FORM 10-Q. - QUARTERLY REPORT UNDER SECTION 13 OR 15(d)  
             OF THE SECURITIES EXCHANGE ACT OF 1934

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

                  For the quarterly period ended June 30, 1998

                                       or


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

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

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

161 Inverness Drive West                  Not applicable
Englewood, Colorado 80112

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

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

     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 securities as of August 13,
1998 were 45,729,222, 1, 31,831,558 and 1,918, respectively. ICG Communications,
Inc. owns all of the issued and  outstanding  common  securities of ICG Funding,
LLC. ICG Holdings  (Canada),  Inc. owns all of the issued and outstanding common
shares of ICG Holdings, Inc.


<PAGE>

                                TABLE OF CONTENTS




PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    2
     ITEM 1.  CONSOLIDATED FINANCIAL STATEMENTS  . . . . . . . . . . . .    2
              Consolidated Balance Sheets as of December 31, 1997 and 
                June 30, 1998 (unaudited)  . . . . . . . . . . . . . . .    2
              Consolidated Statements of Operations (unaudited) for the 
                Three Months and Six Months Ended June 30, 1997 and 1998    4
              Consolidated Statement of Stockholders' Deficit 
                (unaudited) for the Six Months Ended June 30, 1998  . . .   5
              Consolidated Statements of Cash Flows (unaudited) for the 
                Six Months Ended June 30, 1997 and 1998 . . . . . . . . .   6
              Notes to Consolidated Financial Statements (unaudited). . .   8
     ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
              AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . .  18


PART II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  30
     ITEM 1.  LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . .  30
     ITEM 2.  CHANGES IN SECURITIES . . . . . . . . . . . . . . . . . . .  30
     ITEM 3.  DEFAULTS UPON SENIOR SECURITIES . . . . . . . . . . . . . .  30
     ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS   . .  30
     ITEM 5.  OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . .  30
     ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K  . . . . . . . . . . . . .  30
              Exhibits  . . . . . . . . . . . . . . . . . . . . . . . . .  30
              Reports on Form 8-K   . . . . . . . . . . . . . . . . . . .  31


<PAGE>
                                       2


                    ICG COMMUNICATIONS, INC. AND SUBSIDIARIES

                           Consolidated Balance Sheets
                 December 31, 1997 and June 30, 1998 (unaudited)

<TABLE>
<CAPTION>

                                                                           December 31,           June 30,
                                                                               1997                 1998
                                                                        ------------------    ----------------
                                                                                     (in thousands)
<S>                                                                      <C>                       <C>    
      Assets

      Current assets:
         Cash and cash equivalents                                       $    182,202               615,494
         Short-term investments                                               112,281                16,000
         Receivables:
            Trade, net of allowance of $7,004 and $10,263 at
              December 31, 1997 and June 30, 1998, respectively
              (note 7)                                                         61,439                84,490
            Revenue earned, but unbilled                                        8,599                13,424
            Due from affiliate                                                  9,384                 7,022
            Other                                                               1,696                 1,598
                                                                        ------------------    ----------------
                                                                               81,118               106,534

         Inventory                                                              4,242                 3,426
         Prepaid expenses and deposits                                         14,097                12,774
                                                                        ------------------    ----------------

            Total current assets                                              393,940               754,228
                                                                        ------------------    ----------------

      Property and equipment                                                  860,495               998,615
         Less accumulated depreciation                                       (155,383)             (203,914)
                                                                        ------------------    ----------------
            Net property and equipment                                        705,112               794,701
                                                                        ------------------    ----------------

      Long-term notes receivable from affiliate and others, net                10,375                15,285
      Restricted cash                                                          24,649                20,836
      Other assets, net of accumulated amortization:
         Goodwill                                                              77,562                74,398
         Deferred financing costs                                              23,196                38,481
         Deferred advertising costs                                             3,115                 8,032
         Transmission and other licenses                                        6,031                 5,878
         Deposits and other                                                    10,531                20,793
                                                                        ------------------    ----------------
                                                                              120,435               147,582
                                                                        ==================    ================

                                                                         $  1,254,511             1,732,632
                                                                        ==================    ================
                                                                                                  (Continued)
</TABLE>

<PAGE>
                                       3





                    ICG COMMUNICATIONS, INC. AND SUBSIDIARIES

               Consolidated Balance Sheets (unaudited), Continued

<TABLE>
<CAPTION>

                                                                          December 31,              June 30,
                                                                              1997                    1998
                                                                        ------------------     -------------------
                                                                                      (in thousands)
<S>                                                                     <C>                        <C>   
Liabilities and Stockholders' Deficit

Current liabilities:
   Accounts payable                                                     $      38,457                 71,825
   Accrued liabilities                                                         71,678                 60,139
   Deferred revenue                                                            10,219                 13,933
   Current portion of capital lease obligations (note 7)                        8,128                  7,821
   Current portion of long-term debt (note 2)                                   1,784                    935
                                                                        ------------------     -------------------
      Total current liabilities                                               130,266                154,653
                                                                        ------------------     -------------------

Capital lease obligations, less current portion (note 7)                       70,489                 64,941
Long-term debt, net of discount, less current portion (note 2)                890,568              1,512,805
                                                                        ------------------     -------------------

   Total liabilities                                                        1,091,323              1,732,399
                                                                        ------------------     -------------------

