCOM  common  stock  became   automatically
          convertible into shares of Common Stock at an exchange ratio of 0.8628
          shares of Common  Stock per NETCOM  common  share.  As a result of the
          transaction,  the Company  expects to issue an estimated  10.2 million
          shares of Common Stock for the NETCOM  common  shares  outstanding  on
          January 21, 1998. Cash will be paid in lieu of fractional  shares. The
          Company  will  account  for  the   business   combination   under  the
          pooling-of-interests   method  of  accounting  and  accordingly,   the
          Company's  financial  statements  will  be  restated  to  reflect  the
          operations  of NETCOM  and the  Company  on a  combined  basis for all
          historical periods.

          The following  unaudited pro forma  information  presents the combined
          results of  operations  of the Company  and NETCOM as if the  business
          combination had been  consummated on October 1, 1994. The Company does
          not anticipate any  significant  adjustments to conform the accounting
          policies of NETCOM with those of the Company.
<TABLE>
<CAPTION>

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

            <S>                          <C>            <C>                    <C>                    <C>
            Revenue                      $164,032        289,634                93,335                 434,014
            Net loss                      (90,712)      (228,372)              (61,313)               (360,735)
            Loss per share -
              basic and diluted             (2.94)         (6.19)                (1.46)                  (8.49)

</TABLE>

<PAGE>
                                       F-25


ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

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

(4)  Short-term Investments Available for Sale

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

                                                         December 31,
                                            ------------------------------------
                                                 1996                 1997
                                            ----------------     ---------------
                                                       (in thousands)

     Money market investments                  $   10,000                   -
     Commercial paper                               5,500               4,000
     U.S. Treasury securities                      17,101              94,181
                                            ================     ===============
                                                $  32,601              98,181
                                            ================     ===============

     At December 31, 1996 and 1997,  the  estimated  fair value of the Company's
     money market  instruments,  commercial paper and U.S.  Treasury  securities
     approximated  cost,  and the  amount  of  gross  unrealized  gains  was not
     significant.  All  money  market  instruments,  commercial  paper  and U.S.
     Treasury securities mature within one year.

(5)  Notes Receivable and Due from Affiliate

     In January 1997,  the Company  announced a strategic  alliance with Central
     and South  West  Corporation  ("CSW")  which is  developing  and  marketing
     telecommunications services in certain cities in Texas. The venture entity,
     a limited partnership named CSW/ICG ChoiceCom, L.P. ("ChoiceCom"), is based
     in Austin, Texas. CSW holds 100% of the interest in ChoiceCom,  and CSW and
     the Company each have two  representatives  on the Management  Committee of
     the  general  partner of  ChoiceCom.  The  Company  has  committed  to loan
     ChoiceCom  $15.0 million under two promissory  notes,  which are payable on
     demand and earn  interest at LIBOR plus 2% per annum (7.97% at December 31,
     1997). Advances under these promissory notes were $10.0 million at December
     31, 1997.

     Additionally,  the  Company  has agreed to perform  certain  administrative
     services for  ChoiceCom  and make certain  payments to vendors on behalf of
     ChoiceCom,  for which such  services and payments are to be conducted on an
     arm's  length  basis and  reimbursed  by  ChoiceCom.  At December 31, 1997,
     amounts  outstanding  under  this  arrangement  and  included  in due  from
     affiliate  were  approximately  $9.4  million,  and were  collected in full
     during the subsequent fiscal quarter.

<PAGE>
                                       F-26


ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

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

(6)  Property and Equipment

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

                                                       December 31,
                                              -------------------------------
                                                   1996            1997
                                              -------------   ---------------
                                                      (in thousands)

     Land                                      $     306              709
     Buildings and improvements                    2,300            2,238
     Furniture, fixtures and office equipment     35,904           46,711
     Machinery and equipment                      10,764           31,630
     Fiber optic equipment                       143,133          156,255
     Satellite equipment                          19,408           29,760
     Switch equipment                             58,199           85,546
     Fiber optic transmission system             117,281          192,756
     Build out/site preparation                   13,284           13,898
     Construction in progress (see note 14)       59,642          178,985
                                              -------------   ---------------
                                                 460,221          738,488
     Less accumulated depreciation               (56,545)        (106,321)
                                              =============   ===============
                                               $ 403,676          632,167
                                              =============   ===============

     Property and equipment includes  approximately  $179.0 million of equipment
     which has not been placed in service at December 31, 1997, and accordingly,
     is not being  depreciated.  The  majority  of this amount is related to new
     network construction (see note 14).


<PAGE>
                                       F-27


ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

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

(6)  Property and Equipment (continued)

     Certain of the assets  described  above have been  pledged as security  for
     long-term  debt and are held under capital leases at December 31, 1997. The
     following is a summary of property and equipment held under capital leases:

                                                       December 31,
                                              --------------------------------
                                                  1996             1997
                                              -------------   ----------------
                                                      (in thousands)

     Machinery and equipment                   $   1,842            3,926
     Fiber optic equipment                         7,514            6,314
     Switch equipment                             22,280           21,380
     Fiber optic transmission system              55,746           58,806
     Construction in progress                     20,187           17,895
                                              -------------   ----------------
                                                 107,569          108,321
     Less accumulated depreciation                (4,424)          (8,409)
                                              =============   ================
                                               $ 103,145           99,912
                                              =============   ================

(7)  Other Assets

     Other assets are comprised of the following:

                                                       December 31,
                                              --------------------------------
                                                  1996               1997
                                              -------------   ----------------
                                                      (in thousands)

     Deposits                                   $   3,579            2,429
     Pace customer base                             2,581            2,805
     Rights of way                                  1,739              425
     Minutes of use agreement                       1,421                -
     Non-compete agreements                           902            1,386
     Right of entry                                     -            5,019
     Other                                          1,063              839
                                              -------------   ----------------
                                                   11,285           12,903
     Less accumulated amortization                 (1,547)          (3,499)
                                              =============   ================
       Other                                   $    9,738            9,404
                                              =============   ================


<PAGE>
                                       F-28


ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

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

(8)  Related Party Transactions

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

     At December 31, 1996 and 1997,  receivables  from officers and employees of
     approximately  $1.0 million and $0.9 million,  respectively,  are primarily
     comprised of promissory notes from officers for relocation expenses,  which
     are generally  payable on demand and bear interest at 7% per annum, and are
     included in  receivables-other in the accompanying  consolidated  financial
     statements.

