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

                                    FORM 10-Q

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

                  For the quarterly period ended June 30, 1999

                                       OR

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

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


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

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

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

         The number of registrants'  outstanding  common shares as of August 13,
1999  were  47,342,835,   31,931,558  and  1,918,  respectively.   ICG  Canadian
Acquisition,  Inc., a wholly owned subsidiary of ICG Communications,  Inc., owns
all of the issued and outstanding common shares of ICG Holdings (Canada) Co. ICG
Holdings  (Canada)  Co.  owns all of the  issued and  outstanding  shares of ICG
Holdings, Inc.

<PAGE>

                                TABLE OF CONTENTS




PART I........................................................................ 3
   ITEM 1.  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ...................... 3
            Consolidated Balance Sheets as of December 31, 1998 and
               June 30, 1999 (unaudited)...................................... 3
             Consolidated Statements of Operations (unaudited) for the
               Three Months and Six Months Ended June 30, 1998 and 1999....... 5
            Consolidated Statement of Stockholders' Deficit (unaudited)
               for the Six Months Ended June 30, 1999 ........................ 7
            Consolidated Statements of Cash Flows (unaudited) for the
               Six Months Ended June 30, 1998 and 1999 ....................... 8
            Notes to Consolidated Financial Statements, December 31, 1998
               and June 30, 1999 (unaudited)..................................10
   ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
            AND RESULTS OF OPERATIONS ........................................26
   ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK .......43

PART II   ....................................................................45
   ITEM 1.  LEGAL PROCEEDINGS ................................................45
   ITEM 2.  CHANGES IN SECURITIES ............................................45
   ITEM 3.  DEFAULTS UPON SENIOR SECURITIES ..................................45
   ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS ............45
   ITEM 5.  OTHER INFORMATION ................................................45
   ITEM 6.  EXHIBITS AND REPORT ON FORM 8-K ..................................45
            Exhibits .........................................................45
            Report on Form 8-K ...............................................46



                                       2
<PAGE>

                    ICG COMMUNICATIONS, INC. AND SUBSIDIARIES

                           Consolidated Balance Sheets
                 December 31, 1998 and June 30, 1999 (unaudited)

<TABLE>
<CAPTION>

                                                                               December 31,               June 30,
                                                                                   1998                     1999
                                                                            --------------------     --------------------
    Assets                                                                                 (in thousands)
<S>                                                                          <C>                         <C>
    Current assets:
       Cash and cash equivalents                                             $      210,307                234,713
       Short-term investments available for sale                                     52,000                 30,646
       Receivables:
          Trade, net of allowance of $14,351 and $20,823 at December 31,
            1998 and June 30, 1999, respectively (note 6)                           113,030                160,990
          Other                                                                         529                    587
                                                                            --------------------     --------------------
                                                                                    113,559                161,577

       Inventory                                                                          -                     67
       Prepaid expenses and deposits                                                 11,530                 11,520
       Net current assets of discontinued operations (note 3)                            66                 10,980
                                                                            --------------------     --------------------

          Total current assets                                                      387,462                449,503
                                                                            --------------------     --------------------

    Property and equipment                                                        1,064,112              1,299,116
       Less accumulated depreciation                                               (156,054)              (195,747)
                                                                            --------------------     --------------------
          Net property and equipment                                                908,058              1,103,369
                                                                            --------------------     --------------------

    Restricted cash                                                                  16,912                 13,372
    Investments in debt securities available for sale and restricted
      preferred stock (note 4)                                                            -                 27,686
    Other assets, net of accumulated amortization:
       Goodwill                                                                     110,513                105,575
       Deferred financing costs                                                      35,958                 33,678
       Transmission and other licenses                                                5,646                  1,207
       Deposits and other                                                            22,324                 14,152
                                                                            --------------------     -------------------
                                                                                    174,441                154,612
                                                                            --------------------     -------------------

    Net non-current assets of discontinued operations (note 3)                      102,774                 48,475
                                                                            --------------------     -------------------

          Total assets (note 7)                                              $    1,589,647              1,797,017
                                                                            ====================     ===================
                                                                                                             (Continued)

</TABLE>


                                       3
<PAGE>


                    ICG COMMUNICATIONS, INC. AND SUBSIDIARIES

               Consolidated Balance Sheets (unaudited), Continued

<TABLE>
<CAPTION>

                                                                            December 31,             June 30,
                                                                                1998                   1999
                                                                         -------------------    -------------------
Liabilities and Stockholders' Deficit                                                 (in thousands)
<S>                                                                      <C>                       <C>
Current liabilities:
   Accounts payable                                                      $        30,424               22,193
   Accrued liabilities                                                            51,565               75,443
   Deferred revenue (note 6)                                                       5,647               38,545
   Deferred gain on sale (note 3)                                                      -               15,502
   Current portion of capital lease obligations (note 6)                           4,846                8,535
   Current portion of long-term debt (note 5)                                         46                   46
                                                                         -------------------    -------------------
      Total current liabilities                                                   92,528              160,264
                                                                         -------------------    -------------------

Capital lease obligations, less current portion (note 6)                          62,946               63,314
Long-term debt, net of discount, less current portion (note 5)                 1,598,998            1,726,525
Other long-term liabilities                                                            -                  431
                                                                         -------------------    -------------------

   Total liabilities                                                           1,754,472            1,950,534
                                                                         -------------------    -------------------

Redeemable preferred stock of subsidiary ($371.2 million liquidation
   value at June 30, 1999) (note 5)                                              338,310              363,700

Company-obligated  mandatorily  redeemable  preferred  securities
   of subsidiary limited  liability company which holds solely Company
   preferred stock ($133.4 million liquidation value at June 30, 1999)           128,042              128,233

Stockholders' deficit:
   Common stock,  $0.01 par value,  100,000  shares  authorized;
      46,360,185 and 47,110,309 shares issued and outstanding at
      December 31, 1998 and June 30, 1999, respectively                              464                  471
   Additional paid-in capital                                                    577,940              589,239
   Accumulated deficit                                                        (1,209,462)          (1,235,160)
   Accumulated other comprehensive loss                                             (119)                   -
                                                                         -------------------    -------------------
      Total stockholders' deficit                                               (631,177)            (645,450)
                                                                         -------------------    -------------------

Commitments and contingencies (notes 5 and 6)

      Total liabilities and stockholders' deficit                        $     1,589,647            1,797,017
                                                                         ===================    ===================
</TABLE>

          See accompanying notes to consolidated financial statements.




                                       4
<PAGE>


                    ICG COMMUNICATIONS, INC. AND SUBSIDIARIES

                Consolidated Statements of Operations (unaudited)
            Three Months and Six Months Ended June 30, 1998 and 1999

<TABLE>
<CAPTION>

                                                               Three months ended June 30,       Six months ended June 30,
                                                              -------------------------------  -------------------------------
                                                                   1998            1999             1998            1999
                                                              ---------------  --------------  ---------------  --------------
                                                                           (in thousands, except per share data)

<S>                                                            <C>                <C>            <C>              <C>
Revenue (note 7)                                               $   64,215          117,654        122,702          221,985

Operating costs and expenses:
   Operating costs                                                 43,310           59,458         88,968          113,107
   Selling, general and administrative expenses                    37,832           42,975         73,214           85,783
   Depreciation and amortization (note 7)                          18,589           44,683         31,595           81,058
   Provision for impairment of long-lived assets (note 8)               -           29,300              -           29,300
   Other, net                                                          (7)             398            498             (535)
                                                              ---------------  --------------  ---------------  --------------
      Total operating costs and expenses                           99,724          176,814        194,275          308,713
                                                              ---------------  --------------  ---------------  --------------

      Operating loss                                              (35,509)         (59,160)       (71,573)         (86,728)

Other income (expense):
   Interest expense (note 7)                                      (41,482)         (51,308)       (75,904)         (98,746)
   Interest income                                                  8,490            3,793         13,985            7,897
   Other expense, net, including realized and unrealized
     gains and losses on marketable trading securities
     (note 4)                                                        (320)          (1,843)          (612)          (2,343)
                                                              ---------------  --------------  ---------------  --------------
                                                                  (33,312)         (49,358)       (62,531)         (93,192)
                                                              ---------------  --------------  ---------------  --------------

Loss from continuing operations before preferred dividends
   and extraordinary gain                                         (68,821)        (108,518)      (134,104)        (179,920)
Accretion and preferred dividends on preferred securities of
   subsidiaries                                                   (13,595)         (15,241)       (26,787)         (30,045)
                                                              ---------------  --------------  ---------------  --------------

Loss from continuing operations before extraordinary gain         (82,416)        (123,759)      (160,891)        (209,965)

Discontinued operations (note 3):
   Net loss from discontinued operations                          (18,420)            (692)       (41,700)            (803)
   Loss on disposal of discontinued operations, including
     provision of $0.3 million for operating losses during
     phase out period                                                   -           (7,959)             -           (7,959)
                                                              ---------------  --------------  ---------------  --------------
                                                                  (18,420)          (8,651)       (41,700)          (8,762)
                                                              ---------------  --------------  ---------------  --------------
Extraordinary gain on sales of operations of NETCOM, net of
   income taxes of $6.4 million (note 3)                                -                -              -          193,029
                                                              ---------------  --------------  ---------------  --------------

     Net loss                                                  $ (100,836)        (132,410)      (202,591)         (25,698)
                                                              ===============  ==============  ===============  ==============

Other comprehensive income - foreign currency translation
   adjustment                                                        (181)               -            (76)               -
                                                              ---------------  --------------  ---------------  --------------

     Comprehensive loss                                        $ (101,017)        (132,410)      (202,667)         (25,698)
                                                              ===============  ==============  ===============  ==============
                                                                                                                  (Continued)
</TABLE>

                                       5
<PAGE>


                    ICG COMMUNICATIONS, INC. AND SUBSIDIARIES

          Consolidated Statements of Operations (unaudited), Continued


<TABLE>
<CAPTION>
                                                               Three months ended June 30,       Six months ended June 30,
                                                              -------------------------------  -------------------------------
                                                                   1998            1999             1998            1999
                                                              ---------------  --------------  ---------------  --------------
                                                                           (in thousands, except per share data)

<S>                                                           <C>                   <C>            <C>              <C>
Net loss per share - basic and diluted:
   Loss from continuing operations                            $    (1.84)           (2.63)          (3.61)           (4.49)
   Net loss from discontinued operations                           (0.41)           (0.19)          (0.93)           (0.19)
   Extraordinary gain on sales of operations of NETCOM                  -                -              -             4.13
                                                              ---------------  --------------  ---------------  --------------
     Net loss per share - basic and diluted                   $    (2.25)           (2.82)          (4.54)           (0.55)
                                                              ===============  ==============  ===============  ==============

Weighted average number of shares outstanding - basic and
    diluted                                                       44,865           46,988          44,588           46,763
                                                              ===============  ==============  ===============  ==============
</TABLE>

          See accompanying notes to consolidated financial statements.


                                       6
<PAGE>

                    ICG COMMUNICATIONS, INC. AND SUBSIDIARIES

           Consolidated Statement of Stockholders' Deficit (unaudited)
                         Six Months Ended June 30, 1999


<TABLE>
<CAPTION>

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

<S>                                                <C>      <C>            <C>           <C>                  <C>        <C>
Balances at January 1, 1999                        46,360   $    464       577,940       (1,209,462)          (119)      (631,177)
   Shares issued for cash in connection with the
     exercise of options and warrants                 525          5         7,090                -              -          7,095
   Shares issued for cash in connection with the
     employee stock purchase plan                     127          1         2,133                -              -          2,134
   Shares issued as contribution to 401(k) plan        98          1         2,076                -              -          2,077
   Reversal of cumulative foreign currency
     translation adjustment (note 3)                    -          -             -                -            119            119
   Net loss                                             -          -             -          (25,698)             -        (25,698)
                                                =========== =========== ============= ==============  =============  ==============
Balances at June 30, 1999                          47,110   $    471       589,239       (1,235,160)             -       (645,450)
                                                =========== =========== ============= ==============  =============  ==============

</TABLE>

          See accompanying notes to consolidated financial statements.



                                       7
<PAGE>

                    ICG COMMUNICATIONS, INC. AND SUBSIDIARIES

                Consolidated Statements of Cash Flows (unaudited)
                     Six Months Ended June 30, 1998 and 1999
<TABLE>
<CAPTION>

                                                                                               Six months ended June 30,
                                                                                           -----------------------------------
                                                                                               1998                 1999
                                                                                           --------------      ---------------
                                                                                                     (in thousands)

<S>                                                                                         <C>                   <C>
Cash flows from operating activities:
   Net loss                                                                                 $   (202,591)          (25,698)
   Loss from discontinued operations                                                              41,700             8,762
   Extraordinary gain on sales of discontinued operations                                              -          (193,029)
   Adjustments to reconcile net loss to net cash used by operating activities:
       Recognition of deferred gain                                                                    -           (10,498)
       Accretion and preferred dividends on preferred securities of subsidiaries                  26,787            30,045
       Depreciation and amortization                                                              31,595            81,058
       Provision for impairment of long-lived assets                                                   -            29,300
       Deferred compensation                                                                           -               431
       Net loss (gain) on disposal of long-lived assets                                              498              (966)
       Gain on marketable trading securities                                                           -              (439)
       Provision for uncollectible accounts                                                        3,645             8,103
       Interest expense deferred and included in long-term debt                                   73,164            94,473
       Interest expense deferred and included in capital lease obligations                         2,831             2,672
       Amortization of deferred financing costs included in interest expense                       1,820             2,283
       Interest expense capitalized on assets under construction                                  (5,469)           (6,708)
       Contribution to 401(k) plan through issuance of common stock                                1,509             2,077
       Change in  operating  assets and  liabilities,  excluding  the effects of
         dispositions and non-cash transactions:
            Receivables                                                                          (25,103)          (60,100)
            Inventory                                                                                  -               139
            Prepaid expenses and deposits                                                            555             3,104
            Deferred advertising costs                                                            (1,361)                -
            Accounts payable and accrued liabilities                                              18,780           (21,095)
            Deferred revenue                                                                         787            34,090
                                                                                           --------------      ---------------
               Net cash used by operating activities                                             (30,853)          (21,996)
                                                                                           --------------      ---------------
Cash flows from investing activities:
  Increase in long-term notes receivable from affiliates and others                               (4,910)                -
  Acquisition of property, equipment and other assets                                           (150,044)         (229,747)
  Payments for construction of corporate headquarters                                             (4,944)                -
  Proceeds from sales of operations of NETCOM, net of cash included in sale                            -           252,881
  Proceeds from disposition of property, equipment and other assets                                  145             4,302
  Proceeds from sale of corporate headquarters, net of selling and other costs                    29,094                 -
  Proceeds from sales of short-term investments available for sale                                96,281            21,354
  Proceeds from sale of marketable securities                                                          -            30,439
  Decrease in restricted cash                                                                      3,813             3,540
  Purchase of investments                                                                              -           (27,686)
  Purchase of minority interest in subsidiary                                                          -            (4,189)
                                                                                           --------------      ---------------
       Net cash (used) provided by investing activities                                          (30,565)           50,894
                                                                                           --------------      ---------------
                                                                                                                  (Continued)
</TABLE>


                                       8
<PAGE>


                    ICG COMMUNICATIONS, INC. AND SUBSIDIARIES

          Consolidated Statements of Cash Flows (unaudited), Continued


<TABLE>
<CAPTION>

                                                                                               Six months ended June 30,
                                                                                          -------------------------------------
                                                                                                 1998                  1999
                                                                                          -------------------   ---------------
                                                                                                     (in thousands)

<S>                                                                                       <C>                         <C>
Cash flows from financing activities:
  Proceeds from issuance of common stock:
      Sale by subsidiary                                                                  $          3,385                   -
      Exercise of options and warrants                                                              11,668               7,095
      Employee stock purchase plan                                                                     884               2,134
  Proceeds from issuance of long-term debt                                                         550,574                   -
  Deferred long-term debt issuance costs                                                           (17,205)                  -
Principal payments on capital lease obligations                                                     (8,952)             (9,589)
Principal payments on long-term debt                                                                (2,350)                (23)
Payments of preferred dividends                                                                     (4,463)             (4,463)
                                                                                          -------------------   ---------------
    Net cash provided (used) by financing activities                                                533,541             (4,846)
                                                                                          -------------------   ---------------

    Net increase in cash and cash equivalents                                                       472,123             24,052
    Net cash (used) provided by discontinued operations                                             (14,484)               354
Cash and cash equivalents, beginning of period                                                      120,574            210,307
                                                                                          ===================   ===============
Cash and cash equivalents, end of period                                                  $         578,213            234,713
                                                                                          ===================   ===============

Supplemental disclosure of cash flows information of continuing operations:
   Cash paid for interest                                                                 $           3,558              6,026
                                                                                          ===================   ================

   Cash paid for income taxes                                                             $               -                931
                                                                                          ===================   ================

Supplemental schedule of non-cash investing and activities of continuing operations:
      Acquisition of corporate headquarters assets through the issuance of long-term debt
        and conversion of security deposit (note 5)                                       $               -             33,077
                                                                                          ===================   ================
      Assets acquired under capital leases                                                $               -              6,190
                                                                                          ===================   ================
</TABLE>


          See accompanying notes to consolidated financial statements.



                                       9
<PAGE>


                    ICG COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements
                 December 31, 1998 and June 30, 1999 (unaudited)


(1)       Organization and Basis of Presentation

          ICG  Communications,   Inc.,  a  Delaware   corporation  ("ICG"),  was
          incorporated on April 11, 1996 and is the publicly-traded  U.S. parent
          company  of ICG  Funding,  LLC,  a special  purpose  Delaware  limited
          liability  company ("ICG Funding"),  ICG Holdings (Canada) Co., a Nova
          Scotia unlimited liability company ("Holdings-Canada"),  ICG Holdings,
          Inc., a Colorado corporation  ("Holdings"),  and ICG Services, Inc., a
          Delaware corporation ("ICG Services"), and their subsidiaries. ICG and
          its subsidiaries are collectively referred to as the "Company."

          The  Company's  principal  business  activity  is   telecommunications
          services,  including Telecom Services, and until the completion of the
          sales of such  operations,  Network  Services and Satellite  Services.
          Telecom Services consists primarily of the Company's competitive local
          exchange  carrier  operations  which provide local,  long distance and
          data  services  to  business  end users,  Internet  service  providers
          ("ISPs") and long distance  carriers and resellers.  Additionally,  in
          February  1999,  the  Company  began  marketing  Internet  access  and
          enhanced  network  services  to  ISPs  and  other   telecommunications
          providers.  Network Services supplies information  technology services
          and  selected  networking   products,   focusing  on  network  design,
          installation,  maintenance  and  support  for a variety  of end users,
          including   Fortune  1000  firms  and  other  large   businesses   and
          telecommunications companies. Satellite Services consists of satellite
          voice,  data and video  services  provided to major cruise ship lines,
          the U.S.  Navy,  the  offshore  oil and gas  industry  and  integrated
          communications providers.