(9)  Capital Lease Obligations

     The Company has payment  obligations under various capital lease agreements
     for equipment.  The future  required  payments under the Company's  capital
     lease  obligations  subsequent  to  December  31,  1997 are as follows  (in
     thousands):

     Due December 31:
       1998                                             $    15,651
       1999                                                  13,782
       2000                                                  14,431
       2001                                                  16,350
       2002                                                  11,009
       Thereafter                                            93,584
                                                      ---------------------
         Total minimum lease payments                       164,807
         Less amounts representing interest                 (92,231)
                                                      ---------------------
         Present value of net minimum lease payments         72,576
         Less current portion                                (5,637)
                                                      =====================
                                                        $    66,939
                                                      =====================


<PAGE>
                                       F-29


ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

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

(10) Long-term Debt

     Long-term debt is summarized as follows:

 <TABLE>
<CAPTION>
                                                                                          December 31,
                                                                           -----------------------------------------------
                                                                                  1996                     1997
                                                                           ----------------------   ----------------------
                                                                                           (in thousands)

     <S>                                                                     <C>                         <C>
     11 5/8% Senior discount notes, net of discount (a)                      $        -                  109,436
     12 1/2% Senior discount notes, net of discount (b)                         325,530                  367,494
     13 1/2% Senior discount notes, net of discount (c)                         355,955                  407,409
     Note payable with interest at the 90-day commercial
       paper rate plus 4 3/4% (10.3% at December 31, 1997),
       due 2001, secured by certain telecommunications equipment                  5,815                    4,932
     Note payable with interest at 11%, due monthly through
       fiscal 1999, secured by equipment                                          2,625                    1,860
     Mortgage payable with interest at 8 1/2%, due monthly
       through 2009, secured by building                                          1,177                    1,131
     Other                                                                           73                       90
                                                                           ----------------------    ---------------------
                                                                                691,175                  892,352
     Less current portion                                                          (817)                  (1,784)
                                                                           ----------------------    ---------------------
                                                                              $ 690,358                  890,568
                                                                           ======================    =====================
</TABLE>

     (a)  11 5/8% Notes

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

          The 11  5/8%  Notes  are  unsecured  senior  obligations  of  Holdings
          (guaranteed by ICG) that mature on March 15, 2007, at a maturity value
          of  $176.0  million.  Interest  will  accrue  at 11  5/8%  per  annum,
          beginning  March 15, 2002,  and is payable each March 15 and September
          15, commencing September 15, 2002. The indenture for the


<PAGE>
                                       F-30


ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

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

(10) Long-term Debt (continued)

          11 5/8% Notes contains certain covenants which provide for limitations
          on indebtedness, dividends, asset sales and certain other transactions
          and effectively prohibits the payment of cash dividends.

          The 11 5/8% Notes were  originally  recorded  at  approximately  $99.9
          million. The discount on the 11 5/8% Notes and the debt issuance costs
          are being  accreted  over ten years until  maturity at March 15, 2007.
          The accretion of the discount and debt  issuance  costs is included in
          interest   expense   in  the   accompanying   consolidated   financial
          statements.

     (b)  12 1/2% Notes

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

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

          The 12 1/2% Notes were  originally  recorded at  approximately  $300.0
          million. The discount on the 12 1/2% Notes and the debt issuance costs
          are being  accreted over ten years until  maturity at May 1, 2006. The
          accretion  of the  discount  and debt  issuance  costs is  included in
          interest   expense   in  the   accompanying   consolidated   financial
          statements.


<PAGE>
                                       F-31


ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

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

(10) Long-term Debt (continued)

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

     (c)  13 1/2% Notes

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

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

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


<PAGE>
                                       F-32


ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

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

(10) Long-term Debt (continued)

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

          The Unit  Warrants  entitle the holder to purchase one common share of
          Holdings-Canada, which is exchangeable into one share of Common Stock,
          at the exercise  price of $12.51 per share and are  exercisable at any
          time between August 8, 1996 and August 8, 2005.

          In  connection  with the  issuance of the 13 1/2%  Notes,  the Company
          obtained $6.0 million of interim  financing  from the placement  agent
          and  certain  private  investors  in exchange  for the  issuance of an
          aggregate  of 520,000  Series A Warrants  (see note 12 (c)).  The $6.0
          million  was  repaid  with a  portion  of the  proceeds  from the 1995
          Private  Offering.  As a  result  of  the  repayment  of  the  interim
          financing,  the  value  assigned  to the  Series A  Warrants  totaling
          approximately $3.0 million, representing debt discount, was charged to
          interest expense during the year ended September 30, 1995.


<PAGE>
                                       F-33


ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

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

(10) Long-term Debt (continued)

          Scheduled  principal  maturities of long-term  debt as of December 31,
          1997 are as follows (in thousands):

          Due December 31:
            1998                                 $       1,784
            1999                                         1,686
            2000                                         1,290
            2001                                           938
            2002                                           938
            Thereafter (a)                           1,311,976
                                                 -----------------
                                                     1,318,612
              Less unaccreted discount on
                the 11 5/8% Notes, the 12 1/2%
                Notes and the 13 1/2% Notes           (426,260)
                                                 ==================
                                                 $     892,352
                                                 ==================

          (a)  Includes $176.0 million,  $550.3 million and $584.3 million of 11
               5/8% Notes, 12 1/2% Notes, and 13 1/2% Notes,  respectively,  due
               at maturity.

     (e)  Private  Placement of Senior  Discount Notes  Completed  Subsequent to
          December 31, 1997

          On February 12, 1998, ICG Services,  Inc., a Delaware  corporation and
          new wholly  owned  subsidiary  of ICG ("ICG  Services"),  completed  a
          private  placement  of 10%  Senior  Discount  Notes due 2008 (the "10%
          Notes")  for gross  proceeds  of  approximately  $300.6  million.  Net
          proceeds from the offering,  after underwriting costs of approximately
          $9.0 million, were approximately $291.6 million.

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


<PAGE>
                                       F-34


ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

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

(11) Redeemable Preferred Securities of Subsidiaries

     Redeemable preferred stock of subsidiary is summarized as follows:

                                                   December 31,
                                          --------------------------------
                                               1996             1997
                                          --------------  -----------------
                                                    (in thousands)
     14% Exchangeable preferred stock,
       mandatorily redeemable in 2008 (a)   $       -           108,022

     14 1/4% Exchangeable preferred stock,
       mandatorily redeemable in 2007 (b)     159,120           184,420
                                          ==============  =================
                                           $  159,120           292,442
                                          ==============  =================

     (a)  14% Preferred Stock

          In connection  with the 1997 Private  Offering,  Holdings sold 100,000
          shares of exchangeable preferred stock that bear a cumulative dividend
          at the rate of 14% per annum.  The  dividend is payable  quarterly  in
          arrears  each March 15, June 15,  September  15, and  December 15, and
          commenced  June 15,  1997.  Through  March 15,  2002,  the dividend is
          payable at the option of Holdings in cash or additional  shares of 14%
          Preferred  Stock.  Holdings may exchange the 14% Preferred  Stock into
          14%  Senior  Subordinated  Exchange  Debentures  at any time after the
          exchange  is  permitted  by certain  indenture  restrictions.  The 14%
          Preferred Stock is subject to mandatory redemption on March 15, 2008.

     (b)  14 1/4% Preferred Stock

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


<PAGE>
                                       F-35


ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

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

(11) Redeemable Preferred Securities of Subsidiaries (continued)

     (c)  6 3/4% Preferred Securities

          During  fiscal 1997,  a new  subsidiary  of the Company,  ICG Funding,
          completed a private placement of 6 3/4% Exchangeable Limited Liability
          Company Preferred Securities  Mandatorily Redeemable 2009 (the "6 3/4%
          Preferred  Securities")  for gross  proceeds of $132.25  million.  Net
          proceeds  from the  private  placement,  after  offering  costs,  were
          approximately $127.6 million.  Restricted cash at December 31, 1997 of
          $38.7  million  includes  the  proceeds  from the  offering  which are
          designated  for the payment of cash  dividends on the 6 3/4% Preferred
          Securities through November 15, 2000.

          The 6 3/4%  Preferred  Securities  consist of  2,645,000  exchangeable
          preferred securities of ICG Funding that bear a cumulative dividend at
          the  rate of 6 3/4% per  annum.  The  dividend  is paid  quarterly  in
          arrears  each  February  15, May 15,  August 15 and  November  15, and
          commenced  November 15, 1997.  The dividend is payable in cash through
          November  15,  2000 and  thereafter,  in cash or shares of ICG Common
          Stock, at the option of ICG Funding.  The 6 3/4% Preferred  Securities
          are  exchangeable,  at the option of the holder,  at any time prior to
          November  15,  2009 into  shares  of Common  Stock at a rate of 2.0812
          shares of Common Stock per preferred  security,  or $24.025 per share,
          subject to  adjustment.  ICG Funding may, at its option,  redeem the 6
          3/4%  Preferred  Securities at any time on or after November 18, 2000.
          Prior to that  time,  ICG  Funding  may  redeem  the 6 3/4%  Preferred
          Securities  if the  current  market  value of Common  Stock  equals or
          exceeds the exchange price, for at least 20 days of any 30-day trading
          period,  by 170% prior to November  16, 1998;  160% from  November 16,
          1998  through  November  15,  1999;  and 150% from  November  16, 1999
          through November 15, 2000. The 6 3/4% Preferred Securities are subject
          to mandatory redemption on November 15, 2009.

          On February 15, 1998, ICG Funding used the remaining proceeds from the
          private  placement  of the 6 3/4%  Preferred  Securities  to  purchase
          $112.4  million of ICG  Communications,  Inc.  Preferred  Stock  ("ICG
          Preferred  Stock")  which pays  dividends  each  February  15, May 15,
          August 15 and November 15 in additional  shares of ICG Preferred Stock
          through November 15, 2000.  Subsequent to November 15, 2000, dividends
          are payable in cash or shares of Common  Stock,  at the option of ICG.
          The ICG Preferred Stock is exchangeable, at the option of ICG


<PAGE>
                                       F-36


ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

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

(11) Redeemable Preferred Securities of Subsidiaries (continued)

          Funding,  at any time prior to November 15, 2009 into shares of Common
          Stock at an  exchange  rate based on the  exchange  rate of the 6 3/4%
          Preferred Securities.  The ICG Preferred Stock is subject to mandatory
          redemption on November 15, 2009.

          The accreted value of the 6 3/4%  Preferred  Securities is included in
          Company-obligated   mandatorily  redeemable  preferred  securities  of
          subsidiary  limited  liability  company  which  holds  solely  Company
          preferred  stock in the  accompanying  consolidated  balance  sheet at
          December 31, 1997.

     Included in  minority  interest in share of losses,  net of  accretion  and
     preferred   dividends   on  preferred   securities   of   subsidiaries   is
     approximately $1.3 million,  $27.0 million,  $5.8 million and $39.8 million
     for fiscal 1995 and 1996,  the three  months  ended  December  31, 1996 and
     fiscal 1997, respectively, associated with the accretion of issuance costs,
     discount and preferred  security dividend accruals for the 6 3/4% Preferred
     Securities,  the 14% Preferred  Stock,  the 14 1/4% Preferred Stock and the
     Redeemable  Preferred  Stock  (issued in  connection  with the 1995 Private
     Offering and redeemed in April 1996).  These costs are partially  offset by
     the minority interest share in losses of subsidiaries of approximately $0.6
     million,  $2.7  million,  $0.8 million and $2.0 million for fiscal 1995 and
     1996,   the  three  months  ended   December  31,  1996  and  fiscal  1997,
     respectively.

(12) Stockholders' Deficit

     (a)  Common Stock

          Common stock  outstanding  at December 31, 1997  represents the issued
          and  outstanding  Common  Stock of ICG and  Class A common  shares  of
          Holdings-Canada (not owned by ICG) which are exchangeable at any time,
          on a one-for-one basis, for ICG Common Stock. The following table sets
          forth the number of shares outstanding for ICG and  Holdings-Canada on
          a separate company basis as of December 31, 1997:


<PAGE>
                                       F-37


ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

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

(12) Stockholders' Deficit (continued)

                                               Shares          Shares not owned
                                            owned by ICG           by ICG
                                        -------------------- -------------------
     ICG Common Stock, $.01 par value,
       100,000,000 shares authorized;
       31,087,825 and 33,784,500 shares
       issued and outstanding at December
       31, 1996 and 1997, respectively            -                 33,784,500
     Holdings-Canada Class A common shares,
       no par value, 100,000,000 shares
       authorized; 31,795,270 and
       31,822,756 shares issued and
       outstanding at December 31, 1996
       and 1997, respectively:
       Class A common shares,
         exchangeable on a one-for-one
         basis for ICG Common Stock
         at any time                              -                     23,700
       Class A common shares owned
         by ICG                          31,799,056                          -
                                                             -------------------
     Total shares outstanding                                       33,808,200
                                                             ===================

     (b)  Stock Options and Employee Stock Purchase Plan

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

          In fiscal years 1994,  1995 and 1996,  the three months ended December
          31, 1996 and fiscal 1997,  the Company's  Board of Directors  approved
          incentive and non-qualified  stock option plans and  replenishments to
          plans which provide for the granting of options to certain  directors,
          officers and employees to purchase 2,536,000 shares of


<PAGE>
                                       F-38


ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

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

(12) Stockholders' Deficit (continued)

          the  Company's  Common  Stock under the 1994 plan and an  aggregate of
          2,700,000 shares of the Company's Common Stock under the 1995 and 1996
          plans.  A total of 5,709,426  options  have been  granted  under these
          plans at original  exercise prices ranging from $7.94 to $27.06,  none
          of which  were less than 100% of the fair  market  value of the shares
          underlying  options  on  the  date  of  grant,  and  accordingly,   no
          compensation  expense was recorded for these options under APB 25. The
          options  granted  under  these  plans are  subject to various  vesting
          requirements and expire in five and ten years from the date of grant.

          In order to continue  to provide  non-cash  incentives  and retain key
          employees,  all employee  stock options  outstanding on April 16, 1997
          with  exercise  prices at or in excess of $15.875 were canceled by the
          Stock  Option  Committee  of the  Company's  Board  of  Directors  and
          regranted with an exercise price of $10.375,  the closing price of the
          Company's  Common  Stock on the  Nasdaq  National  Market on April 16,
          1997.  A total of  597,600  options,  with  original  exercise  prices
          ranging from $15.875 to $26.25, were canceled and regranted. There was
          no effect on the  Company's  consolidated  financial  statements  as a
          result of the cancellation and regranting of options.