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

          On July 15, 1999,  the Company's  board of directors  adopted a formal
          plan to dispose of the Company's  investments in Network  Services and
          Satellite  Services  (see  note 3)  and,  accordingly,  the  Company's
          consolidated  financial  statements  reflect  the  operations  and net
          assets of Network Services and Satellite  Services as discontinued for
          all periods presented.

(2)      Significant Accounting Policies

         (a)   Basis of Presentation

               The Company's financial  statements should be read in conjunction
               with ICG's  Annual  Report on Form 10-K for the fiscal year ended
               December 31, 1998, as certain  information  and note  disclosures
               normally included in financial  statements prepared in accordance
               with generally accepted accounting principles have been condensed
               or omitted  pursuant to the rules and  regulations  of the United
               States Securities and Exchange Commission.  The interim financial
               statements  reflect all adjustments  which are, in the opinion of
               management,  necessary  for  a  fair  presentation  of  financial
               position,  results of operations and cash flows as of and for the
               interim  periods  presented.  Such  adjustments  are of a  normal
               recurring nature.


                                       10
<PAGE>

                   ICG COMMUNICATIONS, INC. AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued


(2)      Significant Accounting Policies (continued)

               Operating  results for the six months ended June 30, 1999 are not
               necessarily  indicative  of the results  that may be expected for
               the fiscal year ending December 31, 1999.

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

         (b)   Net Loss Per Share

               Basic and  diluted net loss per share is  calculated  by dividing
               net loss by the weighted average number of shares of common stock
               outstanding.   Weighted  average  number  of  shares  outstanding
               represents ICG Common Stock  outstanding for the six months ended
               June 30, 1999 and combined  ICG Common Stock and  Holdings-Canada
               Class A common shares  outstanding  for the six months ended June
               30,  1998.   Potential  common  stock,  which  includes  options,
               warrants  and  convertible   subordinated   notes  and  preferred
               securities,   are  not   included  in  the  net  loss  per  share
               calculation  as their  effect is  anti-dilutive.  The Company has
               presented  net loss per share from  discontinued  operations  and
               extraordinary  gain on  sales  of  operations  of  NETCOM  in the
               consolidated statement of operations for all periods presented.

         (c)   Reclassifications

               Certain 1998 amounts have been  reclassified  to conform with the
               1999 presentation.

 (3)      Discontinued Operations

          Net loss from discontinued operations consists of the following:

<TABLE>
<CAPTION>
                                                             Three months ended                  Six months ended
                                                                  June 30,                           June 30,
                                                       -------------------------------    -------------------------------
                                                           1998              1999             1998              1999
                                                       -------------     -------------    --------------    -------------
                                                                                (in thousands)

<S>                                                    <C>                      <C>           <C>                  <C>
        Network Services (a)                           $    (2,355)             (703)          (6,180)           (1,115)
        Satellite Services (b)                              (4,664)               11           (3,927)              312
        Zycom (c)                                             (801)                -           (3,199)                -
        NETCOM (d)                                         (10,600)                -          (28,394)                -
                                                       -------------     -------------    --------------    -------------
            Net loss from discontinued operations      $   (18,420)             (692)         (41,700)             (803)
                                                       =============     =============    ==============    =============
</TABLE>

         (a)   Network Services

               On July 15, 1999,  the  Company's  board of  directors  adopted a
               formal  plan  to  dispose  of the  Company's  investments  in its
               wholly-owned subsidiaries, ICG Fiber Optic Technologies, Inc. and
               Fiber Optic  Technologies of the Northwest,  Inc.  (collectively,
               "Network Services"). The Company's plan of disposal consists of a
               sale for cash  proceeds of the business of Network  Services.  On
               July 19, 1999,  the Company signed a letter of intent to sell all
               of the  capital  stock of Network  Services  to a third party for
               cash  proceeds  of  approximately  $24.0  million.   The  Company
               anticipates the sale of Network Services will be completed within
               the next 12 months.

               The  Company's  consolidated  financial  statements  reflect  the
               operations of Network  Services as  discontinued  for all periods
               presented.  Additionally,  during the three months ended June 30,

                                       11
<PAGE>



                    ICG COMMUNICATIONS, INC. AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued


(3)       Discontinued Operations (continued)

               1999,  the  Company  accrued   approximately   $8.0  million  for
               estimated  losses on  disposal  of  Network  Services,  including
               approximately  $0.3  million for  estimated  operating  losses of
               Network  Services  during the phase out  period.  Included in net
               current  assets  and  net  non-current   assets  of  discontinued
               operations in the Company's  consolidated  balance sheets are the
               following accounts of Network Services:

<TABLE>
<CAPTION>
                                                        December 31,         June 30,
                                                            1998               1999
                                                     ------------------- ------------------
                                                                  (in thousands)

<S>                                                  <C>                         <C>
Cash and cash equivalents                            $           846               1,519
Receivables, net                                              21,237              21,849
Inventory, prepaid expenses and deposits                       1,888               2,812
Accounts payable, accrued liabilities and
   other current liabilities                                  (5,752)            (16,106)
                                                     ------------------- ------------------

   Net current assets of Network Services            $        18,219              10,074
                                                     =================== ==================

Property and equipment, net                          $         3,686               3,103
Goodwill, net                                                  9,865               9,275
Other assets                                                      93                  79
Capital lease obligations, less current portion                 (413)               (329)
                                                     ------------------- ------------------

   Net non-current assets of Network Services        $        13,231              12,128
                                                     =================== ==================
</TABLE>

         (b)   Satellite Services

               On July 15, 1999,  the  Company's  board of  directors  adopted a
               formal  plan  to  dispose  of the  Company's  investments  in ICG
               Satellite Services, Inc. and Maritime Telecommunications Network,
               Inc. (collectively,  "Satellite Services"). The Company's plan of
               disposal  consists of a sale for cash proceeds of the business of
               Satellite Services.  On August 11, 1999, the Company entered into
               a  definitive  agreement  to sell  all of the  capital  stock  of
               Satellite  Services  to  a  third  party  for  cash  proceeds  of
               approximately  $100.0  million.  The company  expects to record a
               gain on the  sale  of  Satellite  Services,  which  gain  will be
               included in the Company's  consolidated  financial  statements in
               the  period of  disposal.  The  Company  anticipates  the sale of
               Satellite Services will be completed within the next 12 months.

               The  Company's  consolidated  financial  statements  reflect  the
               operations of Satellite  Services as discontinued for all periods
               presented.  Included  in net current  assets and net  non-current
               assets of discontinued  operations in the Company's  consolidated
               balance sheets are the following accounts of Satellite Services:


                                       12
<PAGE>

                    ICG COMMUNICATIONS, INC. AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued


(3)       Discontinued Operations (continued)

<TABLE>
<CAPTION>
                                                        December 31,         June 30,
                                                            1998               1999
                                                     ------------------- ------------------
                                                                 (in thousands)
<S>                                                  <C>                          <C>
Receivables, net                                     $        10,342               5,266
Inventory, prepaid expenses and deposits                       1,440               2,212
Accounts payable and accrued liabilities                      (6,664)             (5,753)
                                                     ------------------- ------------------

   Net current assets of Satellite Services          $         5,118               1,725
                                                     =================== ==================

Property and equipment, net                          $        22,390              24,416
Goodwill, net                                                 10,125               9,300
Other assets, net                                              2,785               2,631
                                                     ------------------- ------------------

   Net non-current assets of Satellite Services      $         35,300             36,347
                                                     =================== ==================
</TABLE>
            (c)    Zycom

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

               The call traffic assigned to ICN represented approximately 86% of
               Zycom's revenue for the year ended December 31, 1998. The loss of
               this   significant   portion   of   Zycom's   business,   despite
               management's  best  efforts to secure  other  sources of revenue,
               raised  substantial  doubt as to Zycom's  ability to operate in a
               manner which would benefit Zycom's or the Company's shareholders.
               Accordingly,  on August  25,  1998,  Zycom's  board of  directors
               approved a plan to wind down and ultimately  discontinue  Zycom's
               operations.  On October 22, 1998, Zycom completed the transfer of
               all customer traffic to other providers.  On January 4, 1999, the
               Company completed the sale of the remainder of Zycom's long-lived
               operating  assets to an unrelated  third party for total proceeds
               of $0.2  million.  As Zycom's  assets were  recorded at estimated
               fair  market  value at  December  31,  1998,  no gain or loss was
               recorded on the sale during the six months  ended June 30,  1999.
               Zycom anticipates the disposition of its remaining assets and the
               discharge  of  its  remaining   operating   liabilities  will  be
               completed in 1999.

               The  Company's  consolidated  financial  statements  reflect  the
               operations of Zycom as  discontinued  for all periods  presented.
               Zycom reported net losses from operations of  approximately  $1.2
               million for the period from August 25, 1998 to December  31, 1998
               and  reported  no income or losses  from  operations  for the six
               months  ended June 30,  1999.  The  Company  has  accrued for all
               expected  future net  losses of Zycom.  Included  in net  current

                                       13
<PAGE>

                    ICG COMMUNICATIONS, INC. AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued


(3)       Discontinued Operations (continued)

               liabilities and net non-current assets of discontinued operations
               in the Company's  consolidated  balance  sheets are the following
               accounts of Zycom:
<TABLE>
<CAPTION>
                                                                           December 31,             June 30,
                                                                               1998                   1999
                                                                        -------------------    --------------------
                                                                                      (in thousands)
<S>                                                                     <C>                               <C>
               Cash and cash equivalents                                $            47                      -
               Receivables, net                                                      90                      -
               Prepaid expenses and deposits                                         11                      1
               Accounts payable and accrued liabilities                          (1,092)                  (820)
                                                                        -------------------    --------------------

                   Net current liabilities of Zycom                     $          (944)                  (819)
                                                                        ===================    ====================

               Net non-current assets of Zycom - property and
                   equipment, net                                       $           220                      -
                                                                        ===================    ====================
</TABLE>
          (d)    NETCOM

               On February 17, 1999,  the Company sold certain of the  operating
               assets and liabilities of NETCOM to MindSpring Enterprises, Inc.,
               an ISP located in Atlanta, Georgia ("MindSpring"). Total proceeds
               from the sale were $245.0  million,  consisting of $215.0 million
               in cash and 376,116 shares of common stock of MindSpring,  valued
               at approximately $79.76 per share at the time of the transaction.
               Assets and liabilities sold to MindSpring  include those directly
               related to the domestic  operations of NETCOM's Internet dial-up,
               dedicated  access and Web site hosting  services.  In conjunction
               with  the  sale  to  MindSpring,  the  Company  entered  into  an
               agreement  to lease  to  MindSpring  for a  one-year  period  the
               capacity of certain  network  operating  assets formerly owned by
               NETCOM and retained by the Company.  MindSpring  is utilizing the
               Company's  network  capacity  to provide  Internet  access to the
               dial-up  services  customers  formerly owned by NETCOM.  Over the
               term of the one-year agreement, MindSpring is required to pay the
               Company a minimum  of $27.0  million  for the  Company's  network
               capacity,  although such minimum is subject to increase dependent
               upon network usage.  In addition,  the Company is receiving for a
               one-year  period 50% of the gross  revenue  earned by  MindSpring
               from the dedicated  access  customers  formerly  owned by NETCOM,
               estimated to be  approximately  $10.0 million for the term of the
               agreement.  The Company, through NetAhead, is currently utilizing
               the  retained  network  operating  assets  to  provide  wholesale
               capacity and other  enhanced  network  services to MindSpring and
               intends  to   provide   similar   services   to  other  ISPs  and
               telecommunications providers in the future. The carrying value of
               the  assets  retained  by the  Company  was  approximately  $21.7
               million,   including   approximately  $17.5  million  of  network
               equipment,  on  February  17,  1999.  The Company  also  retained
               approximately  $11.3 million of accrued  liabilities  and capital
               lease obligations.

               On March 16, 1999,  the Company sold all of the capital  stock of
               NETCOM's   international   operations   for  total   proceeds  of
               approximately  $41.1 million.  MetroNET  Communications  Corp., a
               Canadian  entity,  and  Providence  Equity  Partners,  located in
               Providence,  Rhode Island ("Providence"),  together purchased the
               80%  interest  in  NETCOM   Canada  Inc.   owned  by  NETCOM  for
               approximately  $28.9  million in cash.  Additionally,  Providence
               purchased  all of the  capital  stock of NETCOM  Internet  Access
               Services Limited,  NETCOM's operations in the United Kingdom, for
               approximately $12.2 million in cash.

                                       14
<PAGE>

                    ICG COMMUNICATIONS, INC. AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued


(3)      Discontinued Operations (continued)

               During the six months ended June 30, 1999, the Company recorded a
               combined  gain  on the  sales  of the  operations  of  NETCOM  of
               approximately   $193.0   million,   net  of   income   taxes   of
               approximately  $6.4 million.  Offsetting the gain on the sales is
               approximately  $16.6  million of net losses  from  operations  of
               NETCOM  from  November  3, 1998 (the date on which the  Company's
               board of  directors  adopted  the  formal  plan to dispose of the
               operations   of   NETCOM)   through   the  dates  of  the  sales.
               Additionally,  since the Company  expects to  generate  operating
               costs in excess of revenue under its network  capacity  agreement
               with  MindSpring  and  the  terms  of  the  sale  agreement  were
               dependent upon and  negotiated in  conjunction  with the terms of
               the   network   capacity   agreement,    the   Company   deferred
               approximately  $26.0  million  of  the  proceeds  from  the  sale
               agreement  to be  applied  on a  periodic  basis  to the  network
               capacity  agreement.  The deferred proceeds are recognized in the
               Company's  statement  of  operations  as the Company  incurs cash
               operating   losses   under  the   network   capacity   agreement.
               Accordingly,  the  Company  does  not  expect  to  recognize  any
               revenue,  operating costs or selling,  general and administrative
               expenses from services provided to MindSpring for the term of the
               agreement.  Any  incremental  revenue or costs generated by other
               customers,  or by other  services  provided  to  MindSpring,  are
               recognized in the Company's  consolidated statement of operations
               as  incurred.  During the three  months and six months ended June
               30, 1999,  the Company  applied  $3.8 million and $10.5  million,
               respectively, of deferred proceeds from the sale of the operating
               assets  and  liabilities  of  NETCOM  to  the  network   capacity
               agreement with MindSpring, which entirely offset the costs of the
               Company's  operations  under the agreement.  Since the operations
               sold were  acquired by ICG in a  transaction  accounted  for as a
               pooling of interests,  the gain on the sales of the operations of
               NETCOM is  classified as an  extraordinary  item in the Company's
               consolidated statement of operations.

(4)      Investments

          As discussed in note 3, the Company  received 376,116 shares of common
          stock of MindSpring,  valued at $79.76 per share, or $30.0 million, at
          the time of the transaction,  as partial consideration for the sale of
          the domestic operations of NETCOM. In April 1999, the Company sold its
          investment  in  MindSpring  for net  proceeds of  approximately  $30.4
          million. The Company has recorded a gain of approximately $0.4 million
          in its statement of operations for the six months ended June 30, 1999.

          On March 30, 1999,  the Company  purchased,  for  approximately  $10.0
          million in cash,  454,545  shares of  restricted  Series D-1 Preferred
          Stock (the "NorthPoint Preferred Stock") of NorthPoint  Communications
          Holdings,  Inc., a Delaware corporation and competitive local exchange
          carrier  ("CLEC") based in San Francisco,  California  ("NorthPoint").
          The NorthPoint  Preferred Stock has no voting rights and is ultimately
          convertible  into a voting class of common stock of NorthPoint,  at an
          exchange  price  which  represents  a  discount,  as  provided  in the
          relevant  documentation,  to the  initial  public  offering  price  of
          NorthPoint's  common stock. The Company is restricted from selling the
          NorthPoint  Preferred Stock or securities  obtained upon conversion of
          the NorthPoint  Preferred  Stock until March 23, 2000. On May 5, 1999,
          NorthPoint  completed the initial public offering of its common stock,
          at which time the NorthPoint Preferred Stock, and additional shares of
          NorthPoint  Preferred Stock obtained as a result of stock splits, were
          automatically  converted  into  shares  of  Class B  common  stock,  a
          nonvoting class of common stock of NorthPoint (the "NorthPoint Class B
          Shares"),  which  are  convertible  on or after  March  23,  2000 on a
          one-for-one  basis into a voting class of common stock of  NorthPoint.
          The Company will account for its  investment in  NorthPoint  under the
          cost  method of  accounting  until the  NorthPoint  Class B Shares are
          converted into voting and tradable  common stock of NorthPoint,  after
          which the investment will be classified as a trading security.



                                       15
<PAGE>

                    ICG COMMUNICATIONS, INC. AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued


(5)      Long-term Debt and Redeemable Preferred Stock of Subsidiary

          Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
                                                                                 December 31,            June 30,
                                                                                     1998                  1999
                                                                              -------------------    -----------------
                                                                                          (in thousands)

 <S>                                                                         <C>                         <C>
           9 7/8% Senior discount notes of ICG Services, net of discount      $        266,918             280,096
           10% Senior discount notes of ICG Services, net of discount                  327,699             344,087
           11 5/8% Senior discount notes of Holdings, net of discount                  122,528             129,650
           12 1/2% Senior discount notes of Holdings, net of discount                  414,864             440,794
           13 1/2% Senior discount notes of Holdings, net of discount                  465,886             497,741
           Mortgage loan payable with interest at 8 1/2%, due monthly
               into 2009, secured by building                                            1,084               1,061
           Mortgage loan payable with variable rate of interest (14.77% at
               June 30, 1999) due in full on January 31, 2013, secured by
               corporate headquarters (a)                                                    -              33,077
           Other                                                                            65                  65
                                                                              -------------------    -----------------
                                                                                     1,599,044           1,726,571
              Less current portion                                                         (46)                (46)
                                                                              -------------------    -----------------
                                                                              $      1,598,998           1,726,525
                                                                              ===================    =================
</TABLE>

              (a) Mortgage Loan Payable

                  Effective January 1, 1999, the Company purchased its corporate
                  headquarters  building,  land and improvements  (collectively,
                  the "Corporate Headquarters") for approximately $43.4 million,
                  which amount represents  historical cost and approximates fair
                  value.  The  Company,   through  a  newly  formed  subsidiary,
                  financed  the purchase  primarily  through a loan secured by a
                  mortgage  on the  Corporate  Headquarters,  guaranteed  by ICG
                  Services, Inc. The amended loan agreement,  dated May 1, 1999,
                  requires monthly interest payments at an initial interest rate
                  of 14.77% per annum which rate  increases  annually by 0.003%,
                  with the mortgage  balance due January 31, 2013. The seller of
                  the   Corporate   Headquarters   has  retained  an  option  to
                  repurchase  the Corporate  Headquarters  at the original sales
                  price,  which  option  is  exercisable  from  January  1, 2004
                  through January 31, 2012.