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

          The  Company  recorded  compensation  expense in  connection  with its
          stock-based employee and non-employee  director  compensation plans of
          $0.2 million and $0.1 million for fiscal 1995 and 1996,  respectively,
          pursuant  to  the  intrinsic   value  based  method  of  APB  25.  Had
          compensation  expense for the Company's plans been determined based on
          the fair market value of the options at the grant dates for awards



<PAGE>
                                       F-39


ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

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

(12) Stockholders' Deficit (continued)

          under those plans  consistent  with the  provisions  of SFAS 123,  the
          Company's  pro forma net loss and loss per  share  would  have been as
          presented below. Pro forma disclosures include the effects of employee
          and non-employee director stock options granted during fiscal 1995 and
          1996, the three months ended December 31, 1996 and fiscal 1997.
<TABLE>
<CAPTION>


                                   Fiscal years ended                Three months ended             Fiscal year ended
                                     September 30,                      December 31,                  December 31,
                           -----------------------------------
                                1995               1996                     1996                          1997
                           ---------------    ----------------    --------------------------    --------------------------
                                                      (in thousands, except per share amounts)
Net loss:
<S>                          <C>                   <C>                       <C>                         <C>
As reported                  $   (76,648)          (184,107)                 (49,823)                    (327,643)
Pro forma                        (82,544)          (186,831)                 (50,819)                    (331,715)

Loss per share - basic
and diluted:
As reported                  $     (3.25)             (6.83)                   (1.56)                      (10.11)
Pro forma                          (3.50)             (6.93)                   (1.60)                      (10.24)

</TABLE>

          The fair value of each option grant was estimated on the date of grant
          using  the  Black-Scholes  option-pricing  model  with  the  following
          weighted average  assumptions:  an expected option life of three years
          for directors,  officers and other executives, and two years for other
          employees,  for  all  periods;  expected  volatility  of 50%  for  all
          periods;  and risk-free interest rates ranging from 5.03% to 7.42% for
          fiscal 1995 and 1996 and the three months ended December 31, 1996, and
          risk-free  interest rates ranging from 5.61% to 6.74% for fiscal 1997.
          Risk-free  interest  rates,  as were currently  available on the grant
          date,  were assigned to each granted  option based on the  zero-coupon
          rate of U.S.  Treasury  bills to be held for the  same  period  as the
          assumed option life. Since the Company does not anticipate issuing any
          dividends on its Common  Stock,  the dividend  yield was assumed to be
          zero. The weighted average fair market value of options granted during
          fiscal 1995 and 1996,  the three  months  ended  December 31, 1996 and
          fiscal  1997 was  approximately  $4.11,  $5.28,  $9.42  and  $5.75 per
          option, respectively.


<PAGE>
                                       F-40


ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

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

(12) Stockholders' Deficit (continued)

          As options  outstanding  at December 31, 1997 will continue to vest in
          subsequent  periods,  additional  options  are  expected to be awarded
          under  existing and new plans and options  granted  prior to 1995 have
          not been  considered,  the above pro forma results are not necessarily
          indicative  of the  impact  on net loss and loss per  share in  future
          periods.

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

<TABLE>
<CAPTION>

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

      <S>                                                  <C>          <C>                         <C>
      Outstanding at October 1, 1994                       1,319        $       6.81                  769
           Granted                                         2,520                9.73
           Exercised                                        (264)               3.32
           Canceled                                         (201)              13.25
                                                 -------------------

      Outstanding at September 30, 1995                    3,374                9.08                  940
           Granted                                         1,322               11.78
           Exercised                                        (248)               7.55
           Canceled                                         (243)              11.12
                                                 -------------------

      Outstanding at September 30, 1996                    4,205                9.77                2,264
           Granted                                           335               18.59
           Exercised                                         (31)               8.95
           Canceled                                          (56)              12.65
                                                 -------------------

      Outstanding at December 31, 1996                     4,453               10.34                2,969
           Granted                                         1,546               13.55
           Exercised                                        (632)               7.54
           Canceled                                         (860)              16.08
                                                 -------------------

      Outstanding at December 31, 1997                     4,507               10.62                3,037
                                                 ===================
</TABLE>

<PAGE>
                                       F-41


ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

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

(12) Stockholders' Deficit (continued)

          The following table summarizes  information about options  outstanding
          at December 31, 1997:

<TABLE>
<CAPTION>


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

       <S>                       <C>                 <C>             <C>                    <C>             <C>
       $4.00  -   6.25              98               4.95            $    4.23                 98           $   4.23
            7.94                 1,550               7.41                 7.94              1,550               7.94
        8.50  -  10.38           1,689               8.35                10.02                607               9.71
       10.50  -  26.88           1,135               7.89                15.26                782              13.70
            27.06                   35               9.77                27.06                  -               -
                          ------------------                                         ------------------
                                 4,507                                                      3,037
                          ==================                                         ==================
</TABLE>

     (c)  Warrants

          During fiscal 1995 and 1996,  the three months ended December 31, 1996
          and fiscal 1997, the Company's warrant activity was as follows:

          (i)  During fiscal 1993, the Company issued to a debt holder  warrants
               to purchase  17,067,  3,255 and 11,039  common shares at exercise
               prices of $6.56,  $7.38 and $7.88,  respectively.  During  fiscal
               1994,   17,067   warrants   were   exercised   for   proceeds  of
               approximately $0.1 million. In addition,  during fiscal 1994, the
               Company  issued to the same debt  holder  additional  warrants to
               purchase 1,989, 15,260 and 3,665 common shares of Holdings-Canada
               at $21.51, $20.01 and $11.80 per share,  exercisable on or before
               November   10,  1998,   March  24,   1999,   and  July  8,  1999,
               respectively.  An additional  7,725  warrants were issued on July
               10, 1995 at an exercise price of $14.50,  which expire on July 9,
               2000.  Also  issued  on July  10,  1995  were  60,000  additional
               warrants to an affiliate of the debt holder at an exercise  price
               of $14.50,  which expire on July 9, 2000. During the three months
               ended December 31, 1996, 1,231 of


<PAGE>
                                       F-42


ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

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

(12) Stockholders' Deficit (continued)

               the $7.38 warrants,  4,456 of the $7.88 warrants and 2,215 of the
               $11.80 warrants were canceled.  During fiscal 1997,  2,024 of the
               $7.38 warrants,  6,583 of the $7.88 warrants, 1,450 of the $11.80
               warrants  and 17,429 of the $14.50  warrants  were  exercised  in
               exchange for Holdings-Canada  Class A common shares. In addition,
               50,296 of the $14.50  warrants  were  canceled.  At December  31,
               1997, a total of 17,249 of these warrants remained outstanding.

          (ii) During fiscal 1994, the Company issued to two financial  advisors
               warrants  to  purchase   75,000  and  200,000  common  shares  of
               Holdings-Canada.  These  warrants have an exercise price of $7.94
               and $18.00 and are  exercisable  for two- and five-year  periods,
               respectively.  During fiscal 1995 and 1996, 74,335 and 665 of the
               75,000   warrants   were   exercised   for  total   proceeds   of
               approximately  $0.6  million.   During  the  three  months  ended
               December 31, 1996, 100,000 of the 200,000 warrants were exercised
               for proceeds of approximately $1.8 million. At December 31, 1997,
               100,000 warrants remained outstanding.