             (b)  Senior Facility

                  On August 12, 1999, ICG Equipment and NetAhead  entered into a
                  $200.0 million senior secured financing  facility (the "Senior
                  Facility")  consisting  of a $75.0 million term loan, a $100.0
                  million  term  loan  and a  $25.0  million  revolving  line of
                  credit.  The Senior Facility is guaranteed by ICG Services and
                  is secured by the assets of ICG Equipment and NetAhead.

                  As required under the terms of the loan, the Company  borrowed
                  on August 12, 1999 the  available  $75.0  million on the $75.0
                  million  term  loan.  The loan  bears  interest  at an  annual
                  interest  rate of LIBOR plus 3.5% or the base rate, as defined
                  in the credit  agreement,  plus 2.5%, at the Company's  option
                  (10.5% on August  12,  1999).  Quarterly  repayments  commence
                  September  30,  1999  and  require   quarterly   loan  balance
                  reductions  of 0.25%  through June 30, 2005 with the remaining
                  outstanding  balance  to be  repaid  during  the  final  three
                  quarters of the loan term. The $75.0 million term loan matures
                  on March 31, 2006.


                                       16
<PAGE>
                    ICG COMMUNICATIONS, INC. AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued


(5)      Long-term Debt and Redeemable Preferred Stock of Subsidiary (continued)

                  On August 12, 1999,  the Company  borrowed $5.0 million on the
                  $100.0  million term loan,  which is available  through August
                  10, 2000 at an initial annual interest rate of LIBOR plus 3.5%
                  or the base rate,  as defined  in the credit  agreement,  plus
                  2.125%,  at the Company's option (10.125% on August 12, 1999).
                  Quarterly  repayments  commence September 30, 2002 and require
                  aggregate  loan  balance  reductions  of 25% through  June 30,
                  2003, 35% through June 30, 2004 and 40% through June 30, 2005.
                  The $100.0 million term loan matures on June 30, 2005.

                  The  $25.0  million  revolving  line of  credit  is  available
                  through  the  maturity  date of June  30,  2005 at an  initial
                  annual  interest  rate of LIBOR plus 3.5% or the base rate, as
                  defined in the credit agreement, plus 2.125%, at the Company's
                  option.

                  The terms of the Senior Facility  provide certain  limitations
                  on the use of proceeds,  additional  indebtedness,  dividends,
                  prepayment of the Senior Facility and other  indebtedness  and
                  certain  other  transactions.  Additionally,  the  Company  is
                  subject to certain  financial  covenants  based on its results
                  and the  results of ICG  Services.  The Company is required to
                  pay  commitment  fees  ranging  from  0.625% to 1.375% for the
                  unused  portion  of  available  borrowings  under  the  Senior
                  Facility.

             Redeemable preferred stock of subsidiary is summarized as follows:
<TABLE>
<CAPTION>
                                                                      December 31,                June 30,
                                                                          1998                      1999
                                                                  ----------------------     -------------------
                                                                                   (in thousands)
<S>                                                               <C>                              <C>
           14% Exchangeable preferred stock of Holdings,
             mandatorily redeemable in 2008                       $        124,867                 134,179
           14 1/4% Exchangeable preferred stock of Holdings,
             mandatorily redeemable in 2007                                213,443                 229,521
                                                                  ----------------------     -------------------
                                                                  $        338,310                 363,700
                                                                  ======================     ===================
</TABLE>
 (6)      Commitments and Contingencies

          (a)  Network Construction

               In March 1996, the Company and Southern California Edison Company
               ("SCE") entered into a 25-year  agreement under which the Company
               will  license  1,258  miles of  fiber  optic  cable  in  Southern
               California,  and can install up to 500 additional  miles of fiber
               optic cable. This network,  which will be maintained and operated
               primarily by the Company,  stretches from Los Angeles to southern
               Orange County. Under the terms of this agreement, SCE is entitled
               to receive an annual fee for ten years,  certain fixed  quarterly
               payments,  a quarterly  payment  equal to a percentage of certain
               network  revenue,   and  certain  other  installation  and  fiber
               connection fees. The aggregate fixed payments remaining under the
               agreement totaled  approximately $126.9 million at June 30, 1999.
               The  agreement  has been  accounted for as a capital lease in the
               accompanying consolidated balance sheets.

               In June 1997, the Company entered into an  indefeasible  right of
               use  ("IRU")  agreement  with  Qwest  Communications  Corporation
               ("Qwest")  for  approximately  1,800 miles of fiber optic network
               and additional broadband capacity in California,  Colorado,  Ohio
               and  the  Southeast.  Network  construction  is  ongoing  and  is
               expected to be completed in 1999. The Company is responsible  for
               payment  on the  construction  as  segments  of the  network  are
               completed and has incurred approximately $24.9 million as of June

                                       17
<PAGE>

                    ICG COMMUNICATIONS, INC. AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued


(6)      Commitments and Contingencies (continued)

               30, 1999,  with remaining costs  anticipated to be  approximately
               $10.1  million.  As part  of this  agreement,  the  Company  also
               committed to purchase $6.0 million in network capacity from Qwest
               prior  to the  end  of  1999.  The  Company's  capacity  purchase
               commitment was cancelled by Qwest,  without further obligation by
               the Company,  in  conjunction  with the Company's  additional IRU
               agreement with Qwest, signed on June 25, 1999.

               On June 25, 1999,  the Company signed an agreement to lease fiber
               optic  capacity to Qwest for a minimum  10-year term. The Company
               will  account for the capacity  agreement as a sales-type  lease.
               Revenue will be recognized on a  percentage-of-completion  basis,
               as the network build-out is completed and is available for use by
               Qwest. The $32.0 million received by the Company on June 29, 1999
               for Qwest's total  payment on the capacity  agreement is included
               in deferred revenue in the Company's  consolidated  balance sheet
               at June 30, 1999.

          (b)  Network Capacity and Line Purchase Commitments

               In November 1998, the Company entered into two service agreements
               with WorldCom Network Services,  Inc.  ("WorldCom").  Both of the
               agreements have three-year  terms and were effective in September
               1998. Under the Telecom Services Agreement, WorldCom provides, at
               designated rates, switched  telecommunications services and other
               related services to the Company,  including termination services,
               toll-free  origination,  switched  access,  dedicated  access and
               travel  card  services.   Under  the  Carrier  Digital   Services
               Agreement,  WorldCom  provides the Company,  at designated rates,
               with  the  installation   and  operation  of  dedicated   digital
               telecommunications interexchange services, local access and other
               related  services,  which the Company believes  expedites service
               availability to its customers.  Both agreements  require that the
               Company provide  WorldCom with certain  minimum monthly  revenue,
               which if not met,  would  require  payment by the Company for the
               difference  between the minimum commitment and the actual monthly
               revenue.  Additionally,   both  agreements  limit  the  Company's
               ability  to  utilize  vendors  other than  WorldCom  for  certain
               telecommunications  services  specified  in the  agreements.  The
               Company's  policy is to accrue and include in operating costs the
               effect of any  shortfall  in minimum  revenue  commitments  under
               these  agreements in the period in which the shortfall  occurred.
               The  Company  has  successfully   achieved  all  minimum  revenue
               commitments to WorldCom under these  agreements  through June 30,
               1999.

               In  March  1999,  the  Company  entered  into an  agreement  with
               NorthPoint,   which   designates   NorthPoint  as  the  Company's
               exclusive  digital  subscriber line ("DSL") provider through June
               1, 2001. Under the agreement, the Company is required to purchase
               49,000 digital subscriber lines before June 1, 2001 at designated
               intervals.  In  return,  the  Company  receives  substantial  DSL
               service  price   discounts   and  enhanced   market  access  from
               NorthPoint.   Price  discounts  are  determined   pursuant  to  a
               graduated  schedule  based on the  number of  digital  subscriber
               lines purchased by the Company,  with maximum discounts  achieved
               by purchasing  75,000 digital  subscriber lines over the two-year
               term. The Company's  policy is to accrue and include in operating
               costs the effect of any shortfall in DSL installations  under its
               agreement  with  NorthPoint  in the period in which the shortfall
               occurred. The 49,000 digital subscriber line purchase requirement
               and the price  discounts  are  adjustable  based on  NorthPoint's
               compliance with a commitment schedule of DSL service availability
               for various U.S. locations.  Additionally,  the Company agreed to
               sell its existing DSL equipment to NorthPoint  for total proceeds
               of approximately $2.7 million.


                                       18
<PAGE>
                    ICG COMMUNICATIONS, INC. AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued


(6)      Commitments and Contingencies (continued)

         (c)   Other Commitments

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

               Additionally, the Company has entered into certain commitments to
               purchase  capital  assets  with an  aggregate  purchase  price of
               approximately $117.1 million at June 30, 1999.

         (d)   Transport and Termination Charges

               The Company has recorded revenue of  approximately  $4.9 million,
               $58.3 million and $70.9 million for fiscal 1997,  fiscal 1998 and
               the six months ended June 30, 1999, respectively,  for reciprocal
               compensation  relating to the transport and  termination of local
               traffic  to ISPs  from  customers  of  incumbent  local  exchange
               carriers   ("ILECs")   pursuant   to   various    interconnection
               agreements.  Some of the  ILECs  have not paid  most of the bills
               they  have   received   from  the  Company   and  have   disputed
               substantially  all of these charges based on the belief that such
               calls are not local traffic as defined by the various  agreements
               and not subject to payment of transport and  termination  charges
               under state and federal  laws and public  policies.  As a result,
               the Company  expects  receivables  from transport and termination
               charges will continue to increase  until these disputes have been
               resolved.

               The  resolution  of these  disputes  will be based on  rulings by
               state   public   utility   commissions   and/or  by  the  Federal
               Communications  Commission  ("FCC").  To date,  there  have  been
               favorable final rulings from 31 state public utility  commissions
               that  ISP  traffic  is  subject  to  the  payment  of  reciprocal
               compensation under current  interconnection  agreements.  Many of
               these state commission decisions have been appealed by the ILECs.
               To date,  four  federal  district  court  decisions,  one federal
               circuit  court of appeals  decision and one state court  decision
               have been issued  upholding state commission  decisions  ordering
               the  payment  of  reciprocal  compensation  for ISP  traffic.  On
               February  25,  1999,  the FCC  issued a decision  that  ISP-bound
               traffic  is  largely  jurisdictionally  interstate  traffic.  The
               decision  relies on the  long-standing  federal  policy  that ISP
               traffic,  although  jurisdictionally  interstate,  is  treated as
               though it is local  traffic for pricing  purposes.  The  decision
               also emphasizes that because there are currently no federal rules
               governing   intercarrier   compensation  for  ISP  traffic,   the
               determination as to whether such traffic is subject to reciprocal
               compensation  under the terms of  interconnection  agreements  is
               properly  made by the state  commissions  and that  carriers  are
               bound by their  interconnection  agreements and state  commission
               decisions  regarding the payment of reciprocal  compensation  for
               ISP  traffic.  The  FCC has  initiated  a  rulemaking  proceeding
               regarding   the  adoption  of   prospective   federal  rules  for
               intercarrier  compensation  for ISP  traffic.  In its  notice  of
               rulemaking,  the FCC expresses its preference  that  compensation
               rates for this traffic continue to be set by negotiations between
               carriers,  with disputes  resolved by  arbitrations  conducted by
               state commissions, pursuant to the Telecommunications Act of 1996
               (the  "Telecommunications  Act"). Since the issuance of the FCC's
               decision on February  25,  1999,  15 state  utility  commissions,
               including  four  states  in  which  the  Company   provides  CLEC
               services,  have either  ruled or  reaffirmed  that ISP traffic is
               subject to reciprocal  compensation under current interconnection
               agreements,  and two state  commissions  have  declined  to apply
               reciprocal compensation for ISP traffic.

                                       19
<PAGE>

                    ICG COMMUNICATIONS, INC. AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued


(6)      Commitments and Contingencies (continued)

               On May 5, 1999, the Public Utilities  Commission of Ohio ("PUCO")
               issued a decision  affirming  its August 1998  decision  that ISP
               traffic is subject to reciprocal compensation under the Company's
               current  interconnection  agreement  with  Ameritech  Corporation
               ("Ameritech").  The PUCO also  denied  Ameritech's  request for a
               stay of its obligation to remit payment to the Company. After the
               PUCO issued the May 5, 1999 ruling,  the Company  received  $43.1
               million  during the three  months ended June 30, 1999 for amounts
               owed by Ameritech  for  reciprocal  compensation.  Ameritech  has
               filed for  judicial  review  of the PUCO  decision.  The  Company
               cannot  predict  the  final  outcome  on the  merits of the court
               appeal.   Additionally,   on  June  4,  1999,  Southwestern  Bell
               Telephone  Company  ("SWBT")  remitted  payment to the Company of
               $1.8 million for reciprocal  compensation owed to the Company for
               traffic  from  SWBT  customers  in  Texas to ISPs  served  by the
               Company.  On June 21, 1999, the Alabama Public Service Commission
               ("PSC")   issued   a   decision   that   BellSouth    Corporation
               ("BellSouth")   is  required   to  pay  the  Company   reciprocal
               compensation  for ISP traffic.  The PSC's June 21, 1999  decision
               modified its March 1999 decision  that had found that  reciprocal
               compensation  is owed for  Internet  traffic  under  certain CLEC
               interconnection  agreements at issue in the proceeding.  The June
               21, 1999 PSC decision held that the Company should be treated the
               same as the other CLECs that  participated  in the proceeding and
               for which the  Alabama  PSC  previously  ordered  the  payment of
               reciprocal compensation.  BellSouth has filed for judicial review
               of both the March 4,  1999 and June 21,  1999 PSC  decisions.  On
               July 26, 1999 the California Public Utilities Commission issued a
               decision affirming a previous decision, issued October 1998, that
               held that  reciprocal  compensation  must be paid by Pacific Bell
               and GTE  California  for the  termination of ISP traffic by CLECs
               under existing interconnection  agreements. On July 28, 1999, the
               Colorado  Public  Utilities  Commission  approved a decision that
               orders  US  WEST  Communications,  Inc.  ("US  WEST")  to pay the
               Company reciprocal  compensation for calls from US WEST customers
               to ISPs  served by the  Company.  The  decision  resolves  in the
               Company's favor a complaint that was filed by the Company in June
               1998.

               The  Company has also  recorded  revenue of  approximately  $19.1
               million and $7.6 million for fiscal 1998 and the six months ended
               June 30,  1999,  respectively,  related  to other  transport  and
               termination  charges  to the  ILECs,  pursuant  to the  Company's
               interconnection  agreements  with these  ILECs.  Included  in the
               Company's  trade  receivables  at December  31, 1998 and June 30,
               1999 are $72.8 million and $100.7 million,  respectively, for all
               receivables   related  to  reciprocal   compensation   and  other
               transport and termination  charges.  The  receivables  balance at
               June 30, 1999 is net of an allowance of $9.6 million for disputed
               amounts.

               As  the  Company's  interconnection   agreements  expire  or  are
               extended,  rates for transport and termination  charges are being
               and  will  continue  to be  renegotiated.  Some of the  Company's
               agreements  are already  being  affected.  Although the Company's
               interconnection agreement with BellSouth has expired, the Company
               has received written notification from BellSouth that the Company
               may  continue   operating   under  the  expired   interconnection
               agreement,  until such agreement is renegotiated or arbitrated by
               the relevant  state  commissions.  On May 27,  1999,  the Company
               filed petitions with the state  commissions of Alabama,  Georgia,
               North Carolina,  Kentucky,  Tennessee and Florida for arbitration
               with BellSouth.  The arbitration  proceedings are ongoing in each
               of these  states.  Additionally,  the  Company's  interconnection
               agreement with Ameritech recently was extended from June 15, 1999
               to  February   15,   2000.   The   Company's   extension  of  its
               interconnection  agreement with Ameritech  includes reduced rates
               for transport and  termination  charges,  and the Company expects
               that its negotiations  and arbitrations  with BellSouth will also
               affect the rates for transport and termination  charges  included

                                       20
<PAGE>
                    ICG COMMUNICATIONS, INC. AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued


(6)      Commitments and Contingencies (continued)

               in its existing  interconnection  agreement with  BellSouth.  The
               Company's remaining interconnection agreements expire in 1999 and
               2000,  and the  Company  has  commenced  renegotiations  with the
               ILECs.  While the  Company  believes  that all  revenue  recorded
               through June 30, 1999 is collectible and that future revenue from
               transport  and  termination  charges  billed under the  Company's
               current interconnection agreements will be realized, there can be
               no assurance that future  regulatory and judicial rulings will be
               favorable to the Company,  or that  different  pricing  plans for
               transport and termination  charges  between  carriers will not be
               adopted  when  the  Company's   interconnection   agreements  are
               renegotiated  or  arbitrated,   or  as  a  result  of  the  FCC's
               rulemaking  proceeding on future  compensation  methods. In fact,
               the  Company  believes  that  different  pricing  plans  will  be
               considered  and adopted,  and  although the Company  expects that
               revenue  from  transport  and  termination  charges  likely  will
               decrease as a percentage of total revenue from local  services in
               periods   after  the   expiration   of  current   interconnection
               agreements,  the Company's local termination  services still will
               be  required  by  the  ILECs  and  must  be  provided  under  the
               Telecommunications  Act,  and likely  will  result in  increasing
               volume in minutes due to the growth of the  Internet  and related
               services  markets.  The Company  expects to negotiate  reasonable
               compensation and collection terms for local termination services,
               although there is no assurance that such compensation will remain
               consistent with current levels.

          (e)  Litigation

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

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

(7)      Business Segments

         The Company conducts  transactions with external  customers through the
         operations of its Telecom Services business unit. Shared administrative
         services  are  provided  to Telecom  Services  by  Corporate  Services.
         Corporate  Services  consists  of  the  operating   activities  of  ICG
         Communications, Inc., ICG Funding, LLC, ICG Canadian Acquisition, Inc.,
         ICG Holdings (Canada) Co., ICG Holdings,  Inc., ICG Services, Inc., ICG
         Corporate Headquarters,  L.L.C. and ICG 161, L.P., which primarily hold
         securities  and other  nonoperating  assets and provide  certain legal,
         accounting  and finance,  personnel  and other  administrative  support
         services to the business units.

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

                                       21
<PAGE>

                    ICG COMMUNICATIONS, INC. AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued


(7)      Business Segments (continued)

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

<TABLE>
<CAPTION>
                                                               Three months ended June 30,      Six months ended June 30,
                                                              ------------------------------- ------------------------------
                                                                   1998            1999            1998            1999
                                                              --------------  --------------  -------------- ---------------
                                                                                      (in thousands)
<S>                                                           <C>                   <C>             <C>            <C>
Revenue:
   Telecom Services                                           $      64,215         117,654         122,702        221,985
   Corporate Services                                                     -               -               -              -
                                                              --------------  --------------  -------------- ---------------
       Total revenue                                          $      64,215         117,654         122,702        221,985
                                                              ==============  ==============  ==============  =============

EBITDA (before nonrecurring and noncash charges) (a):
   Telecom Services                                           $     (11,085)         20,364         (29,220)        32,622
   Corporate Services                                                (5,842)         (5,143)        (10,260)        (9,527)
                                                              --------------  --------------  -------------- ---------------
      Total EBITDA (before nonrecurring and noncash
         charges)                                             $     (16,927)         15,221         (39,480)        23,095
                                                              ==============  ==============  ==============  =============

Depreciation and amortization (b):
   Telecom Services                                           $      17,151          43,910          28,953         79,139
   Corporate Services                                                 1,438             773           2,642          1,919
                                                              --------------  --------------  -------------- ---------------
      Total depreciation and amortization                     $      18,589          44,683          31,595         81,058
                                                              ==============  ==============  ==============  =============

Interest expense (b):
   Telecom Services                                           $         908               -             908               -
   Corporate Services                                                40,574          51,308          74,996          98,746
                                                              --------------  --------------  -------------- ---------------
      Total interest expense                                  $      41,482          51,308          75,904          98,746
                                                              ==============  ==============  ==============  ==============

Capital expenditures of continuing operations (c):
   Telecom Services                                           $      81,652         133,012         144,771         235,924
    Corporate Services                                                2,973              13           5,273              13
                                                              --------------  --------------  -------------- ---------------
      Total capital expenditures of continuing operations     $      84,625         133,025         150,044         235,937
                                                              ==============  ==============  ==============  ==============
</TABLE>

                                       22
<PAGE>

                    ICG COMMUNICATIONS, INC. AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued


(7)      Business Segments (continued)

<TABLE>
<CAPTION>
                                                                               December 31,             June 30,
                                                                                   1998                   1999
                                                                           ---------------------   --------------------
                                                                                         (in thousands)
<S>                                                                        <C>                           <C>
          Total assets:
             Telecom Services (d)                                          $     1,135,937               1,379,567
             Corporate Services (d)                                                371,157                 389,242
             Eliminations                                                          (20,287)                (31,247)
             Net assets of discontinued operations                                 102,840                  59,455
                                                                           ---------------------   --------------------
                Total assets                                               $     1,589,647               1,797,017
                                                                           =====================   ====================
</TABLE>
          (a)  EBITDA (before nonrecurring and noncash charges) consists of loss
               from  continuing   operations  before  interest,   income  taxes,
               depreciation  and  amortization,   provision  for  impairment  of
               long-lived  assets and other,  net operating  costs and expenses,
               including  deferred  compensation and net loss (gain) on disposal
               of  long-lived  assets,  other  expense,  net and  accretion  and
               preferred dividends on preferred  securities of subsidiaries,  or
               simply,  revenue less  operating  costs and selling,  general and
               administrative expenses.  EBITDA (before nonrecurring and noncash
               charges)  is  presented  as the  Company's  measure of  operating
               performance  because  it  is  a  measure  commonly  used  in  the
               telecommunications  industry.  EBITDA  (before  nonrecurring  and
               noncash  charges) is presented to enhance an understanding of the
               Company's operating results and is not intended to represent cash
               flows or results  of  operations  in  accordance  with  generally
               accepted accounting principles for the periods indicated.  EBITDA
               (before  nonrecurring  and noncash  charges) is not a measurement
               under  generally  accepted  accounting   principles  and  is  not
               necessarily  comparable  with similarly  titled measures of other
               companies.

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

          (c)  Capital expenditures include assets acquired under capital leases
               and excludes payments for construction of the Company's corporate
               headquarters and corporate  headquarters  assets acquired through
               the issuance of long-term debt.

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

(8)      Provision for Impairment of Long-Lived Assets

         During the three  months ended June 30,  1999,  the Company  recorded a
         provision for impairment of long-lived  assets of $29.3 million,  which
         relates to the  impairment  of  software  and other  capitalized  costs
         associated with Telecom Services'  in-process  billing and provisioning
         system development projects. The provision for impairment of long-lived
         assets was based on  management's  decision  to select new  vendors for
         each of these  systems,  which  vendors  are  expected  to provide  the
         Company  with  billing  and   provisioning   solutions   with  improved
         functionality and earlier delivery dates at significantly  lower costs.
         The Company's  in-process billing and provisioning  systems were either
         not  operational  or  were  serving  minimal   customers  at  the  time
         management  determined the carrying value of the underlying  assets was
         not recoverable.

                                       23
<PAGE>

                    ICG COMMUNICATIONS, INC. AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued


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

         The 11 5/8% Senior Discount Notes due 2007 (the "11 5/8% Notes") issued
         by  Holdings  during  1997 are  guaranteed  by ICG.  The 12 1/2% Senior
         Discount  Notes due 2006 (the "12 1/2%  Notes")  and the 13 1/2% Senior
         Discount Notes due 2005 (the "13 1/2% Notes") issued by Holdings during
         1996 and 1995, respectively, are guaranteed by ICG and Holdings-Canada.

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

                Summarized Consolidated Balance Sheet Information
<TABLE>
<CAPTION>
                                                               December 31,               June 30,
                                                                   1998                     1999
                                                            --------------------    ---------------------
                                                                           (in thousands)

<S>                                                         <C>                           <C>
  Current assets                                            $        241,667                329,277
  Net current assets of discontinued operations                       22,392                 10,980
  Property and equipment, net                                        610,671                507,909
  Other non-current assets, net                                      147,283                134,442
  Net non-current assets of discontinued operations                   48,751                 48,475
  Current liabilities                                                 69,204                108,880
  Capital lease obligations, less current portion                     62,946                 56,766
  Long-term debt, less current portion                             1,004,316              1,069,200
  Due to parent                                                      191,889                257,743
  Due to ICG Services                                                137,762                113,420
  Redeemable preferred stock                                         338,311                363,700
  Stockholder's deficit                                             (733,664)              (938,626)
</TABLE>

           Summarized Consolidated Statement of Operations Information

<TABLE>
<CAPTION>
                                            Three months ended June 30,     Six months ended June 30,
                                           ------------------------------ ------------------------------
                                               1998            1999           1998            1999
                                           -------------- --------------- --------------  --------------
                                                                  (in thousands)

<S>                                        <C>                 <C>             <C>             <C>
  Total revenue                            $      64,989        119,026         123,830         224,759
  Total operating costs and expenses              99,458        181,509         192,530         319,614
  Operating loss                                 (34,469)       (62,483)        (68,700)        (94,855)
  Loss from continuing operations                (60,574)      (101,381)       (124,798)       (168,751)
  Net loss                                       (80,735)      (122,712)       (160,238)       (204,962)
</TABLE>

                                       24
<PAGE>

                    ICG COMMUNICATIONS, INC. AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued


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

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

                       Condensed Balance Sheet Information
<TABLE>
<CAPTION>
                                                     December 31,             June 30,
                                                         1998                   1999
                                                  -------------------     ------------------
                                                                (in thousands)
<S>                                               <C>                            <C>
  Current assets                                  $            162                    162
  Advances to subsidiaries                                 191,889                257,743
  Non-current assets, net                                    2,414                  1,207
  Current liabilities                                           73                     73
  Long-term debt, less current portion                          65                     65
  Due to parent                                            182,101                247,954
  Share of losses of subsidiaries                          733,664                938,626
  Shareholders' deficit                                   (721,438)              (927,606)
</TABLE>

                  Condensed Statement of Operations Information

<TABLE>
<CAPTION>
                                                        Three months ended June 30,      Six months ended June 30,
                                                       ------------------------------  ------------------------------
                                                           1998            1999            1998            1999
                                                       --------------  --------------  --------------  --------------
                                                                              (in thousands)

<S>                                                         <C>            <C>             <C>             <C>
         Total revenue                                            -               -               -               -
         Total operating costs and expenses                      48             603              81           1,206
         Operating loss                                         (48)           (603)            (81)         (1,206)
         Losses of subsidiaries                             (80,735)       (122,712)       (160,238)       (204,962)
         Net loss attributable to common shareholders       (80,783)       (123,315)       (160,319)       (206,168)
</TABLE>
(11)  Condensed  Financial  Information  of  ICG  Communications,  Inc.  (Parent
      company)

         The primary  assets of ICG are its  investments  in ICG  Services,  ICG
         Funding and Holdings-Canada,  including advances to those subsidiaries.
         Certain corporate  expenses of the parent company are included in ICG's
         statement of operations  and were  approximately  $0.5 million and $1.0
         million  for the three  months  and six  months  ended  June 30,  1998,
         respectively,  and $0.4  million and $0.9  million for the three months
         and six months ended June 30, 1999, respectively. ICG has no operations
         other than those of ICG Services,  ICG Funding and  Holdings-Canada and
         their subsidiaries.

                                       25
<PAGE>

ITEM 2. 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  enhanced  telephony  and  network  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 of operations for
the three  months and six  months  ended June 30,  1998 and 1999  represent  the
consolidated  operating  results of the  Company.  See the  unaudited  condensed
consolidated  financial  statements of the Company for the six months ended June
30,  1999  included  elsewhere  herein.  The  Company's  consolidated  financial
statements reflect the operations of Network Services, Satellite Services, Zycom
and NETCOM as discontinued  for all periods  presented.  The Company changed its
fiscal year end to December 31 from September 30, effective January 1, 1997. All
dollar amounts are in U.S. dollars.

Company Overview

     ICG  Communications  Inc.  ("ICG" or the  "Company") is one of the nation's
leading competitive  integrated  communications  providers ("ICPs") based on the
industry's  1998 revenue.  ICPs seek to provide an  alternative to the incumbent
local   exchange   carriers   ("ILECs"),   long  distance   carriers  and  other
communications service providers for a full range of communications  services in
the increasingly deregulated  telecommunications industry. The Company's Telecom
Services  primarily  include its  competitive  local exchange  carrier  ("CLEC")
operations,  in which the Company  operates fiber networks in regional  clusters
covering major  metropolitan  statistical areas in California,  Colorado,  Ohio,
Texas and the  Southeast,  offering  local,  long  distance,  data and  enhanced
telephony  services to business  end users and ISPs.  Additionally,  in February
1999, the Company began providing wholesale network services over its nationwide
data network. Until the completion of the sales of such operations,  the Company
also provides a wide range of network systems integration  services and maritime
and international satellite transmission services.  Network Services consists of
information  technology services and selected networking  products,  focusing on
network  design,  installation,  maintenance  and  support.  Satellite  Services
consists of satellite  voice,  data and video services  provided to major cruise
lines,  the U.S.  Navy, the offshore oil and gas industry and ICPs. As a leading
participant  in  the  rapidly  growing   competitive  local   telecommunications
industry,  the Company has experienced  significant  growth,  with total revenue
increasing  from  approximately  $72.7 million for fiscal 1996 to  approximately
$402.6 million for the 12-month  period ended June 30, 1999. The Company's rapid
growth is the result of the initial  installation,  acquisition  and  subsequent
expansion of its fiber optic  networks and the  expansion of its  communications
service offerings.

     The Federal  Telecommunications Act of 1996 (the "Telecommunications  Act")
and pro-competitive state regulatory  initiatives have substantially changed the
telecommunications  regulatory  environment  in the  United  States.  Under  the
Telecommunications  Act, the Company is permitted  to offer all  interstate  and
intrastate telephone services,  including  competitive local dial tone. In early
1997, the Company began  marketing and selling local dial tone services in major
metropolitan  areas in  California,  Colorado,  Ohio and the  Southeast  and, in
December 1998,  began offering  services in Texas through an acquired  business.
During  fiscal 1997,  fiscal 1998 and the six months  ended June 30,  1999,  the
Company sold 178,470, 206,458 and 132,122 local access lines, respectively,  net
of cancellations of which 494,405 were in service at June 30, 1999. In addition,
the Company's regional fiber networks have grown from 2,143 fiber route miles at
the end of fiscal 1996 to 4,406 fiber route miles at June 30, 1999.  The Company
had 29 operating high capacity  digital circuit switches and 16 operational data
communications  switches  at June 30,  1999,  and  plans to  install  additional
switches as demand  warrants.  As a complement  to its local  exchange  services
offered to business end users,  the Company markets  bundled  service  offerings
provided over its regional fiber network which include long  distance,  enhanced
telecommunications  services and data services.  Additionally,  the Company owns
and operates a nationwide data network with 236 points of presence ("POPs") over
which the  Company  recently  began  providing  wholesale  Internet  access  and
enhanced network services to MindSpring  Enterprises,  Inc., an Internet service
provider ("ISP") located in Atlanta,  Georgia  ("MindSpring")  and certain other
ISPs, and intends to offer similar services to more ISPs and  telecommunications
providers in the future.

                                       26
<PAGE>
     To better focus its efforts on its core Telecom  Services  operations,  the
Company  made  further  progress  toward the  disposal of certain  assets  which
management believes do not complement its overall business strategy. On July 15,
1999, the Company's  board of directors  adopted a formal plan to dispose of the
operations  of  the  Company's  wholly-owned   subsidiaries,   ICG  Fiber  Optic
Technologies,   Inc.  and  Fiber  Optic  Technologies  of  the  Northwest,  Inc.
(collectively, "Network Services") and ICG Satellite Services, Inc. and Maritime
Telecommunications Network, Inc. (collectively,  "Satellite Services"),  through
the sales of such businesses for cash proceeds.  The Company has signed a letter
of intent to a third party to sell all of the capital stock of Network Services.
On August 11, 1999, the Company entered into a definitive  agreement to sell all
of the capital stock of Satellite Services to a third party for cash proceeds of
approximately  $100.0  million.  The  Company  anticipates  the sales of Network
Services and Satellite Services will be completed during the next 12 months. Due
primarily  to the  loss of a  major  customer,  which  generated  a  significant
obligation under a volume discount  agreement with its call transport  provider,
the board of directors of Zycom Corporation  ("Zycom") approved a plan on August
25, 1998 to wind down and ultimately discontinue Zycom's operations.  On October
22,  1998,  Zycom  completed  the  transfer  of all  customer  traffic  to other
providers  and on  January  4,  1999,  the  Company  completed  the  sale of the
remainder of Zycom's long-lived operating assets to an unrelated third party. On
February  17,  1999,  the  Company  sold  certain  of the  operating  assets and
liabilities  of  NETCOM  On-Line  Communication  Services,  Inc.  ("NETCOM")  to
MindSpring  for total  proceeds of $245.0  million,  and on March 16, 1999,  the
Company sold all of the capital  stock of NETCOM's  international  operations in
Canada  and the  United  Kingdom  to other  unrelated  third  parties  for total
proceeds of  approximately  $41.1 million.  During the six months ended June 30,
1999,  the Company  recorded a combined  gain on the sales of the  operations of
NETCOM of  approximately  $193.0 million,  net of income taxes of  approximately
$6.4 million. Offsetting the gain on the sales is approximately $16.6 million of
net losses from  operations  of NETCOM from  November 3, 1998 (the date on which
the  Company's  board of  directors  adopted  the formal  plan to dispose of the
operations of NETCOM) through the dates of the sales.  Since the operations sold
were  acquired by the  Company in a  transaction  accounted  for as a pooling of
interests, the gain on the sales of the operations of NETCOM is classified as an
extraordinary item in the Company's  consolidated  statement of operations.  For
fiscal 1996, 1997 and 1998,  Network  Services,  Satellite  Services,  Zycom and
NETCOM combined  reported  revenue of $216.8 million,  $284.7 million and $275.9
million,  respectively,  and EBITDA  losses  (before  nonrecurring  and  noncash
charges) of $(36.0) million, $(13.4) million and $(16.7) million,  respectively.
The  Company's  consolidated  financial  statements  reflect the  operations  of
Network Services,  Satellite Services,  Zycom and NETCOM as discontinued for all
periods presented. The Company will from time to time evaluate all of its assets
as to their core need and, based on such analysis, may sell or otherwise dispose
of assets which do not complement its overall business strategy.

     In conjunction  with the sale to  MindSpring,  the legal name of the NETCOM
subsidiary was changed to ICG NetAhead, Inc. ("NetAhead"). NetAhead has retained
the domestic Internet backbone assets formerly owned by NETCOM which include 236
POPs serving  approximately  700 cities  nationwide.  NetAhead is utilizing  the
retained  network  operating  assets to provide  wholesale  Internet  access and
enhanced  network  services to MindSpring and other ISPs and  telecommunications
providers.  On February 17, 1999, the Company entered into an agreement to lease
to MindSpring for a one-year  period the capacity of certain  network  operating
assets  formerly  owned by NETCOM and  retained by the  Company.  MindSpring  is
utilizing  the  Company's  network  capacity to provide  Internet  access to the
dial-up  services  customers  formerly  owned  by  NETCOM.  Over the term of the
one-year agreement, MindSpring is required to pay the Company a minimum of $27.0
million,  although  such minimum is subject to increase  dependent  upon network
usage.  In addition,  the Company is receiving for a one-year  period 50% of the
gross revenue earned by MindSpring from the dedicated access customers  formerly
owned by NETCOM, estimated to be approximately $10.0 million for the term of the
agreement.  Although the Company expects to generate cash operating losses under
this  agreement,  any such losses will be offset by the periodic  recognition of
approximately $26.0 million of the proceeds from the sale of certain of NETCOM's
domestic  operating  assets and  liabilities  to  MindSpring,  which the Company
deferred on  February  17,  1999.  Accordingly,  the Company  does not expect to
recognize any revenue,  operating costs or selling,  general and  administrative
expenses from services provided to MindSpring for the term of the agreement. Any
incremental revenue or costs generated by other customers,  or by other services
provided to MindSpring,  are recognized in the Company's  consolidated statement
of operations as incurred.