          (iii)Pursuant  to a  private  placement  of the  Redeemable  Preferred
               Stock and the interim financing  arrangement  during fiscal 1995,
               the Company  issued  1,895,000  Series A Warrants  and  1,375,000
               Series B Warrants to purchase an equal number of common shares of
               Holdings-Canada   with  exercise   prices  of  $7.94  and  $8.73,
               respectively,  which expire on July 14, 2000. During fiscal 1996,
               the Company repurchased 458,333 each of the Series A and Series B
               Warrants for $3.21 and $2.52,  respectively (see note 10 (c)). In
               addition,  1,853,334 warrants were exercised in June 1996 through
               a cashless  exercise in which  1,271,651  Holdings-Canada  common
               shares were issued.  During fiscal 1997,  the  remaining  500,000
               warrants of the Series A and Series B warrants were  exercised in
               exchange for 346,014 common shares of Holdings-Canada, which were
               in turn  converted  into an equal  number of shares of ICG Common
               Stock.




<PAGE>
                                       F-43


ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

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

(12) Stockholders' Deficit (continued)

          (iv) In connection with the 1995 Private Offering,  the Company issued
               1,928,190  warrants to purchase an equal number of common  shares
               of  Holdings-Canada.  The  warrants  were  exercisable  beginning
               August 8, 1996 at $12.51  per share and expire on August 6, 2005.
               During  fiscal 1997,  71,775  warrants  were  exercised for total
               proceeds of approximately $0.9 million and were in turn converted
               into an equal number of shares of ICG Common  Stock.  At December
               31, 1997, 1,856,415 of these warrants remained outstanding.

     The following table  summarizes  warrant activity for fiscal 1995 and 1996,
     the three months ended December 31, 1996 and fiscal 1997:

                                        Outstanding                Price
                                          warrants                 range
                                    -------------------  -----------------------
                                                 (in thousands)
     Outstanding, October 1, 1994             310         $   7.38   -   21.51
     Granted                                5,266             7.94   -   14.50
     Exercised                                (74)                  7.94
                                    -------------------
     Outstanding, September 30, 1995        5,502             7.38   -   21.51
     Exercised                             (1,854)             7.94  -    8.73
     Repurchased                             (917)             2.52  -    3.21
                                    --------------------
     Outstanding, September 30, 1996        2,731              7.38  -   21.51
     Exercised                               (100)                 18.00
     Canceled                                  (8)             7.38  -   11.80
                                    --------------------
     Outstanding, December 31, 1996         2,623              7.38  -   21.51
     Exercised                               (599)             7.38  -   14.50
     Canceled                                 (50)                 14.50
                                    ====================
     Outstanding, December 31, 1997         1,974             12.51  -   21.51
                                    ====================




<PAGE>
                                       F-44


ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

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

(12) Stockholders' Deficit (continued)

     The  warrants  outstanding  on December  31,  1997 expire on the  following
     dates:

                                      Outstanding           Exercise
     Expiration date                    warrants              price
     -----------------             ------------------    ----------------
                                                (in thousands)


     November 10, 1998                        2           $     21.51
     December 17, 1998                      100                 18.00
     March 24, 1999                          15                 20.01
     August 6, 2005                       1,857                 12.51
                                   ==================
                                          1,974
                                   ==================


(13) Sale of Teleports

     In December  1995,  the Company  received  approximately  $21.1  million as
     partial  payment for the sale of four of its teleports and certain  related
     assets, and entered into a management  agreement with the purchaser whereby
     the purchaser assumed control of the teleport operations.  Upon approval of
     the  transaction  by the Federal  Communications  Commission  ("FCC"),  the
     Company  completed the sale in March 1996 and received an  additional  $0.4
     million due to certain  closing  adjustments,  for total  proceeds of $21.5
     million. The Company recognized a loss of approximately $1.1 million on the
     sale.  Revenue  associated  with these  operations was  approximately  $9.1
     million  and $2.5  million  for  fiscal  1995 and 1996,  respectively.  The
     Company  has  reported  results of  operations  from these  assets  through
     December 31, 1995.

(14) Commitments and Contingencies

     (a)  Network Construction

          In March 1996,  the Company and  Southern  California  Edison  Company
          ("SCE")  jointly  entered  into a 25-year  agreement  under  which the
          Company  will  lease  1,258  miles of fiber  optic  cable in  Southern
          California,  and can install up to 500 additional miles of fiber optic
          cable. This network,  which will be maintained and operated  primarily
          by the Company,  stretches from Los Angeles to southern Orange County.
          Under the terms of this agreement,  SCE will be entitled to receive an
          annual fee for


<PAGE>
                                       F-45


ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

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

(14) Commitments and Contingencies (continued)

          ten years, certain fixed quarterly payments, a quarterly payment equal
          to  a  percentage  of  certain  network  revenue,  and  certain  other
          installation  and fiber  connection fees. The aggregate fixed payments
          remaining under the agreement totaled  approximately $144.7 million at
          December 31, 1997.  The agreement has been  accounted for as a capital
          lease in the accompanying consolidated balance sheets.

          In May 1997, the Company  entered into a long-term  agreement with The
          Southern  Company   ("Southern")  that  will  permit  the  Company  to
          construct a 100-mile  fiber optic network in the Atlanta  metropolitan
          area.  The Company paid $5.5 million upon  execution of the  agreement
          and is responsible for  reimbursement to Southern for costs of network
          design,   construction,    installation,   maintenance   and   repair.
          Additionally, the Company is also required to pay Southern a quarterly
          fee based on specified  percentages of the Company's  revenue  derived
          from services provided over this network.  Network construction on the
          initial  43-mile build is expected to be completed by May of 1998. The
          Company   estimates   costs  to  complete  the  initial  build  to  be
          approximately  $5.2  million.  Other  than the  initial  $5.5  million
          payment, no costs have been incurred as of December 31, 1997.

          In January 1997, the Company  announced the formation of ChoiceCom,  a
          strategic  alliance  between the Company and CSW, which is expected to
          develop and market  telecommunications  services in certain  cities in
          Texas. CSW holds 100% of the partnership interest in ChoiceCom and the
          Company has an option to purchase a 50%  interest at any time prior to
          July 1, 2003.  Subsequent  to July 1,  1999,  if the  Company  has not
          exercised  its  option,  CSW  will  have the  right to sell,  at price
          pursuant to the terms of the limited partnership agreement, either 51%
          or 100% of the  partnership  interest  in  ChoiceCom  to the  Company.
          Additionally,  the  Company  has  committed  to loan $15.0  million to
          ChoiceCom  under two  promissory  notes,  of which  $10.0  million was
          advanced as of December  31, 1997 and the  remaining  $5.0 million was
          advanced during the first quarter of fiscal 1998.

          In June 1997, the Company  entered into an  indefeasible  right of use
          ("IRU") agreement with Qwest Communications  Corporation ("Qwest") for
          approximately  1,800  miles  of fiber  optic  network  and  additional
          broadband  capacity in California,  Colorado,  Ohio and the Southeast.
          Network  construction  is ongoing  and is  expected  to be complete by
          December  1998.  The  Company  is  responsible   for  payment  on  the
          construction as segments of the network are completed and has incurred


<PAGE>
                                       f-46


ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

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

(14) Commitments and Contingencies (continued)

          approximately  $8.0 million as of December 31, 1997,  with total costs
          anticipated  to be  approximately  $35.0  million.  Additionally,  the
          Company has  committed to purchase  $6.0  million in network  capacity
          from Qwest prior to the end of 1998.