     Additionally,  the Company intends to provide network capacity and enhanced
data services to ISPs and other  telecommunications  providers,  as required. In
December 1998, the Company announced plans to offer several new network services
to its business and ISP customers by utilizing its  nationwide  data network and

                                       27
<PAGE>

service  capabilities to carry  out-of-region  traffic and enhance data services
provided. One of the services currently being offered is modemless remote access
service ("RAS"). RAS, also known as managed modem service, allows the Company to
provide modem access at its own switch  location,  thereby  eliminating the need
for ISPs to deploy  modems  physically  at each of their POPs.  The  benefits to
ISPs, including reduced capital expenditures and the shift of network management
responsibility from the ISPs to the Company, will allow the Company to act as an
aggregator of ISP traffic.  In offering RAS, the Company provides radius routing
and proxy  services at the modem bank  connected to the Company's  local switch,
which  services  are the  authentication  services  necessary  to  validate  and
accurately  route  incoming  call traffic to the ISP. The Company also  provides
transport  services to deliver all Internet  protocol ("IP") data packets either
directly to the ISP, if the ISP is not collocated at the Company's local switch,
or  directly  to the  Internet,  bypassing  the ISP.  Additionally,  through its
network  operations  center,  the Company monitors the usage of each port and is
responsible for the  administration  of all network repair and maintenance.  The
Company is currently  offering  Internet RAS services,  or expanded  originating
services,  to MindSpring and expects to extend such services  offerings to other
ISPs in the  future.  In  August  1998,  the  Company  began  offering  enhanced
telephony services via IP technology.  The Company currently offers this service
in 230 major cities in the United States, which cities account for more than 90%
of the commercial long distance market.  The Company carries the IP traffic over
its  nationwide  data network and  terminates a large portion of the traffic via
its own POPs. The Company also began offering  integrated access service ("IAS")
which allows voice and data traffic to be carried on the same  circuit.  Through
equipment  installed  by the  Company  at  the  customers'  premises  and in the
Company's  central  offices,  IAS  provides  expanded  bandwidth  for  small  to
medium-sized  business  customers as an  alternative  to  purchasing  additional
circuits.  Data traffic,  including Internet traffic, from IAS service offerings
will be carried over the Company's  nationwide network. The Company's nationwide
network will also be utilized in offering peering services to its ISP customers,
in which service offerings the Company will become the general backbone provider
for its customers.  Additionally,  the Company intends to provide other enhanced
network services as demand warrants.

     The Company  will  continue  to expand its  network  and service  offerings
through  construction,  leased facilities,  strategic  alliances and mergers and
acquisitions.  For example,  on December 31, 1998,  the Company  purchased  from
Central and South West Corporation ("CSW") 100% of the partnership  interests in
ICG ChoiceCom, L.P. ("ChoiceCom"),  a strategic alliance with CSW formed for the
purpose of  developing  and  marketing  telecommunications  services  in certain
cities in Texas.  ChoiceCom  is based in Austin,  Texas and  currently  provides
local exchange and long distance  services in Austin,  Corpus  Christi,  Dallas,
Houston and San Antonio,  Texas.  For fiscal 1997 and 1998,  ChoiceCom  reported
revenue of $0.3  million  and $5.8  million,  respectively,  and  EBITDA  losses
(before nonrecurring and noncash charges) of $(5.5) million and $(13.6) million,
respectively.   Additionally,  on  the  acquisition  date,  ChoiceCom  had  five
operating  high  capacity  digital  circuit  switches and two  operational  data
communications switches and had 19,569 access lines in service, including 15,282
access lines  previously sold by ICG on behalf of ChoiceCom.  In March 1999, the
Company entered into an agreement with NorthPoint  Communications,  Inc., a data
CLEC  based  in  San  Francisco,  California  ("NorthPoint"),  which  designates
NorthPoint as the Company's  preferred digital  subscriber line ("DSL") provider
through June 1, 2001. A significant portion of the Company's DSL traffic will be
routed  by  NorthPoint  to the  Company's  asynchronous  transfer  mode  ("ATM")
switches and  transported by the Company either to the ISP, via a point to point
connection or via IP technology,  or directly to the Internet, as required.  The
Company  expects to purchase a minimum of 75,000 digital  subscriber  lines from
NorthPoint during the term of the agreement.  In August 1999, the Company signed
a  nonbinding  letter of intent with a large  national  ISP which is currently a
local  exchange  customer of the Company.  If the  agreement is  finalized,  the
Company  will  provide  Internet  RAS to the ISP for a  five-year  period  for a
minimum  of  $160.0  million  over the term of the  agreement.  The  Company  is
currently  converting the ISP's existing primary rate interface ("PRI") lines to
accommodate  RAS  service and expects to convert a total of 100,000 PRI lines in
conjunction  with the  agreement.  In June  1999,  the  Company  entered  into a
five-year agreement with Qwest  Communications  Corporation  ("Qwest"),  whereby
Qwest has agreed to purchase 100,000 RAS circuits from the Company.  The Company
expects to install a minimum of 80,000 of Qwest's RAS circuits by September  30,
1999,  with the remaining  20,000 RAS circuits to be installed prior to June 29,
2000.  The  Company  also  entered  into  two  long-term  fiber  optic  capacity
agreements with Qwest in June 1999. Under the first agreement,  the Company will
lease more than 7,600  miles of fiber  optic  capacity  from Qwest for a term of
between 8 and 20 years, as determined by the Company.  The Company believes that
the  additional  capacity will  increase the speed and national  presence of the
Company's  fiber optic  network.  Under the second  agreement,  Qwest will lease
certain fiber optic  capacity from the Company,  for a 10-year  minimum term for

                                       28
<PAGE>

total  proceeds of $32.0  million.  In April 1999,  the  Company  announced  its
intention to expand its RAS and other network service  offerings  during 1999 to
the major U.S. markets of Boston, New York,  Washington D.C., Miami, Chicago and
Seattle.

     In conjunction with the increase in its service offerings,  the Company has
and will  continue  to need to spend  significant  amounts on sales,  marketing,
customer  service,  engineering and support personnel prior to the generation of
corresponding revenue. EBITDA, EBITDA (before nonrecurring and noncash charges),
and operating and net losses have generally increased  immediately preceding and
during  periods of relatively  rapid network  expansion and  development  of new
services.  Since  the  quarter  ended  June  30,  1996,  EBITDA  losses  (before
nonrecurring and noncash  charges) have improved for each  consecutive  quarter,
through  and  including  the  quarter  ended June 30, 1999 for which the Company
reported  positive  EBITDA (before  nonrecurring  and noncash  charges) of $15.2
million.  As the Company  provides a greater  volume of higher margin  services,
principally local exchange services,  carries more traffic on its own facilities
rather  than  ILEC  facilities  and  obtains  the  right to use  unbundled  ILEC
facilities,  while  experiencing  decelerating  increases in personnel and other
selling,  general and administrative expenses supporting its operations,  any or
all of which may not occur, the Company anticipates that EBITDA performance will
continue to improve in the near term.

Results of Operations

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

<TABLE>
<CAPTION>
                                               Three months ended June 30,                       Six months ended June 30,
                                     ------------------------------------------------ ----------------------------------------------
                                              1998                    1999                     1998                    1999
                                     ----------------------- ------------------------ ----------------------- ----------------------
                                          $           %           $            %           $            %           $           %
                                     ------------- --------- ------------- ---------- ------------- --------- ------------- --------
                                                                               (unaudited)
                                                                              (in thousands)
<S>                                      <C>         <C>         <C>          <C>          <C>         <C>         <C>          <C>
Statement of Operations Data:
Revenue                                   64,215     100         117,654      100          122,702     100         221,985      100
Operating costs                           43,310      67          59,458       51           88,968      72         113,107       51
Selling, general and administrative:
    Telecom services                      31,990                  37,832                   62,954                   76,256
    Corporate services (1)                 5,842                   5,143                   10,260                    9,527
                                     ------------- --------- ------------- ---------- ------------- ---------- ------------- -------
         Total selling, general and
            administrative                37,832      59          42,975       36           73,214      60          85,783       39
Depreciation and amortization             18,589      29          44,683       38           31,595      26          81,058       36
Provision for impairment of
   long-lived assets                           -      -           29,300       25                -       -          29,300       13
Other, net                                    (7)     -              398        -              498       -            (535)       -
                                     ------------- --------- ------------- ---------- ------------- ----------- ------------ -------
    Operating loss                       (35,509)    (55)        (59,160)     (50)         (71,573)    (58)        (86,728)     (39)

Other Data:
Net cash (used) provided by
   operating activities                  (25,568)                 25,910                   (30,853)                 (21,996)
Net cash used by investing
   activities                            (67,411)                (82,206)                  (30,565)                  50,894
Net cash provided (used) by
   financing activities                  238,725                  (4,390)                  533,541                   (4,846)
EBITDA (2)                               (16,920)    (26)        (14,477)     (12)         (39,978)    (33)          (5,670)     (3)
EBITDA (before nonrecurring and
   noncash charges) (2)                  (16,927)    (26)         15,221       13          (39,480)    (32)          23,095      10
Capital expenditures of continuing
   operations (3)                         84,625                 133,025                   150,044                  235,937
Capital expenditures of discontinued
   operations (3)                         11,237                   3,354                    18,077                    6,159
</TABLE>

                                       29
<PAGE>
<TABLE>
<CAPTION>
                                              June 30,       September 30,      December 31,        March 31,         June 30,
                                                1998              1998              1998              1999              1999
                                           ---------------   ---------------   ----------------   --------------    --------------
                                                                                (unaudited)
<S>                                              <C>                <C>               <C>               <C>               <C>
Statistical Data (4):
Full time employees                                3,089              3,251             3,415             2,665             2,753
Telecom services:
   Access lines in service (5)                   237,458            290,983           354,482           418,610           494,405
   Buildings connected:
     On-net                                          665                684               777               789               874
     Hybrid (6)                                    3,733              4,217             4,620             5,337             5,915
                                           ---------------    --------------    -------------     -------------     --------------
       Total buildings connected                   4,398              4,901             5,397             6,126             6,789
   Operational switches:
     Circuit                                          20                 21                29                29                29
     Data                                             15                 15                16                17                16
                                           ---------------    --------------    -------------     -------------     --------------
       Total operational switches                     35                 36                45                46                45
   Fiber route miles (7):
     Operational                                   3,812              3,995             4,255             4,351             4,406
     Under construction                                -                  -                 -                 -               526
   Fiber strand miles (8):
     Operational                                 124,642            127,756           134,152           155,788           164,416
     Under construction                                -                  -                 -                 -            17,363
   Collocations with ILECs                            45                 47                59               111               126
Satellite services:
   C-Band installations (9)                           66                 69                76                78                81
</TABLE>
(1)     Corporate   Services  consists  of  the  operating   activities  of  ICG
        Communications,  Inc., ICG Funding, LLC, ICG Canadian Acquisition, Inc.,
        ICG Holdings (Canada) Co., ICG Holdings,  Inc., ICG Services,  Inc., ICG
        Corporate  Headquarters,  L.L.C. and ICG 161, L.P., which primarily hold
        securities  and other  nonoperating  assets and provide  certain  legal,
        accounting  and  finance,  personnel  and other  administrative  support
        services to the business units.

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

(3)     Capital  expenditures  include assets  acquired under capital leases and
        excludes   payments  for   construction   of  the  Company's   corporate
        headquarters  and corporate  headquarters  assets  acquired  through the
        issuance  of  long-term  debt.  Capital   expenditures  of  discontinued
        operations  includes  the  capital  expenditures  of  Network  Services,
        Satellite Services, Zycom and NETCOM combined for all periods presented.

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

(5)     Access lines in service at June 30, 1999  includes  413,715  lines which
        are provisioned  through the Company's switch and 80,690 lines which are
        provisioned  through  resale and other  agreements  with  various  local
        exchange carriers. Resale lines typically generate lower margins and are
        used  primarily  to obtain  customers.  Although  the  Company  plans to
        migrate lines from resale to higher margin on-switch lines,  there is no
        assurance that it will be successful in executing this strategy.

                                       30
<PAGE>

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

(7)     Fiber  route miles  refers to the number of miles of fiber optic  cable,
        including leased fiber. As of June 30, 1999, the Company had 4,406 fiber
        route miles,  of which 48 fiber route miles were leased under  operating
        leases.  Fiber  route miles under  construction  represents  fiber under
        construction which is expected to be operational within six months.

(8)     Fiber strand miles refers to the number of fiber route miles,  including
        leased fiber, along a  telecommunications  path multiplied by the number
        of fiber strands  along that path. As of June 30, 1999,  the Company had
        164,416 fiber strand miles,  of which 856 fiber strand miles were leased
        under operating leases. Fiber strand miles under construction represents
        fiber under  construction which is expected to be operational within six
        months.

(9)     The Company's C-Band  installations are provided by Satellite  Services.
        C-Band  installations  service  cruise  ships,  U.S.  Navy  vessels  and
        offshore  oil  platform   installations.   The  Company's   consolidated
        financial  statements  reflect the  operations of Satellite  Services as
        discontinued for all periods presented.

Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998

     Revenue.  Revenue,  which consists solely of revenue from Telecom Services,
increased  $53.5 million,  or 83%, from $64.2 million for the three months ended
June 30, 1998 to $117.7 million for the three months ended June 30, 1999.  Local
services revenue increased from $29.5 million, or 46% of revenue,  for the three
months ended June 30, 1998 to $76.8  million,  or 65% of revenue,  for the three
months ended June 30, 1999,  primarily  due to an increase in local access lines
from  237,458  lines in service at June 30, 1998 to 494,405  lines in service at
June  30,  1999.  In  addition,   local  access  revenue   includes  revenue  of
approximately $6.6 million and $40.1 million for the three months ended June 30,
1998  and  1999,  respectively,  for  reciprocal  compensation  relating  to the
transport  and  termination  of local  traffic to ISPs from  customers  of ILECs
pursuant to various interconnection agreements.  These agreements are subject to
renegotiation over the next several months. While management believes that these
agreements  will be replaced by  agreements  offering  the Company  some form of
compensation for ISP traffic, the renegotiated  agreements may reflect rates for
reciprocal  compensation  which are  lower  than the  rates  under  the  current
contracts.  See "Liquidity - Transport and Termination  Charges." Special access
revenue  increased from $17.5 million,  or 27% of revenue,  for the three months
ended June 30, 1998 to $23.4  million,  or 20% of revenue,  for the three months
ended  June 30,  1999.  Switched  access  (terminating  long  distance)  revenue
increased to $12.4 million for the three months ended June 30, 1999, compared to
$11.4  million for the three months ended June 30, 1998.  The Company has raised
prices on its wholesale  switched  services product in order to improve margins.
Revenue from long distance  services  decreased  from $5.8 million for the three
months  ended June 30, 1998 to $5.1  million for the three months ended June 30,
1999.  The decrease in long distance  revenue is primarily  attributable  to the
Company's  planned attrition of resale access lines which had high long distance
service  penetration  rates.  Revenue  from data  services  did not  generate  a
material portion of total revenue during either period.

     Operating costs.  Operating costs, which consists solely of operating costs
from Telecom Services,  increased $16.1 million,  or 37%, from $43.3 million for
the three months ended June 30, 1998 to $59.5 million for the three months ended
June 30, 1999.  Additionally,  operating  costs  decreased  as a  percentage  of
revenue  from 67% for the three  months ended June 30, 1998 to 51% for the three
months ended June 30, 1999. Operating costs consist of payments to ILECs for the
use of network  facilities  to support  special and  switched  access  services,
network  operating  costs,  right of way fees and other  costs.  The increase in
operating costs in absolute dollars is attributable to the increase in volume of
local and special access  services and the increase in network  operating  costs
which include engineering and operations  personnel dedicated to the development
and launch of local  exchange  services.  The decrease in  operating  costs as a
percentage  of revenue is due  primarily  to a greater  volume of higher  margin
services,  principally local exchange services. The Company expects the 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 the ILEC  facilities and
obtains the right to use unbundled ILEC facilities on satisfactory terms, any or
all of which may not occur.

     Selling,  general and administrative  expenses.  Total selling, general and
administrative  ("SG&A")  expenses  increased  $5.1 million,  or 14%, from $37.8

                                       31
<PAGE>

million for the three months ended June 30, 1998 to $43.0  million for the three
months ended June 30, 1999.  Total SG&A  expenses  decreased as a percentage  of
revenue  from 59% for the three  months ended June 30, 1998 to 36% for the three
months ended June 30, 1999.  Telecom Services SG&A expenses increased from $32.0
million,  or 50% of revenue,  for the three  months ended June 30, 1998 to $37.8
million,  or 32% of  revenue,  for the three  months  ended June 30,  1999.  The
increase in absolute dollars is principally due to the continued rapid expansion
of the Company's Telecom Services networks and related significant  additions to
the Company's management  information systems,  customer service,  marketing and
sales  staffs  dedicated  to  the  expansion  of  the  Company's   networks  and
implementation  of the  Company's  expanded  services  strategy,  primarily  the
development of local and long distance telephone services. As the Company begins
to benefit from the revenue  generated  by newly  developed  services  requiring
substantial  administrative,  selling  and  marketing  expense  prior to initial
service offerings, Telecom Services has experienced declining SG&A expenses as a
percentage of revenue.  From time to time, the Company will experience increases
in SG&A  expenses as the  Company  prepares  for  offerings  of newly  developed
services.  Corporate  Services SG&A expenses  decreased $0.7 million,  from $5.8
million for the three  months  ended June 30, 1998 to $5.1 million for the three
months  ended June 30,  1999,  primarily  due to the  Company's  purchase of the
corporate  headquarters,  effective  January 1, 1999,  which was leased under an
operating lease during 1998.

     Depreciation and  amortization.  Depreciation  and  amortization  increased
$26.1 million,  or 140%,  for the three months ended June 30, 1999,  compared to
the three months ended June 30, 1998,  primarily due to increased  investment in
depreciable  assets  resulting  from the  continued  expansion of the  Company's
networks  and  services,  in addition to  increased  amortization  arising  from
goodwill  recorded in  conjunction  with three  purchase  business  combinations
completed  during the second  half of fiscal  1998.  The  Company  expects  that
depreciation and amortization will continue to increase as the Company continues
to invest in the expansion and upgrade of its regional fiber and nationwide data
networks.

     Provision for impairment of long-lived  assets.  For the three months ended
June 30, 1999,  provision for  impairment of long-lived  assets of $29.3 million
relates to the  impairment of software and other  capitalized  costs  associated
with Telecom Services'  in-process  billing and provisioning  system development
projects.  The  provision  for  impairment  of  long-lived  assets  was based on
management's decision to select new vendors for these systems, which vendors are
expected to provide the Company with  billing and  provisioning  solutions  with
improved  functionality and earlier delivery dates at significantly lower costs.
The  Company's  in-process  billing  and  provisioning  systems  were either not
operational or were serving minimal customers at the time management  determined
the carrying value of the underlying assets was not recoverable.

     Other, net. Other, net operating costs and expenses  increased $0.4 million
for the three  months  ended June 30,  1999,  compared to the three months ended
June 30, 1998.  For the three months ended June 30, 1999,  other,  net operating
costs and expenses  primarily  includes  deferred  compensation  expense of $0.4
million  related to the Company's  deferred  compensation  arrangement  with its
chief executive  officer.  Other amounts  included in other, net operating costs
and expenses for the three months ended June 30, 1998 and 1999 include net gains
and losses on disposal of miscellaneous long-lived assets.

     Interest  expense.  Interest  expense  increased  $9.8 million,  from $41.5
million for the three months ended June 30, 1998, to $51.3 million for the three
months ended June 30, 1999,  which includes  $47.1 million of noncash  interest.
The Company's interest expense increases, 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,  beginning in 2001.  Additionally,
interest expense increased due to the increase in long-term debt associated with
the Company's purchase of the corporate headquarters, effective January 1, 1999.

     Interest income.  Interest income decreased $4.7 million, from $8.5 million
for the three  months  ended June 30, 1998 to $3.8  million for the three months
ended June 30, 1999. The decrease is  attributable to the decrease in cash, cash
equivalents and short-term investments as the Company funds operating losses and
continues to invest available cash balances in telecommunications  equipment and
other assets.

     Other expense,  net. Other expense, net increased from $0.3 million for the
three months ended June 30, 1998 to $1.8 million for the three months ended June
30, 1999.  Other expense,  net recorded  during both the three months ended June
30, 1998 and 1999 primarily consists of litigation settlement costs.

                                       32
<PAGE>

     Accretion and preferred dividends on preferred  securities of subsidiaries.
Accretion  and  preferred  dividends on  preferred  securities  of  subsidiaries
increased  $1.6 million,  from $13.6 million for the three months ended June 30,
1998 to $15.2 million for the three months ended June 30, 1999.  The increase is
due  primarily  to the periodic  payment of  dividends  on the 14%  Exchangeable
Preferred Stock Mandatorily  Redeemable 2008 (the "14% Preferred Stock") and the
14 1/4% Exchangeable  Preferred Stock Mandatorily  Redeemable 2009 (the "14 1/4%
Preferred  Stock") in additional  shares of 14%  Preferred  Stock and 14 1/4% of
Preferred Stock.  Accretion and preferred  dividends on preferred  securities of
subsidiaries  recorded  during the three months ended June 30, 1999  consists of
the accretion of issuance  costs ($0.3 million) and the accrual of the preferred
securities  dividends  ($14.9 million)  associated with the 6 3/4%  Exchangeable
Limited Liability Company Preferred Securities  Mandatorily Redeemable 2009 (the
"6  3/4%  Preferred  Securities"),  the  14%  Preferred  Stock  and  the 14 1/4%
Preferred Stock.

     Loss from continuing operations.  Loss from continuing operations increased
$41.4  million,  or 50%,  from $82.4 million for the three months ended June 30,
1998 to $123.8  million  for the three  months  ended  June 30,  1999 due to the
increases in operating costs,  SG&A expenses,  depreciation and amortization and
provision for impairment of long-lived assets, offset by an increase in revenue,
as noted above.

     Net  loss  from  discontinued   operations.   Net  loss  from  discontinued
operations  decreased  $9.7  million or 53%,  from $18.4  million  for the three
months  ended June 30, 1998 to $8.7  million for the three months ended June 30,
1999. Net loss from discontinued  operations for the three months ended June 30,
1998  consists  of the  combined  net  losses  of  Network  Services,  Satellite
Services,  Zycom and NETCOM. Net loss from discontinued operations for the three
months  ended  June 30,  1999  consists  of the  combined  net losses of Network
Services and  Satellite  Services.  Zycom  terminated  its normal  operations on
October  22,  1998  and,   accordingly,   the  Company  reported  no  loss  from
discontinued  operations of Zycom for the three months ended June 30, 1999.  The
Company sold the  operations of NETCOM in February and March 1999. Net loss from
discontinued  operations  for the three months  ended June 30, 1999  includes an
estimated loss on the disposal of Network Services of $8.0 million.

Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998

     Revenue.  Revenue,  which consists solely of revenue from Telecom Services,
increased  $99.3  million,  or 81%, from $122.7 million for the six months ended
June 30, 1998 to $222.0  million for the six months ended June 30,  1999.  Local
services revenue  increased from $52.6 million,  or 43% of revenue,  for the six
months  ended June 30, 1998 to $144.2  million,  or 65% of revenue,  for the six
months ended June 30, 1999. In addition,  local access revenue  includes revenue
of  approximately  $15.1 million and $70.9 million for the six months ended June
30, 1998 and 1999,  respectively,  for reciprocal  compensation  relating to the
transport  and  termination  of local  traffic to ISPs from  customers  of ILECs
pursuant to various interconnection agreements. Special access revenue increased
from $33.7 million, or 27% of revenue, for the six months ended June 30, 1998 to
$46.0  million,  or 21% of  revenue,  for the six months  ended  June 30,  1999.
Switched access  (terminating  long distance) revenue decreased to $21.6 million
for the six months  ended June 30, 1999,  compared to $25.6  million for the six
months  ended June 30,  1998.  The  Company has raised  prices on its  wholesale
switched  services  product in order to improve margins and to de-emphasize  its
wholesale  switched  services.  Revenue  from long  distance  decreased to $10.2
million for the six months  ended June 30, 1999,  compared to $10.9  million for
the six months ended June 30, 1998.  The  decrease in long  distance  revenue is
primarily attributable to the Company's planned attrition of resale access lines
which  had high long  distance  service  penetration  rates.  Revenue  from data
services  did not generate a material  portion of total  revenue  during  either
period.

     Operating costs.  Operating costs, which consists solely of operating costs
from Telecom Services,  increased $24.1 million,  or 27%, from $89.0 million for
the six months  ended June 30, 1998 to $113.1  million for the six months  ended
June 30, 1999.  Additionally,  operating  costs  decreased  as a  percentage  of
revenue  from 73% for the six  months  ended  June  30,  1998 to 51% for the six
months ended June 30, 1999. The increase in operating costs in absolute  dollars
is  attributable  to the increase in volume of local and special access services
and the  increase in network  operating  costs  which  include  engineering  and
operations  personnel  dedicated to the development and launch of local exchange
services.  The  decrease in operating  costs as a  percentage  of revenue is due
primarily  to a greater  volume of higher  margin  services,  principally  local
exchange services.

                                       33
<PAGE>

     Selling, general and administrative expenses. Total SG&A expenses increased
$12.6 million, or 17%, from $73.2 million for the six months ended June 30, 1998
to $85.8  million for the six months  ended June 30, 1999.  Total SG&A  expenses
decreased as a percentage  of revenue from 60% for the six months ended June 30,
1998 to 39% for the six  months  ended  June 30,  1999.  Telecom  Services  SG&A
expenses  increased  from $63.0 million,  or 51% of revenue,  for the six months
ended June 30,  1998 to $76.3  million,  or 34% of  revenue,  for the six months
ended June 30, 1999. The increase in absolute  dollars is principally due to the
continued rapid expansion of the Company's Telecom Services networks and related
significant additions to the Company's management information systems,  customer
service,  marketing and sales staffs dedicated to the expansion of the Company's
networks  and  implementation  of  the  Company's  expanded  services  strategy,
primarily the development of local and long distance telephone services.  As the
Company begins to benefit from the revenue generated by newly developed services
requiring  substantial  administrative,  selling and marketing  expense prior to
initial  service  offerings,  Telecom  Services has  experienced  declining SG&A
expenses as a percentage of revenue.  Corporate Services SG&A expenses decreased
$0.7 million,  from $10.3 million for the six months ended June 30, 1998 to $9.5
million for the six months ended June 30, 1999,  primarily  due to the Company's
purchase of the corporate  headquarters,  effective  January 1, 1999,  which was
leased under an operating lease during 1998.

     Depreciation and  amortization.  Depreciation  and  amortization  increased
$49.5 million,  or 157%, for the six months ended June 30, 1999, compared to the
six  months  ended June 30,  1998,  primarily  due to  increased  investment  in
depreciable  assets  resulting  from the  continued  expansion of the  Company's
networks  and  services,  in addition to  increased  amortization  arising  from
goodwill  recorded in  conjunction  with three  purchase  business  combinations
completed during the second half of fiscal 1998.

     Provision for  impairment of  long-lived  assets.  For the six months ended
June 30, 1999,  provision for  impairment of long-lived  assets of $29.3 million
relates to the  impairment of software and other  capitalized  costs  associated
with Telecom Services'  in-process  billing and provisioning  system development
projects.  The  provision  for  impairment  of  long-lived  assets  was based on
management's decision to select new vendors for these systems, which vendors are
expected to provide the Company with  billing and  provisioning  solutions  with
improved  functionality and earlier delivery dates at significantly lower costs.
The  Company's  in-process  billing  and  provisioning  systems  were either not
operational or were serving minimal customers at the time management  determined
the carrying value of the underlying assets was not recoverable.

     Other,  net. Other,  net operating costs and expenses  fluctuated from $0.5
million net expense to $0.5 million net income.  Other,  net operating costs and
expenses for the six months ended June 30, 1999 includes  deferred  compensation
expenses  of  $0.4  million,  offset  primarily  by a net  gain on  disposal  of
long-lived  assets of $0.9 million relating  primarily to the sale of certain of
the Company's Federal  Communications  Commission  ("FCC") licenses.  Other, net
operating  costs and expenses  for the six months  ended June 30, 1998  consists
primarily  of a net  loss  on  disposal  of  long-lived  assets  related  to the
write-off  of  certain   installation  costs  of  disconnected   special  access
customers.

     Interest  expense.  Interest  expense  increased $22.8 million,  from $75.9
million for the six months  ended June 30,  1998,  to $98.7  million for the six
months ended June 30, 1999,  which includes  $92.7 million of noncash  interest.
The Company's interest expense increases, 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,  beginning in 2001.  Additionally,
interest expense increased due to the increase in long-term debt associated with
the Company's purchase of the corporate headquarters, effective January 1, 1998.

     Interest income. Interest income decreased $6.1 million, from $14.0 million
for the six months  ended June 30, 1998 to $7.9 million for the six months ended
June 30,  1999.  The  decrease is  attributable  to the  decrease in cash,  cash
equivalents and short-term investments as the Company funds operating losses and
continues to invest available cash balances in telecommunications  equipment and
other assets.

     Other expense,  net. Other expense, net increased from $0.6 million for the
six months ended June 30, 1998 to $2.3 million for the six months ended June 30,
1999 and primarily  consists of litigation  settlement costs. For the six months
ended  June 30,  1999,  other  expense,  net is offset by the gain on the common
stock of MindSpring which the Company received as partial  consideration for the
sale of the domestic  operations of NETCOM.  The Company sold its  investment in
MindSpring in April 1999.
                                       34
<PAGE>

     Accretion and preferred dividends on preferred  securities of subsidiaries.
Accretion  and  preferred  dividends on  preferred  securities  of  subsidiaries
increased  $3.2  million,  from $26.8  million for the six months ended June 30,
1998 to $30.0  million for the six months ended June 30,  1999.  The increase is
due primarily to the periodic  payment of dividends on the 14%  Preferred  Stock
and the 14 1/4% Preferred Stock in additional  shares of 14% Preferred Stock and
14 1/4% of  Preferred  Stock.  Accretion  and  preferred  dividends on preferred
securities of  subsidiaries  recorded  during the six months ended June 30, 1999
consists of the  accretion of issuance  costs ($0.6  million) and the accrual of
the preferred  securities  dividends ($29.4 million)  associated with the 6 3/4%
Preferred Securities, the 14% Preferred Stock and the 14 1/4% Preferred Stock.

     Loss from continuing operations.  Loss from continuing operations increased
$49.1  million,  or 31%,  from $160.9  million for the six months ended June 30,
1998 to  $210.0  million  for the six  months  ended  June  30,  1999 due to the
increases in operating  costs,  SG&A expenses,  depreciation  and  amortization,
provision for impairment of long-lived assets and interest expense, offset by an
increase in revenue, as noted above.

     Net  loss  from  discontinued   operations.   Net  loss  from  discontinued
operations decreased $32.9 million or 79%, from $41.7 million for the six months
ended June 30, 1998 to $8.8 million for the six months ended June 30, 1999.  Net
loss  from  discontinued  operations  for the six  months  ended  June 30,  1998
consists of the combined  net losses of Network  Services,  Satellite  Services,
Zycom and NETCOM. Net loss from discontinued operations for the six months ended
June 30,  1999  consists  of the  combined  net losses of Network  Services  and
Satellite  Services.  Zycom terminated its normal operations on October 22, 1998
and, accordingly,  the Company reported no loss from discontinued  operations of
Zycom for the six months  ended June 30,  1999.  Since the  Company  expected to
report a gain on the disposition of NETCOM,  the Company deferred the net losses
from operations of NETCOM from November 3, 1998 (the date on which the Company's
board of  directors  adopted  the formal  plan to dispose of the  operations  of
NETCOM) through the dates of the sales and, accordingly, the Company reported no
loss from  discontinued  operations  of NETCOM for the six months ended June 30,
1999.  Net loss from  discontinued  operations for the six months ended June 30,
1999  includes an  estimated  loss on the  disposal of Network  Services of $8.0
million.

     Extraordinary  gain on sales of operations of NETCOM.  The Company reported
an  extraordinary  gain on the sales of the  operations of NETCOM during the six
months  ended  June 30,  1999 of $193.0  million,  net of  income  taxes of $6.4
million.  Offsetting the gain on the sales is approximately $16.6 million of net
losses of  operations  of NETCOM from  November 3, 1998 through the dates of the
sales and $26.0 million of deferred  sales  proceeds from the sale of certain of
the domestic  operating  assets and  liabilities  of NETCOM to  MindSpring.  The
deferred  proceeds  are  recognized  on a  periodic  basis  over the term of the
Company's network capacity agreement with MindSpring.

Liquidity and Capital Resources

     The Company's growth has been funded through a combination of equity,  debt
and lease  financing.  As of June 30,  1999,  the Company had current  assets of
$449.5  million,   including  $265.4  million  of  cash,  cash  equivalents  and
short-term investments available for sale, which exceeded current liabilities of
$160.3 million, providing working capital of $289.2 million. The Company invests
excess  funds   primarily  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.

Net Cash Used By Operating Activities

     The Company's operating activities used $30.9 million and $22.0 million for
the six months  ended  June 30,  1998 and 1999,  respectively.  Net cash used by
operating  activities is primarily due to losses from continuing  operations and
increases  in  receivables,  which are  partially  offset by  changes in working
capital  items and noncash  expenses,  such as  depreciation  and  amortization,
deferred  interest  expense and accretion and preferred  dividends on subsidiary
preferred securities.

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

                                       35
<PAGE>

supporting  its  operations,  any or all of which  may not  occur,  the  Company
anticipates that net cash used by operating  activities will improve in the near
term.

Net Cash (Used) Provided By Investing Activities

     Investing  activities  used $30.6 million and provided $50.9 million in the
six  months  ended  June  30,  1998 and  1999,  respectively.  Net cash  used by
investing  activities for the six months ended June 30, 1998 primarily  includes
cash  expended for the  acquisition  of property,  equipment and other assets of
$150.0 million,  offset by the proceeds from the sale of corporate  headquarters
of $29.1 million and proceeds from the sale of short-term  investments available
for sale of $96.3 million. Net cash provided by investing activities for the six
months ended June 30, 1999 includes proceeds from the sales of the operations of
NETCOM of $252.9  million and proceeds from the sales of short-term  investments
available for sale and marketable  securities of $51.8  million,  offset by cash
expended for the  acquisition of property,  equipment and other assets of $229.7
million.  The Company will continue to use cash in 1999 and  subsequent  periods
for the  construction of new networks,  the expansion of existing  networks and,
potentially, for acquisitions.  The Company acquired assets under capital leases
of $6.2 million during the six months ended June 30, 1999.

Net Cash Provided (Used) By Financing Activities

     Financing  activities  provided $533.5 million and used $4.8 million in the
six months  ended June 30,  1998 and 1999,  respectively.  Net cash  provided by
financing  activities  for the six months  ended June 30, 1998  includes the net
proceeds  from  the  private  placement  of the 10%  Notes  and 9 7/8%  Notes in
February and April 1998,  respectively.  Historically,  the funds to finance the
Company's  business   acquisitions,   capital   expenditures,   working  capital
requirements  and operating losses have been obtained through public and private
offerings  of ICG and  ICG  Holdings  (Canada)  Co.  ("Holdings-Canada")  common
shares,   convertible   subordinated  notes,  convertible  preferred  shares  of
Holdings-Canada,  capital lease  financings and various working capital sources,
including  credit  facilities,  in  addition  to the  private  placement  of the
securities  previously  mentioned  and  other  securities  offerings.  Net  cash
provided  (used) by financing  activities for the six months ended June 30, 1998
and 1999 also include  proceeds from the issuance of common stock in conjunction
with the  exercise of options and  warrants  and the  Company's  employee  stock
purchase plan, offset by principal payments on long-term debt and capital leases
and payments of preferred dividends on preferred securities of subsidiaries.