     (b)  Company Headquarters

          During the three months ended December 31, 1996, the Company  acquired
          property for its new  headquarters  and commenced  construction  of an
          office building that will accommodate  most of the Company's  Colorado
          operations.   The  total  cost  of  the  project  is  expected  to  be
          approximately  $44.2 million, of which $29.4 million had been incurred
          as of December 31, 1997 and is included in  construction  in progress.
          In January 1998, the Company sold the substantially completed building
          to a third party and entered  into an  agreement  to lease back all of
          the office space under a 15-year  operating  lease which  includes two
          ten-year renewal terms.

     (c)  Other Commitments

          As part of the terms of the original purchase  agreement,  the Company
          was obligated to purchase,  at fair market value, all of the shares of
          Maritime   Telecommunications  Network,  Inc.  ("MTN"),  a  64%  owned
          subsidiary   of  the   Company,   that  were  owned  by  the  minority
          shareholders,   upon  demand  of  the  minority  shareholders,   if  a
          transaction  was not effected which converted the minority shares into
          publicly  traded  securities  or cash by January  3,  1998.  As of the
          current   date,   no  such  demand  has  been  made  by  the  minority
          shareholders.

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

          Additionally,  the Company has entered  into  certain  commitments  to
          purchase   capital   assets  with  an  aggregate   purchase  price  of
          approximately  $19.5 million at December 31, 1997.

<PAGE>
                                       f-47


ICG COMMUNICATIONS,
INC. AND SUBSIDIARIES

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

(14) Commitments and Contingencies (continued)

     (d)  Leases

          The Company  leases  office space and equipment  under  non-cancelable
          operating leases.  Lease expense was approximately $2.8 million,  $5.1
          million,  $1.3 million and $11.8 million for fiscal 1995 and 1996, the
          three  months ended  December 31, 1996 and fiscal 1997,  respectively.
          Estimated  future minimum lease  payments for the years  subsequent to
          December 31, 1997 are (in thousands):

          Due December 31:
            1998                              $12,765
            1999                                9,563
            2000                                8,536
            2001                                8,003
            2002                                6,292
            Thereafter                         53,631
                                          =================
                                           $   98,790
                                          =================

     (e)  Reciprocal Compensation

          The Company has  recorded  revenue of  approximately  $4.9 million for
          fiscal 1997 for reciprocal  compensation relating to the transport and
          termination  of local  traffic  to  Internet  service  providers  from
          customers of incumbent  local  exchange  carriers  pursuant to various
          interconnection  agreements.  These local  exchange  carriers have not
          paid most of the bills they have  received  from the  Company and have
          disputed  substantially  all of these charges based on the belief that
          such calls are not local traffic as defined by the various  agreements
          and under state and federal laws and public  policies.  The resolution
          of these  disputes  will be based on rulings by state  public  utility
          commissions  and/or by the FCC.  To date,  there  have been  favorable
          rulings from 15 states and no  unfavorable  final rulings by any state
          public utilities  commission or the FCC that would indicate that calls
          placed by end users to Internet service providers would not qualify as
          local traffic subject to the payment of reciprocal compensation. While
          the Company  believes that all revenue  recorded  through December 31,
          1997 is collectible and that future  reciprocal  compensation  revenue
          will  be  realized,  there  can  be  no  assurance  that  such  future
          regulatory rulings will be favorable to the Company.


<PAGE>
                                       F-48


ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

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

(14) Commitments and Contingencies (continued)

     (f)  Litigation

          On April 4, 1997, certain shareholders of the Company's majority owned
          subsidiary,   Zycom   Corporation   ("Zycom"),   an  Alberta,   Canada
          corporation,  filed a  shareholder  derivative  suit and class  action
          complaint for unspecified damages, purportedly on behalf of all of the
          minority  shareholders  of  Zycom,  in the  District  Court of  Harris
          County,  Texas (Cause No.  97-17777)  against the  Company,  Zycom and
          certain of their subsidiaries. This complaint alleges that the Company
          and certain of its  subsidiaries  breached  certain duties owed to the
          plaintiffs.  The Company is vigorously  defending the claims. While it
          is not possible to predict the outcome of this litigation,  management
          believes these  proceedings will not have a material adverse effect on
          the  Company's  financial  condition,  results of  operations  or cash
          flows.

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

(15) Income Taxes

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

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

     Current  income tax  expense for fiscal 1996  represents  state  income tax
     relating to operations of companies in states requiring separate entity tax
     returns.  Accordingly,  these entities'  taxable income cannot be offset by
     the Company's net operating  loss  carryforwards.  No income tax expense or
     benefit was  recorded in fiscal 1995,  the three months ended  December 31,
     1996 or fiscal 1997.


<PAGE>
                                       F-49


ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

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

(15) Income Taxes (continued)

     During fiscal 1996, the deferred tax liability was adjusted for the effects
     of  certain  changes  in  estimated  lives of  property  and  equipment  as
     discussed in note 2 (j). As a result,  the Company recognized an income tax
     benefit of $5.3 million.

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

     The tax  effect of  temporary  differences  that  give rise to  significant
     portions  of the  deferred  tax  assets and  deferred  tax  liabilities  at
     December 31, 1996 and 1997 are as follows:

<TABLE>
<CAPTION>

                                                                                    December 31,
                                                                      --------------------------------------
                                                                             1996               1997
                                                                      -------------------  -----------------
                                                                                   (in thousands)
     <S>                                                              <C>                     <C>
     Deferred income tax liabilities:
       Property and equipment, due to excess
         purchase price of tangible assets and
         differences in depreciation for book and
         tax purposes                                                  $       14,106            6,254
                                                                      -------------------   ----------------

     Deferred income tax assets:
       Net operating loss carryforwards                                       (68,740)        (141,185)
       Accrued interest on high yield debt obligations
         deductible when paid                                                 (32,873)         (72,330)
       Accrued expenses not currently deductible for
         tax purposes                                                          (2,031)          (7,968)
       Less valuation allowance                                                89,538          215,229
                                                                      -------------------   -----------------
       Net deferred income tax asset                                          (14,106)          (6,254)
                                                                      --------------------  -----------------
       Net deferred income tax liability                                $           -                -
                                                                      ===================   =================
</TABLE>
<PAGE>
                                       F-50


ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

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

(15) Income Taxes (continued)

     As of December 31, 1997, the Company has net operating  losses  ("NOLs") of
     approximately  $353.0 million for U.S. tax purposes which expire in varying
     amounts  through  2012.  However,  due to the  provisions  of Section  382,
     Section 1502 and certain other provisions of the Internal Revenue Code (the
     "Code"), the utilization of these NOLs will be limited. The Company is also
     subject  to  certain  state  income  tax laws,  which  will also  limit the
     utilization of NOLs.

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

(16) Employee Benefit Plans

     The Company has established  salary  reduction  savings plans under Section
     401(k)  of  the  Code  which  the  Company  administers  for  participating
     employees. All full-time employees are covered under the plan after meeting
     minimum  service  and  age  requirements.  The  Company  makes  a  matching
     contribution of its Common Stock (up to

(16) Employee Benefit Plans (continued)

     a  maximum  of  6%  of  an  employee's  eligible  earnings)  which  totaled
     approximately  $0.5 million,  $1.2  million,  $0.5 million and $3.0 million
     during fiscal 1995 and 1996,  the three months ended  December 31, 1996 and
     fiscal 1997, respectively.