     On August 12,  1999,  ICG  Equipment  and  NetAhead  entered  into a $200.0
million senior secured financing facility (the "Senior Facility")  consisting of
a $75.0  million  term  loan,  a $100.0  million  term loan and a $25.0  million
revolving  line of credit.  As required under the terms of the loan, the Company
borrowed on August 12, 1999 the  available  $75.0  million on the $75.0  million
term loan. The loan bears interest at an annual interest rate of LIBOR plus 3.5%
or the base  rate,  as  defined  in the  credit  agreement,  plus  2.5%,  at the
Company's  option  (10.5% on August 12,  1999).  Quarterly  repayments  commence
September  30, 1999 and  require  quarterly  loan  balance  reductions  of 0.25%
through June 30, 2005 with the remaining outstanding balance to be repaid during
the final three  quarters of the loan term.  The $75.0 million term loan matures
on March 31, 2006. On August 12, 1999, the Company  borrowed $5.0 million on the
$100.0  million term loan,  which is available for borrowing  through August 10,
2000 at an initial  annual  interest rate of LIBOR plus 3.125% or the base rate,
as  defined  in the credit  agreement,  plus  2.125%,  at the  Company's  option
(10.125% on August 12, 1999).  Quarterly  repayments commence September 30, 2002
and require aggregate loan balance  reductions of 25% through June 30, 2003, 35%
through  June 30, 2004 and 40% through June 30,  2005.  The $100.0  million term
loan matures on June 30, 2005.  The $25.0  million  revolving  line of credit is
available  through  the  maturity  date of June 30,  2005 at an  initial  annual
interest  rate of LIBOR plus  3.125% or the base rate,  as defined in the credit
agreement, plus 2.125%, at the Company's option.

     As of June 30, 1999,  the Company had an aggregate of  approximately  $71.8
million  of  capital  lease  obligations  and an  aggregate  accreted  value  of
approximately  $1.7 billion was  outstanding  under the 13 1/2% Senior  Discount
Notes due 2005 (the "13 1/2 % Notes"),  the 12 1/2%  Senior  Discount  Notes due
2006 (the "12 1/2 % Notes"), the 11 5/8% Senior Discount Notes due 2007 (the "11
5/8 % Notes"),  the 10% Notes and the 9 7/8%  Notes.  The 13 1/2% Notes  require
payments of interest to be made in cash commencing  March 15, 2001 and mature on
September 15, 2005. The 12 1/2% Notes require payments of interest to be made in
cash  commencing  November 1, 2001 and mature on May 1, 2006.  The 11 5/8% Notes
require  payments of interest to be made in cash  commencing  September 15, 2002


                                       36
<PAGE>

and mature on March 15, 2007. The 10% Notes require payments of interest in cash
commencing  August 15, 2003 and mature on February  15,  2008.  The 9 7/8% Notes
require  payments of interest in cash commencing  November 1, 2003 and mature on
May 1, 2008. The 6 3/4% Preferred Securities require payments of dividends to be
made in cash through November 15, 2000. In addition, the 14% Preferred Stock and
14  1/4%  Preferred  Stock  require  payments  of  dividends  to be made in cash
commencing June 15, 2002 and August 1, 2001, respectively.  As of June 30, 1999,
the Company had $34.6 million of other indebtedness outstanding. With respect to
senior indebtedness  outstanding on June 30, 1999, the Company has cash interest
payment  obligations of approximately  $113.3 million in 2001, $158.0 million in
2002,  $212.6  million  in 2003 and  $257.2  million  in 2004.  With  respect to
preferred  securities  currently  outstanding,  the  Company  has cash  dividend
obligations of approximately  $4.5 million remaining in 1999 and $8.9 million in
2000,  for which the Company has  restricted  cash  balances  available for such
dividend payments, $10.7 million in 2001 and $35.4 million in 2002 and each year
thereafter  through  2007.  Accordingly,  the  Company  may have to  refinance a
substantial amount of indebtedness and obtain substantial additional funds prior
to March  2001.  The  Company's  ability to do so will  depend on,  among  other
things,  its financial  condition at the time,  restrictions  in the instruments
governing its  indebtedness,  and other factors,  including  market  conditions,
beyond the control of the Company.  There can be no  assurance  that the Company
will be able to refinance such  indebtedness,  including such capital leases, or
obtain  such  additional  funds,  and if the  Company  is unable to effect  such
refinancings or obtain additional funds, the Company's ability to make principal
and interest payments on its indebtedness or make payments of cash dividends on,
or the mandatory  redemption  of, its preferred  securities,  would be adversely
affected.

Capital Expenditures

     The Company's  capital  expenditures  of continuing  operations  (including
assets acquired under capital leases and excluding  payments for construction of
the Company's corporate headquarters) were $150.0 million and $235.9 million for
the six  months  ended  June  30,  1998  and  1999,  respectively.  The  Company
anticipates  that  the  expansion  of  existing  networks,  construction  of new
networks and further  development  of the  Company's  products and services will
require  capital   expenditures  of  approximately  $284.0  million  during  the
remainder of 1999. To facilitate the expansion of its services and networks, the
Company has entered into  equipment  purchase  agreements  with various  vendors
under which the  Company  has  committed  to  purchase a  substantial  amount of
equipment and other assets,  including a full range of switching systems,  fiber
optic cable, network electronics, software and services. If the Company fails to
meet the minimum  purchase level in any given year,  the vendor may  discontinue
certain discounts,  allowances and incentives otherwise provided to the Company.
Actual capital  expenditures will depend on numerous factors,  including certain
factors beyond the Company's control. These factors include the nature of future
expansion  and  acquisition  opportunities,  economic  conditions,  competition,
regulatory   developments  and  the  availability  of  equity,  debt  and  lease
financing.

Other Cash Commitments and Capital Requirements

     The  Company's  operations  have  required  and will  continue  to  require
significant capital  expenditures for development,  construction,  expansion and
acquisition of  telecommunications  assets.  Significant  amounts of capital are
required to be invested  before  revenue is generated,  which results in initial
negative cash flows. In addition to the Company's planned capital  expenditures,
it has other cash  commitments  as described in the  footnotes to the  Company's
unaudited  consolidated  financial  statements for the six months ended June 30,
1999 included elsewhere herein.

     In  view  of the  continuing  development  of the  Company's  products  and
services,  the expansion of existing networks and the construction,  leasing and
licensing of new networks,  the Company will require  additional amounts of cash
in the future from outside sources.  Management believes that the Company's cash
on hand and amounts  expected to be available  through  asset sales,  cash flows
from  operations,  including the  collection of  receivables  from transport and
termination  charges,  vendor financing  arrangements and credit facilities will
provide  sufficient  funds  necessary  for the Company to expand its business as
currently planned and to fund its operations through 2000. Additional sources of
cash may  include  public  and  private  equity  and debt  financings,  sales of
non-strategic assets,  capital leases and other financing  arrangements.  In the
past,  the Company has been able to secure  sufficient  amounts of  financing to
meet its capital needs. There can be no assurance that additional financing will
be available to the Company or, if  available,  that it can be obtained on terms
acceptable to the Company.

                                       37
<PAGE>
     The failure to obtain  sufficient  amounts of financing could result in the
delay or abandonment of some or all of the Company's  development  and expansion
plans, which could have a material adverse effect on the Company's business.  In
addition,  the  inability  to fund  operating  deficits  with  the  proceeds  of
financings  and sales of  non-strategic  assets until the Company  establishes a
sufficient revenue-generating customer base could have a material adverse effect
on the Company's liquidity.

Transport and Termination Charges

     The Company has  recorded  revenue of  approximately  $4.9  million,  $58.3
million and $70.9 million for fiscal 1997,  fiscal 1998 and the six months ended
June  30,  1999,  respectively,  for  reciprocal  compensation  relating  to the
transport  and  termination  of local  traffic to ISPs from  customers  of ILECs
pursuant to various interconnection  agreements. Some of the ILECs have not paid
most of the  bills  they  have  received  from the  Company  and  have  disputed
substantially  all of these  charges based on the belief that such calls are not
local traffic as defined by the various agreements and not subject to payment of
transport  and  termination  charges  under  state and  federal  laws and public
policies.  As a result,  the Company  expects  receivables  from  transport  and
termination  charges will  continue to increase  until these  disputes have been
resolved.

     The  resolution of these  disputes will be based on rulings by state public
utility  commissions and/or by the FCC. To date, there have been favorable final
rulings from 31 state public utility  commissions that ISP traffic is subject to
the payment of reciprocal compensation under current interconnection agreements.
Many of these state  commission  decisions  have been appealed by the ILECs.  To
date,  four federal  district  court  decisions,  one federal  circuit  court of
appeals  decision and one state court decision have been issued  upholding state
commission  decisions  ordering the payment of reciprocal  compensation  for ISP
traffic.  On February 25, 1999, the FCC issued a decision that ISP-bound traffic
is largely  jurisdictionally  interstate  traffic.  The  decision  relies on the
long-standing  federal  policy  that  ISP  traffic,   although  jurisdictionally
interstate,  is treated as though it is local traffic for pricing purposes.  The
decision  also  emphasizes  that because  there are  currently no federal  rules
governing  intercarrier  compensation for ISP traffic,  the  determination as to
whether such traffic is subject to  reciprocal  compensation  under the terms of
interconnection  agreements is properly made by the state  commissions  and that
carriers  are bound by their  interconnection  agreements  and state  commission
decisions regarding the payment of reciprocal  compensation for ISP traffic. The
FCC has initiated a rulemaking  proceeding regarding the adoption of prospective
federal rules for intercarrier  compensation  for ISP traffic.  In its notice of
rulemaking,  the FCC expresses its preference that  compensation  rates for this
traffic  continue to be set by  negotiations  between  carriers,  with  disputes
resolved  by  arbitrations  conducted  by  state  commissions,  pursuant  to the
Telecommunications Act. Since the issuance of the FCC's decision on February 25,
1999, 15 state utility  commissions,  including four states in which the Company
provides  CLEC  services,  have either ruled or  reaffirmed  that ISP traffic is
subject to reciprocal compensation under current interconnection agreements, and
two state  commissions  have declined to apply  reciprocal  compensation for ISP
traffic.

     On May 5, 1999, the Public  Utilities  Commission of Ohio ("PUCO") issued a
decision  affirming  its August  1998  decision  that ISP  traffic is subject to
reciprocal  compensation under the Company's current  interconnection  agreement
with  Ameritech  Corporation  ("Ameritech").  The PUCO also  denied  Ameritech's
request for a stay of its obligation to remit payment to the Company.  After the
PUCO issued the May 5, 1999 ruling,  the Company  received  $43.1 million during
the  three  months  ended  June  30,  1999 for  amounts  owed by  Ameritech  for
reciprocal  compensation.  Ameritech  has filed for judicial  review of the PUCO
decision.  The Company  cannot  predict  the final  outcome on the merits of the
court appeal. Additionally, on June 4, 1999, Southwestern Bell Telephone Company
("SWBT")  remitted  payment  to the  Company  of  $1.8  million  for  reciprocal
compensation  owed to the Company for traffic  from SWBT  customers  in Texas to
ISPs  served by the  Company.  On June 21,  1999,  the  Alabama  Public  Service
Commission ("PSC") issued a decision that BellSouth Corporation ("BellSouth") is
required to pay the Company reciprocal  compensation for ISP traffic.  The PSC's
June 21, 1999  decision  modified  its March 1999  decision  that had found that
reciprocal  compensation  is  owed  for  Internet  traffic  under  certain  CLEC
interconnection  agreements  at issue in the  proceeding.  The June 21, 1999 PSC
decision  held that the  Company  should be treated  the same as the other CLECs
that  participated  in the  proceeding  and for which the Alabama PSC previously
ordered the payment of reciprocal compensation. BellSouth has filed for judicial
review of both the March 4, 1999 and June 21,  1999 PSC  decisions.  On July 26,
1999 the California Public Utilities  Commission  issued a decision  affirming a
previous decision,  issued October 1998, that held that reciprocal  compensation

                                       38
<PAGE>

must be paid by  Pacific  Bell and GTE  California  for the  termination  of ISP
traffic by CLECs under existing  interconnection  agreements.  On July 28, 1999,
the Colorado Public Utilities Commission approved a decision that orders US WEST
Communications,  Inc. ("US WEST") to pay the Company reciprocal compensation for
calls  from US WEST  customers  to ISPs  served  by the  Company.  The  decision
resolves in the  Company's  favor a  complaint  that was filed by the Company in
June 1998.

     The Company has also recorded  revenue of  approximately  $19.1 million and
$7.6  million  for  fiscal  1998  and  the  six  months  ended  June  30,  1999,
respectively,  related to other transport and termination  charges to the ILECs,
pursuant to the Company's interconnection  agreements with these ILECs. Included
in the Company's  trade  receivables  at December 31, 1998 and June 30, 1999 are
$72.8 million and $100.7 million,  respectively,  for all receivables related to
reciprocal  compensation  and  other  transport  and  termination  charges.  The
receivables  balance at June 30, 1999 is net of an allowance of $9.6 million for
disputed amounts.

     As the Company's  interconnection  agreements expire or are extended, rates
for  transport  and  termination  charges  are  being  and will  continue  to be
renegotiated.  Some of the  Company's  agreements  are already  being  affected.
Although the Company's interconnection agreement with BellSouth has expired, the
Company has received  written  notification  from BellSouth that the Company may
continue  operating  under the  expired  interconnection  agreement,  until such
agreement is  renegotiated or arbitrated by the relevant state  commissions.  On
May 27, 1999, the Company filed petitions with the state commissions of Alabama,
Georgia,  North Carolina,  Kentucky,  Tennessee and Florida for arbitration with
BellSouth.  The  arbitration  proceedings  are ongoing in each of these  states.
Additionally,  the Company's  interconnection  agreement with Ameritech recently
was extended from June 15, 1999 to February 15, 2000. The Company's extension of
its  interconnection   agreement  with  Ameritech  includes  reduced  rates  for
transport and termination charges, and the Company expects that its negotiations
and  arbitrations  with  BellSouth  will also affect the rates for transport and
termination  charges  included in its existing  interconnection  agreement  with
BellSouth. The Company's remaining interconnection agreements expire in 1999 and
2000,  and the Company has commenced  renegotiations  with the ILECs.  While the
Company  believes that all revenue recorded through June 30, 1999 is collectible
and that future revenue from transport and termination  charges billed under the
Company's current interconnection  agreements will be realized,  there can be no
assurance that future  regulatory and judicial  rulings will be favorable to the
Company,  or that different pricing plans for transport and termination  charges
between  carriers  will  not  be  adopted  when  the  Company's  interconnection
agreements  are  renegotiated  or  arbitrated,  or  as a  result  of  the  FCC's
rulemaking  proceeding  on future  compensation  methods.  In fact,  the Company
believes  that  different  pricing  plans will be  considered  and adopted,  and
although the Company expects that revenue from transport and termination charges
likely will  decrease as a percentage  of total  revenue from local  services in
periods  after  the  expiration  of  current  interconnection   agreements,  the
Company's  local  termination  services  still will be required by the ILECs and
must be provided  under the  Telecommunications  Act,  and likely will result in
increasing  volume in minutes  due to the  growth of the  Internet  and  related
services markets. The Company expects to negotiate  reasonable  compensation and
collection terms for local termination services,  although there is no assurance
that such compensation will remain consistent with current levels. Additionally,
the Company  expects to supplement  its current  operations  with  revenue,  and
ultimately  EBITDA,  from new services  offerings  such as RAS and DSL services,
however,  the Company may or may not be successful in its efforts to deploy such
services profitably.

Year 2000 Compliance

Importance

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

     Year 2000  compliance  issues are of  particular  importance to the Company
since its operations rely heavily upon computer systems,  software  applications
and other electronics  containing  date-sensitive  embedded technology.  Some of
these  technologies were internally  developed and others are standard purchased
systems which may or may not have been  customized for the Company's  particular
application.  The Company also relies heavily upon various vendors and suppliers

                                       39
<PAGE>

that are themselves very reliant on computer systems,  software applications and
other electronics containing  date-sensitive embedded technology.  These vendors
and suppliers include: (i) ILECs and other local and long distance carriers with
which the Company has  interconnection or resale agreements;  (ii) manufacturers
of the hardware and related  operating systems that the Company uses directly in
its operations;  (iii) providers that create custom software  applications  that
the  Company  uses  directly in its  operations;  and (iv)  providers  that sell
standard  or custom  equipment  or  software  which allow the Company to provide
administrative support to its operations.

Strategy

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

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

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

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

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

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

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

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

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

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

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

                                       40
<PAGE>

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

          The Company has completed all areas of Phase I.

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

     o    Phase III - Testing
          During this phase,  the Company is  performing  testing  sufficient to
          confirm  that the  component  meets  the  desired  state of Year  2000
          readiness.  This phase  consists  of: (i)  testing  the  component  in
          isolation,  or unit testing;  (ii) testing the component  jointly with
          other components,  or system testing; and (iii) testing interdependent
          systems, or environment testing.

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

Current State of Readiness

     The Company has either already completed or has commenced all of the phases
within  its Year 2000  compliance  strategy  for each of its  functional  system
categories,  as shown by the table set forth  below.  Since the  Company has not
waited until the  completion of a phase for all functional  category  components
together  before  commencing  the next phase,  the  information  set forth below
represents  only a general  description of the phase status for each  functional
category.  For systems  and  products  which the  Company  intends to abandon or
replace prior to January 1, 2000, the Company has currently  terminated all Year
2000 compliance efforts.

                                       41
<PAGE>

<TABLE>
<CAPTION>
------------------------------- ----------------------------------------------------------------------------------------------
                                                                            Phase
------------------------------- ----------------------------------------------------------------------------------------------
<S>                             <C>                    <C>                     <C>                     <C>
                                          I                      II                     III                      IV
System and Level of Priority         Assessment             Remediation               Testing              Implementation
------------------------------- ----------------------------------------------------------------------------------------------
Networks and Products
------------------------------- ----------------------------------------------------------------------------------------------
     High                       Complete               Complete                In progress             In progress
                                                                               To complete Q3 1999     To complete Q3 1999
------------------------------- ---------------------- ----------------------- ----------------------- -----------------------
     Medium                     Complete               Complete                In progress             In progress
                                                                               To complete Q3 1999     To complete Q3 1999
------------------------------- ---------------------- ----------------------- ----------------------- -----------------------
     Low                        Complete               Complete                 Complete               Complete
------------------------------- ----------------------------------------------------------------------------------------------
IT Systems
------------------------------- ----------------------------------------------------------------------------------------------
     High                       Complete               In progress             In progress             In progress
                                                       To complete Q3 1999     To complete Q3 1999     To complete Q3 1999
------------------------------- ---------------------- ----------------------- ----------------------- -----------------------
     Medium                     Complete               In progress             In progress             In progress
                                                       To complete Q3 1999     To complete Q3 1999     To complete Q3 1999
------------------------------- ---------------------- ----------------------- ----------------------- -----------------------
     Low                        Complete               Complete                In progress             In progress
                                                                               To complete Q3 1999     To complete Q3 1999
------------------------------- ----------------------------------------------------------------------------------------------
Building and Facilities
------------------------------- ----------------------------------------------------------------------------------------------
     High                       Complete               Complete                In progress             In progress
                                                                               To complete Q3 1999     To complete Q3 1999
------------------------------- ---------------------- -----------------------------------------------------------------------
     Medium                     Complete                Based on the results of Phase I, further remediation not considered
                                                                                     necessary
------------------------------- ---------------------- -----------------------------------------------------------------------
     Low                        Complete                Based on the results of Phase I, further remediation not considered
                                                                                     necessary
------------------------------- ----------------------------------------------------------------------------------------------
Office Equipment
------------------------------- ----------------------------------------------------------------------------------------------
     High                       Complete               Complete                Complete                Complete
------------------------------- ---------------------- ----------------------- ----------------------- -----------------------
     Medium                     Complete               Complete                Complete                Complete
------------------------------- ---------------------- ----------------------- ----------------------- -----------------------
     Low                        Complete               Complete                Complete                Complete
------------------------------- ---------------------- ----------------------- ----------------------- -----------------------
</TABLE>
                                 41 (continued)
<PAGE>

Costs

     The Company expenses all incremental  costs to the Company  associated with
Year 2000  compliance  issues as incurred.  Through  June 30,  1999,  such costs
incurred were  approximately  $1.1 million,  consisting  of  approximately  $0.6
million of replacement  hardware and software and approximately  $0.5 million of
consulting fees and other miscellaneous costs of Year 2000 compliance  reference
and planning  materials.  The Company has also incurred  certain internal costs,
including  salaries and benefits for employees  dedicating  various  portions of
their time to Year 2000 compliance  issues,  of which costs the Company believes
has not exceeded $0.5 million  through June 30, 1999.  The Company  expects that
total  future  incremental  costs  of  Year  2000  compliance  efforts  will  be
approximately $3.8 million,  consisting of $2.3 million in consulting fees, $1.5
million in  replacement  hardware and software  and other  miscellaneous  costs.
These  anticipated  costs have been included in the Company's fiscal 1999 budget
and  represent   approximately  4%  of  the  Company's   budgeted  expenses  for
information  technology  through fiscal 1999. Such cost estimates are based upon
presently available information and may change as the Company continues with its
Year 2000 compliance plan. The Company intends to use cash on hand for Year 2000
compliance costs, as necessary.

Risk, Contingency Planning and Reasonably Likely Worst Case Scenario

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

     The Company believes that a reasonably likely worst case scenario of a Year
2000 compliance  failure could include the temporary failure of a minimal number
of  operating  systems,   despite  the  Company's   execution  and  satisfactory
completion of its comprehensive Year 2000 compliance plan.  However,  under this
scenario,  the Company also believes that any such failed  systems or components
would be fully  recovered  within a short  period  subsequent  to  failure  and,
accordingly,  the Company does not expect to experience any  significant or long
term  operational  disruption  as a result  of the  failure  of any  systems  or
components directly within the Company's control.

     The  Company  acknowledges  the  possibility  that the  Company  may become
subject  to  potential  claims by  customers  if the  Company's  operations  are
interrupted  for an  extended  period of time.  However,  it is not  possible to
predict either the  probability of such  potential  litigation,  the amount that
could  be in  controversy  or upon  which  party a court  would  place  ultimate
responsibility for any such interruption.

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


                                       42
<PAGE>

ITEM 3.       QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Interest Rate Risk

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

     The Company invests  primarily in high grade short-term  investments  which
consist of money market instruments,  commercial paper, certificates of deposit,
government  obligations and corporate  bonds,  all of which are considered to be
available  for sale  and  generally  have  maturities  of one year or less.  The
Company's short term investment  objectives are safety,  liquidity and yield, in
that order. As of June 30, 1999, the Company had approximately $265.3 million in
cash,  cash  equivalents  and  short-term  investments  available for sale, at a
weighted  average fixed interest rate of 4.83% for the six months ended June 30,
1999. A hypothetical  10%  fluctuation in market rates of interest would cause a
change in the fair value of the Company's investment in marketable securities at
June 30, 1999 of approximately $0.7 million and, accordingly,  would not cause a
material impact on the Company's  financial  position,  results of operations or
cash flows.

     At June 30, 1999,  the Company's  indebtedness  included $1.7 billion under
the 13 1/2% Notes, 12 1/2% Notes, 11 5/8% Notes,  10% Notes and 9 7/8% Notes and
$491.9 million under the 14 1/4% Preferred Stock, 14% Preferred Stock and 6 3/4%
Preferred  Securities.  These  instruments  contain  fixed  annual  interest and
dividend rates,  respectively,  and, accordingly,  any change in market interest
rates  would  have no impact on the  Company's  financial  position,  results of
operations or cash flows.  Future increases in interest rates could increase the
cost of any new  borrowings  by the Company.  The Company does not hedge against
future changes in market rates of interest.

     On  August  12,  1999,  the  Company  entered  into  the  Senior  Facility,
consisting of two term loans and a revolving  line of credit.  All components of
the Senior Facility bear variable annual rates of interest,  based on changes in
LIBOR,  the  Royal  Bank of  Canada  prime  rate  and the  federal  funds  rate.
Consequently,  additional  borrowings under the Senior Facility and increases in
LIBOR,  the Royal  Bank of Canada  prime  rate and the  federal  funds rate will
increase the  Company's  indebtedness  and may increase the  Company's  interest
expense in future periods. Additionally, under the terms of the Senior Facility,
the Company is required to hedge the interest rate risk on $100.0 million of the
Senior Facility if LIBOR exceeds 9.0% for 15 consecutive  days. As of August 13,
1999, the Company had $80.0 million outstanding under the Senior Facility.

Equity Price Risk

     On February  17,  1999,  the  Company  completed  the sale of the  domestic
operations of NETCOM to  MindSpring,  in exchange for a combination  of cash and
376,116 shares of common stock of MindSpring, valued at approximately $79.76 per
share, or $30.0 million, at the time of the transaction. Through April 16, 1999,
the Company bore some risk of market price  fluctuations  in its  investment  in
MindSpring.  In order to  mitigate  the risk  associated  with a decrease in the
market value of the Company's investment in MindSpring, the Company entered into
a hedging contract. In April 1999, the Company sold its investment in MindSpring
for net proceeds of approximately $30.4 million.  The Company recorded a gain on
its investment in MindSpring of  approximately  $0.4 million in its statement of
operations  for the six months  ended June 30,  1999.  The hedging  contract was
terminated upon the sale of the common stock of MindSpring.

     On March 30, 1999, the Company purchased,  for approximately  $10.0 million
in cash, 454,545 shares of NorthPoint  Preferred Stock. The NorthPoint Preferred
Stock has no voting rights and is ultimately  convertible into a voting class of
common stock of NorthPoint, at an exchange price which represents a discount, as
provided in the relevant documentation,  to the initial public offering price of
NorthPoint's common stock. The Company is restricted from selling the NorthPoint

                                       43
<PAGE>

Preferred  Stock  or  securities  obtained  upon  conversion  of the  NorthPoint
Preferred Stock until March 23, 2000.  Accordingly,  the Company will be subject
to the  effects  of  fluctuations  in the  fair  value  of the  common  stock of
NorthPoint  until  such time when the  Company is  permitted  to  liquidate  its
investment  in  NorthPoint.  Although  changes in the fair  market  value of the
common stock of  NorthPoint  may affect the fair market  value of the  Company's
investment in NorthPoint  and cause  unrealized  gains or losses,  such gains or
losses will not be realized until the securities are sold.

                                       44
<PAGE>

                                     PART II


ITEM 1.   LEGAL PROCEEDINGS

          See  Note 6 (e)  to the  Company's  unaudited  condensed  consolidated
          financial  statements for the six months ended June 30, 1999 contained
          elsewhere in this Quarterly Report.

ITEM 2.   CHANGES IN SECURITIES

          None.

ITEM 3.   DEFAULTS UPON SENIOR SECURITIES

          None.

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

          The Annual Meeting of  stockholders  of ICG  Communications,  Inc. was
          held on June 9, 1999 (the "Annual  Meeting").  At the Annual  Meeting,
          two matters were  considered  and acted upon:  (1) the election of two
          directors to serve until the 2002 Annual Meeting of  Stockholders  and
          until their  successors have been duly elected and qualified;  (2) the
          ratification of the appointment of KPMG LLP as independent auditors of
          ICG  Communications,  Inc.  and its  subsidiaries  for the fiscal year
          ending December 31, 1999.

          Indicated below are the total votes in favor of each director  nominee
          and the total votes withheld:

<TABLE>
<CAPTION>
                                                Votes
                               ----------------------------------------
                                     For                 Withheld
                               -----------------    -------------------
<S>                               <C>                     <C>
          William J. Laggett      38,003,699              209,760
          J. Shelby Bryan         38,003,599              209,860
</TABLE>

          In connection with the vote on the  ratification of the appointment of
          the independent  auditors,  38,138,209 votes were cast in favor of the
          appointment and 35,841 votes were cast in opposition thereto.

ITEM 5.   OTHER INFORMATION

          None.

ITEM 6.   EXHIBITS AND REPORT ON FORM 8-K

        (A) Exhibits.

             (10) Material Contracts.

                  10.1:  Amended and Restated Loan Agreement, dated as of May 1,
                         1999, by and among TriNet Realty Capital,  Inc. and ICG
                         161, L.P.

                  10.2:  Assumption and Modification Agreement,  dated as of May
                         1, 1999, by and among ICG Services, Inc., ICG 161, L.P.
                         and TriNet Realty Capital, Inc.

                  10.3:  Employment  Agreement,   dated  as  of  May  19,  1999,
                         between ICG Communications, Inc. and Harry R. Herbst.

                  10.4:  Employment  Agreement,   dated  as  of  May  19,  1999,
                         between ICG Communications, Inc. and H. Don Teague.


                                       45
<PAGE>

                  10.5:  Employment  Agreement,   dated  as  of  May  19,  1999,
                         between ICG Communications, Inc. and John Kane.

                  10.6:  Employment  Agreement,   dated  as  of  June  1,  1999,
                         between ICG Communications, Inc. and Douglas I. Falk.

                  10.7:  Amendment to Employment Agreement,  dated as of June 9,
                         1999, between ICG Communications, Inc. and John Kane.

                  10.8:  Employment  Agreement,  dated  as  of  June  28,  1999,
                         between ICG Communications,  Inc. and William S. Beans,
                         Jr.

                  10.9:  Share Price Appreciation  Vesting  Non-Qualified  Stock
                         Option  Agreement,  dated as of June 28, 1999,  between
                         ICG Communications, Inc. and William S. Beans, Jr.

                  10.10: Employment  Agreement,  dated  as  of  July  1,  1999,
                         between ICG Communications, Inc. and Michael D. Kallet.

                  10.11: Credit  Agreement,  dated  as of August 12, 1999, among
                         ICG  Equipment,   Inc.  and  ICG  NetAhead,   Inc.,  as
                         Borrowers,  ICG Services,  Inc., as Parent, the Initial
                         Lenders  and  the  Initial  Issuing  Bank,  as  Initial
                         Lenders and Initial Issuing Bank, Royal Bank of Canada,
                         as Administrative  Agent and Collateral  Agent,  Morgan
                         Stanley Senior Funding,  Inc., as Sole  Book-Runner and
                         Lead  Arranger  and Bank of America,  N.A. and Barclays
                         Bank PLC, as Co-Documentation Agents.

                  10.12: Security  Agreement,  dated  August 12, 1999, from  ICG
                         Equipment,  Inc. and ICG NetAhead, Inc., as Grantors to
                         Royal Bank of Canada, as Collateral Agent.

             (27) Financial Data Schedule.

                  27.1:  Financial Data Schedule of ICG Communications, Inc. for
                         the Six Months Ended June 30, 1999.

          (B)     Report on Form 8-K. The following report on Form 8-K was filed
                  by the registrants during the six months ended June 30, 1999:

                  (i)    Current  Report  on Form  8-K  dated  April  30,  1999,
                         regarding the  announcement  of the Company's  earnings
                         information  and results of operations  for the quarter
                         ended March 31, 1999.

                                       46
<PAGE>

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






<PAGE>


                                INDEX TO EXHIBITS




10.1:          Amended and Restated Loan Agreement,  dated as of May 1, 1999, by
               and among TriNet Realty Capital, Inc. and ICG 161, L.P.

10.2:          Assumption and Modification  Agreement,  dated as of May 1, 1999,
               by and among ICG Services,  Inc., ICG 161, L.P. and TriNet Realty
               Capital, Inc.

10.3:          Employment  Agreement,  dated  as of May 19,  1999,  between  ICG
               Communications, Inc. and Harry R. Herbst.

10.4:          Employment  Agreement,  dated  as of May 19,  1999,  between  ICG
               Communications, Inc. and H. Don Teague.

10.5:          Employment  Agreement,  dated  as of May 19,  1999,  between  ICG
               Communications, Inc. and John Kane.

10.6:          Employment  Agreement,  dated  as of June 1,  1999,  between  ICG
               Communications, Inc. and Douglas I. Falk.

10.7:          Amendment  to  Employment  Agreement,  dated as of June 9,  1999,
               between ICG Communications, Inc. and John Kane.

10.8:          Employment  Agreement,  dated as of June 28,  1999,  between  ICG
               Communications, Inc. and William S. Beans, Jr.

10.9:          Share  Price  Appreciation  Vesting  Non-Qualified  Stock  Option
               Agreement, dated as of June 28, 1999, between ICG Communications,
               Inc. and William S. Beans, Jr.

10.10:         Employment  Agreement,  dated  as of July 1,  1999,  between  ICG
               Communications, Inc. and Michael D. Kallet.

10.11:         Credit  Agreement,  dated  as  of  August  12,  1999,  among  ICG
               Equipment,  Inc.  and  ICG  NetAhead,  Inc.,  as  Borrowers,  ICG
               Services,  Inc., as Parent,  the Initial  Lenders and the Initial
               Issuing Bank, as Initial Lenders and Initial Issuing Bank,  Royal
               Bank of Canada,  as  Administrative  Agent and Collateral  Agent,
               Morgan Stanley Senior Funding, Inc., as Sole Book-Runner and Lead
               Arranger  and Bank of America,  N.A.  and  Barclays  Bank PLC, as
               Co-Documentation Agents.

10.12:         Security  Agreement,  dated August 12, 1999,  from ICG Equipment,
               Inc. and ICG NetAhead, Inc., as Grantors to Royal Bank of Canada,
               as Collateral Agent.

27.1:          Financial Data Schedule of ICG  Communications,  Inc. for the Six
               Months Ended June 30, 1999.

<PAGE>


                                  EXHIBIT 10.1

   Amended and Restated Loan Agreement, dated as of May 1, 1999, by and among
                 TriNet Realty Capital, Inc. and ICG 161, L.P.



<PAGE>


                                  EXHIBIT 10.2

Assumption and Modification Agreement, dated as of May 1, 1999, by and among ICG
         Services, Inc., ICG 161, L.P. and TriNet Realty Capital, Inc.



<PAGE>


                                  EXHIBIT 10.3

Employment Agreement, dated as of May 19, 1999, between ICG Communications, Inc.
                              and Harry R. Herbst.



<PAGE>


                                  EXHIBIT 10.4

Employment Agreement, dated as of May 19, 1999, between ICG Communications, Inc.
                               and H. Don Teague.



<PAGE>


                                  EXHIBIT 10.5

Employment Agreement, dated as of May 19, 1999, between ICG Communications, Inc.
                                 and John Kane.



<PAGE>


                                  EXHIBIT 10.6

Employment Agreement, dated as of June 1, 1999, between ICG Communications, Inc.
                              and Douglas I. Falk.





<PAGE>


                                  EXHIBIT 10.7

    Amendment to Employment Agreement, dated as of June 9, 1999, between ICG
                      Communications, Inc. and John Kane.




<PAGE>


                                  EXHIBIT 10.8

  Employment Agreement, dated as of June 28, 1999, between ICG Communications,
                         Inc. and William S. Beans, Jr.



<PAGE>


                                  EXHIBIT 10.9

Share Price Appreciation Vesting Non-Qualified Stock Option Agreement, dated as
  of June 28, 1999, between ICG Communications, Inc. and William S. Beans, Jr.





<PAGE>


                                  EXHIBIT 10.10

Employment Agreement, dated as of July 1, 1999, between ICG Communications, Inc.
                             and Michael D. Kallet.




<PAGE>


                                  EXHIBIT 10.11

Credit Agreement, dated as of August 12, 1999, among ICG Equipment, Inc. and ICG
NetAhead, Inc., as Borrowers, ICG Services, Inc., as Parent, the Initial Lenders
and the Initial Issuing Bank, as Initial Lenders and Initial Issuing Bank, Royal
  Bank of Canada, as Administrative Agent and Collateral Agent, Morgan Stanley
Senior Funding, Inc., as Sole Book-Runner and Lead Arranger and Bank of America,
            N.A. and Barclays Bank PLC, as Co-Documentation Agents.


<PAGE>


                                  EXHIBIT 10.12

  Security Agreement, dated August 12, 1999, from ICG Equipment, Inc. and ICG
   NetAhead, Inc., as Grantors to Royal Bank of Canada, as Collateral Agent.

<PAGE>


                                  EXHIBIT 27.1

  Financial Data Schedule of ICG Communications, Inc. for the Six Months Ended
                                 June 30, 1999.




<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 August 13, 1999.



                                  ICG COMMUNICATIONS, INC.





Date:  August 13, 1999       By:  /s/ Harry R. Herbst
                                  ----------------------------------------------
                                  Harry R. Herbst, Executive Vice President and
                                  Chief Financial Officer (Principal Financial
                                  Officer)






Date:  August 13, 1999       By:  /s/ John V. Colgan
                                  ----------------------------------------------
                                  John V. Colgan, Vice President of Finance and
                                  Controller (Principal Accounting 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 August 13, 1999.



                                      ICG HOLDINGS (CANADA) CO.





Date:  August 13, 1999        By: /s/ Harry R. Herbst
                                  ----------------------------------------------
                                  Harry R. Herbst, Executive Vice President and
                                  Chief Financial Officer (Principal Financial
                                  Officer)






Date:  August 13, 1999        By:  /s/ John V. Colgan
                                   ---------------------------------------------
                                   John V. Colgan, Vice President of Finance and
                                   Controller (Principal Accounting 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 August 13, 1999.



                               ICG HOLDINGS, INC.





Date:  August 13, 1999       By:  /s/ Harry R. Herbst
                                  ----------------------------------------------
                                  Harry R. Herbst, Executive Vice President and
                                  Chief Financial Officer (Principal Financial
                                  Officer)






Date:  August 13, 1999       By:  /s/ John V. Colgan
                                  ----------------------------------------------
                                  John V. Colgan, Vice President of Finance and
                                  Controller (Principal Accounting Officer)