(17) Significant Customer

     During fiscal 1995,  the Company had revenue from a single  customer  which
     comprised 11% of total revenue and accounts  receivable  which comprised 8%
     of the total accounts  receivable balance at September 30, 1995. There were
     no customers  which  accounted  for greater than 10% of revenue or accounts
     receivable as of, or for the respective  periods ended  September 30, 1996,
     December 31, 1996 or 1997.

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

     As discussed  in note 10, the 11 5/8% Notes issued by Holdings  during 1997
     are  guaranteed  by ICG.  The 12 1/2%  Notes  and 13 1/2%  Notes  issued by
     Holdings during fiscal 1996 and 1995, respectively,  are also guaranteed by
     ICG and  Holdings-Canada.  The separate  complete  financial  statements of
     Holdings  have not been  included  herein  because such  disclosure  is not
     considered to be  significant  to the holders of the 11 5/8% Notes,  the 12
     1/2% Notes and the 13 1/2% Notes.  However,  summarized  combined financial
     information for Holdings and subsidiaries and affiliates is as follows:

<PAGE>
                                       F-51


ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

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

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

                Summarized Consolidated Balance Sheet Information

                                                    December 31,
                                     ---------------------------------------
                                           1996                 1997
                                     ------------------   ------------------
                                                  (in thousands)

     Current assets                    $     449,059             215,817
     Property and equipment, net             403,676             632,167
     Other non-current assets, net            88,439             122,768
     Current liabilities                      87,423              98,351
     Long-term debt, less current portion    690,293             890,503
     Due to parent                            11,485              30,970
     Other long-term liabilities              73,113              66,939
     Preferred stock                         159,120             292,442
     Stockholders' deficit                   (80,260)           (408,453)
<TABLE>
<CAPTION>

  Summarized Consolidated and Combined Statement of Operations Information (a)

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

<S>                           <C>                <C>            <C>              <C>                   <C>
Total revenue                 $ 111,610           169,094        35,399           56,956                273,354
Total operating costs
  and expenses                  157,384           238,908        50,296           83,934                465,517
Operating loss                  (45,774)          (69,814)      (14,897)         (26,978)              (192,163)
Net loss                        (68,760)         (172,687)      (34,281)         (49,750)              (328,193)
</TABLE>

     (a)  Holdings-Canada's  51%  interest in FOTI was  contributed  to Holdings
          effective in February 1995 (the remaining 49% was purchased in January
          1996) and,  accordingly,  FOTI's  operations have been included in the
          consolidated amounts subsequent to that date.

<PAGE>
                                       F-52


ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

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

(19) Financial Information of ICG Holdings (Canada), Inc.

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

                       Condensed Balance Sheet Information

                                                  December 31,
                                  ---------------------------------------------
                                           1996                     1997
                                  ---------------------   ---------------------
                                                 (in thousands)

     Current assets                 $          165                    162
     Advances to subsidiaries               11,485                 30,790
     Non-current assets, net                 2,793                  3,800
     Current liabilities                       199                    107
     Long-term debt, less current portion       65                     65
     Due to parent                           1,566                 22,342
     Preferred stock                       127,729                      -
     Share of losses of subsidiary          80,260                408,453
     Shareholders' deficit                 (67,647)              (396,035)

<PAGE>
                                       F-53


ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

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

(19) Financial Information of ICG Holdings (Canada), Inc. (continued)

<TABLE>
<CAPTION>

                  Condensed Statement of Operations Information

                                       Fiscal years ended           Three months ended December        Fiscal year ended
                                         September 30,                          31,                      December 31,
                                ---------------------------------  -------------------------------
                                       1995            1996             1995            1996                 1997
                                -----------------  --------------  ---------------  --------------   ----------------------
                                                                    (unaudited)
                                                                  (in thousands)
  <S>                           <C>                    <C>              <C>              <C>                <C>
  Total revenue                 $            -                -               -                -                   -
  Total operating costs
    and expenses                         1,309            3,438             361               73                 195
  Operating loss                        (1,309)          (3,438)           (361)             (73)               (195)
  Losses from subsidiaries             (68,760)        (172,687)        (34,281)         (49,750)           (328,193)
  Net loss attributable to
    common shareholders                (76,648)        (184,107)        (34,642)         (49,823)           (328,388)

</TABLE>


(20) Summarized Financial Information of ICG Funding, LLC

     As  discussed  in note 11, the 6 3/4%  Preferred  Securities  issued by ICG
     Funding  during fiscal 1997 are  guaranteed  by ICG. The separate  complete
     financial  statements of ICG Funding have not been included  herein because
     such disclosure is not considered to be significant to the holders of the 6
     3/4% Preferred Securities.  For fiscal 1997, the statement of operations of
     ICG Funding included only the preferred dividends paid and accrued on the 6
     3/4% Preferred  Securities and interest  income earned on the proceeds from
     the offering of such securities.  The summarized  balance sheet information
     for ICG Funding is as follows:
<PAGE>
                                       F-54


ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES

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

(20) Summarized Financial Information of ICG Funding, LLC (continued)

                      Summarized Balance Sheet Information

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

     Cash, cash equivalents and short-term
       investments available for sale                    $      94,182
     Other current assets                                           19
     Restricted cash                                            38,749
     Dividends payable                                           1,116
     Due to parent                                               4,642
     Preferred securities                                      127,729
     Member deficit                                               (537)

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

     The primary  asset of ICG is its  investment  in  Holdings-Canada.  Certain
     corporate expenses of the parent company are included in ICG's statement of
     operations and were approximately $1.2 million for fiscal 1997. At December
     31,  1997,  ICG  had  no  operations  other  than  those  of  ICG  Funding,
     Holdings-Canada and its subsidiaries.






<PAGE>




                          FINANCIAL STATEMENT SCHEDULE





ICG Communications, Inc.                                              Page


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

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




<PAGE>
                                       S-1



                          Independent Auditors' Report




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


Under the date of February 19,  1998,  we reported on the  consolidated  balance
sheets of ICG Communications,  Inc. and subsidiaries as of December 31, 1996 and
1997 and the related consolidated statements of operations, stockholders= equity
(deficit) and cash flows for the fiscal years ended September 30, 1995 and 1996,
the three months ended December 31, 1996, and the fiscal year ended December 31,
1997 as contained  in the  Company's  Annual  Report on Form 10-K for the fiscal
year  ended   December  31,  1997.  In   connection   with  our  audits  of  the
aforementioned  consolidated  financial  statements,  we have also  audited  the
related financial  statement schedule as listed in the accompanying  index. This
financial statement schedule is the responsibility of the Company's  management.
Our responsibility is to express an opinion on this financial statement schedule
based on our audits.

In our opinion,  the related financial  statement  schedule,  when considered in
relation to the basic consolidated financial statements taken as whole, presents
fairly, in all material respects, the information set forth therein.

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




                                                       KPMG Peat Marwick LLP


Denver, Colorado
February 19, 1998




<PAGE>
                                       S-2




ICG COMMUNICATIONS, INC.
AND SUBSIDIARIES                                                     Schedule II

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

<TABLE>
<CAPTION>

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

<S>                                            <C>              <C>                  <C>       <C>              <C>
    Fiscal year ended September 30, 1995       $   1,061        2,360                -         (1,204)          2,217
                                              ------------- --------------  -------------  --------------  -------------

    Fiscal year ended September 30, 1996       $   2,217        1,585                -         (1,293)          2,509
                                              ------------- --------------  -------------  --------------  -------------

    Three months ended December 31, 1996       $   2,509          914                -           (908)          2,515
                                              ------------- --------------  -------------  --------------  -------------

    Fiscal year ended December 31, 1997        $   2,515        4,003                -         (1,142)          5,376
                                              ------------- --------------  -------------  --------------  -------------

Allowance for uncollectible note receivable:

    Fiscal year ended September 30, 1995       $       -          175                -              -             175
                                               ------------- --------------  -------------  --------------  -------------

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

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

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

Allowance for investment impairment:

    Fiscal year ended September 30, 1995       $       -        2,000                -              -            2,000
                                              ------------- --------------  -------------  --------------  -------------

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

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

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

                                     See accompanying independent auditors'report.
</TABLE>


                                       S-2
<PAGE>



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

<PAGE>

                                    EXHIBITS



21:           Subsidiaries of the Registrant.

23.1:         Consent of KPMG Peat Marwick LLP.

27:           Financial Data Schedule.

10.46:        Amendment No. 1 to the ICG Communications, Inc. 1996 Stock
              Option Plan.

10.51:        Employment  Agreement,  dated  June  1,  1997,  between  NETCOM
              On-Line Communication Services, Inc. and David W. Garrison.

10.52a:       Purchase  Agreement between ICG  Holdings,  Inc.  and TriNet
              Corporate Realty Trust, Inc., dated December 9, 1997.

10.52b:       First  Amendment  to  Purchase  Agreement, by and  between ICG
              Holdings,  Inc. and TriNet  Essential  Facilities X, Inc.,  dated
              January 15, 1998.

10.52c:       Assignment  of  Purchase  Agreement,  by and  between  TriNet
              Corporate Realty Trust, Inc., dated January 15, 1998.

10.52d:       Commercial Lease - Net between TriNet Essential  Facilities X,
              Inc. and ICG Holdings, Inc., dated January 15, 1998.

10.52e:       Continuing  Lease  Guaranty,  by ICG  Communications,  Inc. to
              TriNet Essential Facilities X, Inc., dated January 20, 1998.

10.52f:       Continuing Lease Guaranty,  by ICG Holdings (Canada),  Inc. to
              TriNet Essential Facilities X, Inc., dated January 20, 1998.


<PAGE>

                                   SIGNATURES

Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  the  Registrant  has duly  caused  this Report to be signed on its
behalf by the undersigned, thereunto duly authorized, on March 30, 1998.

                              ICG Communications, Inc.

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

Pursuant to the requirements of the Securities Act of 1934, this Report has been
signed by the following persons in the capacities and on the dates indicated:


Signature                        Title                              Date

/s/William J. Laggett    Chairman of the Board of Directors      March 30, 1998
-----------------------
William J. Laggett
                         President, Chief Executive Officer and
/s/J. Shelby Bryan       Director (Principal Executive Officer)  March 30, 1998
-----------------------
J. Shelby Bryan
                         Executive Vice President and Chief
                         Financial Officer (Principal Financial
/s/James D. Grenfell     Officer)                                March 30, 1998
-----------------------
James D. Grenfell
                         Vice President and Corporate Controller
/s/Richard Bambach      (Principal Accounting Officer)           March 30, 1998
-----------------------
Richard Bambach

/s/David W. Garrison     Director                                March 30, 1998
-----------------------
David W. Garrison

/s/Harry R. Herbst       Director                                March 30, 1998
-----------------------
Harry R. Herbst

/s/Leontis Teryazos      Director                                March 30, 1998
-----------------------
Leontis Teryazos

/s/Walter Threadgill     Director                                March 30, 1998
-----------------------
Walter Threadgill


<PAGE>






                                   SIGNATURES

Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  the  Registrant  has duly  caused  this Report to be signed on its
behalf by the undersigned, thereunto duly authorized, on March 30, 1997.

                              ICG Funding, LLC

                              By: ICG Communications, Inc.
                                  Common Member and Manager

                              By: /s/James D. Grenfell
                                  James D. Grenfell
                                  Executive Vice President and
                                  Chief Financial Officer


<PAGE>




                                   SIGNATURES

Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  the  Registrant  has duly  caused  this Report to be signed on its
behalf by the undersigned, thereunto duly authorized, on March 30, 1998.

                              ICG Holdings (Canada), Inc.

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

Pursuant to the requirements of the Securities Act of 1934, this Report has been
signed by the following persons in the capacities and on the dates indicated:

Signature                   Title                                     Date

/s/William J. Laggett    Chairman of the Board of Directors      March 30, 1998
-----------------------
William J. Laggett
                         President, Chief Executive Officer and
/s/J. Shelby Bryan       Director (Principal Executive Officer)  March 30, 1998
-----------------------
J. Shelby Bryan
                         Executive  Vice President and Chief
/s/James D. Grenfell     Financial  Officer(Principal Financial  March 30, 1998
-----------------------  Officer)
James D. Grenfell
                         Vice President and Corporate Controller
/s/Richard Bambach       (Principal Accounting Officer)          March 30, 1998
-----------------------
Richard Bambach

                         Director
-----------------------
Harry R. Herbst

/s/Gregory C.K. Smith    Director                                March 30, 1998
-----------------------
Gregory C.K. Smith

/s/Leontis Teryazos      Director                                March 30, 1998
-----------------------
Leontis Teryazos



<PAGE>


                                   SIGNATURES

Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  the  Registrant  has duly  caused  this Report to be signed on its
behalf by the undersigned, thereunto duly authorized, on March 30, 1997.

                              ICG Holdings, Inc.

                              By:  /s/J. Shelby Bryan
                                   J. Shelby Bryan
                                   Chairman of the Board of Directors,
                                   President and Chief Executive Officer

Pursuant to the requirements of the Securities Act of 1934, this Report has been
signed by the following persons in the capacities and on the dates indicated:

Signature                 Title                                        Date

                         Chairman of the Board of Directors,
                         President and Chief Executive Officer
/s/J. Shelby Bryan       (Principal Executive Officer)           March 30, 1998
-----------------------
J. Shelby Bryan
                         Executive Vice President, Chief Financial
                         Officer and Director(Principal Financial
/s/James D. Grenfell     Officer)                                March 30, 1998
-----------------------
James D. Grenfell
                         Vice President and Corporate Controller
/s/Richard Bambach       (Principal Accounting Officer)          March 30, 1998
-----------------------
Richard Bambach
                         Executive Vice President - Network and
/s/John Kane             Director                                Marc 30, 1998
-----------------------
John Kane
                         Executive Vice President - Strategic
/s/Marc E. Maassen       Planning and Director                   March 30, 1998
-----------------------
Marc E. Maassen
                         Executive Vice President - Telecom
/s/Sheldon S. Ohringer   and Director                            March 30, 1998
-----------------------
Sheldon S. Ohringer