Redeemable preferred stock of subsidiary ($301.2 million and 
   $323.0 million liquidation value at December 31, 1997 and
   June 30, 1998, respectively) (note 2)                                      292,442                314,590

Company-obligated mandatorily redeemable preferred securities 
   of subsidiary limited liability company which holds solely 
   Company preferred stock ($133.4 million liquidation value 
   at December 31, 1997 and June 30, 1998)                                    127,729                127,847

Stockholders' deficit:
   Common stock (note 3)                                                          749                    747
   Additional paid-in capital                                                 533,541                550,989
   Accumulated deficit                                                       (791,417)              (994,008)
   Accumulated other comprehensive income                                         144                     68
                                                                        ------------------     -------------------
      Total stockholders' deficit                                            (256,983)              (442,204)
                                                                        ------------------     -------------------

Commitments and contingencies (notes 4, 5, 6 and 7)
                                                                         $  1,254,511              1,732,632
                                                                        ==================     ===================
</TABLE>

          See accompanying notes to consolidated financial statements.



<PAGE>
                                       4





                    ICG COMMUNICATIONS, INC. AND SUBSIDIARIES

                Consolidated Statements of Operations (unaudited)
            Three Months and Six Months Ended June 30, 1997 and 1998

<TABLE>
<CAPTION>

                                                                Three months ended June 30,         Six months ended June 30,
                                                              --------------------------------    -------------------------------
                                                                  1997              1998              1997             1998
                                                              --------------    --------------    --------------   --------------
                                                                            (in thousands, except per share data)
<S>                                                           <C>                  <C>              <C>               <C>    
Revenue:
   Telecom services                                           $   41,243             69,455           79,523           134,197
   Internet services                                              41,020             40,370           80,025            80,904
   Network services                                               15,640             14,759           33,627            26,190
   Satellite services                                              7,883             11,683           14,666            20,632
                                                              --------------    --------------    --------------    ------------
      Total revenue                                              105,786            136,267          207,841           261,923

Operating costs and expenses:
   Operating costs                                                83,650             93,351          166,602           186,870
   Selling, general and administrative expenses                   58,636             61,444          112,252           122,502
   Depreciation and amortization                                  18,955             30,663           35,681            51,630
   Net (gain) loss on disposal of long-lived assets                 (256)               137             (897)              642
   Provision for impairment of long-lived assets                       -                  -                -             1,860
   Merger and restructuring costs                                  1,712              2,185            1,712             9,931
                                                              --------------    --------------    --------------    ------------
      Total operating costs and expenses                         162,697            187,780          315,350           373,435

      Operating loss                                             (56,911)           (51,513)        (107,509)         (111,512)

Other income (expense):
   Interest expense                                              (28,451)           (41,991)         (53,633)          (76,875)
   Interest income                                                 7,778              9,499           13,876            16,148
   Other expense, net (note 4)                                       (43)            (3,224)            (593)           (3,540)
                                                              --------------    --------------    --------------    ------------
                                                                 (20,716)           (35,716)         (40,350)          (64,267)
                                                              --------------    --------------    --------------    ------------

Loss before income taxes and minority interest                   (77,627)           (87,229)        (147,859)         (175,779)
Income tax expense                                                    (6)               (12)             (13)              (25)
                                                              --------------    --------------    --------------    ------------
Loss before minority interest                                    (77,633)           (87,241)        (147,872)         (175,804)
Minority interest in share of losses, net of 
   accretion and preferred dividends on preferred 
   securities of subsidiaries                                     (9,116)           (13,595)         (14,869)          (26,787)
                                                              --------------    --------------    --------------    ------------

   Net loss                                                   $  (86,749)          (100,836)        (162,741)         (202,591)
                                                              ==============    ==============    ==============    ============

Other comprehensive income (loss):
   Foreign currency translation adjustment                           144               (181)            (234)              (76)
   Unrealized loss on investment securities                          (84)                 -             (305)                -
                                                              --------------    --------------    --------------    ------------
      Other comprehensive income (loss)                               60               (181)            (539)              (76)
                                                              --------------    --------------    --------------    ------------

      Comprehensive loss                                      $  (86,689)          (101,017)        (163,280)         (202,667)
                                                              ==============    ==============    ==============    ============

Net loss per share - basic and diluted (note 3)               $    (2.06)             (2.25)           (3.87)            (4.54)
                                                              ==============    ==============    ==============    ============
Weighted average number of shares outstanding - basic
   and diluted                                                    42,122             44,865           42,067            44,588
                                                              ==============    ==============    ==============    ============
</TABLE>
          See accompanying notes to consolidated financial statements.
<PAGE>
                                       5


                    ICG COMMUNICATIONS, INC. AND SUBSIDIARIES

           Consolidated Statement of Stockholders' Deficit (unaudited)
                         Six Months Ended June 30, 1998

<TABLE>
<CAPTION>
                                                                                                 
                                                                                                 Accumulated
                                           Common stock        Additional                           other            Total   
                                       ----------------------   paid-in       Accumulated        comprehensive    stockholders'
                                        Shares     Amount       capital         deficit             income           deficit
                                      ---------- ------------ ------------- ---------------- ------------------ ----------------
                                                                                   (in thousands)

<S>                                      <C>      <C>            <C>            <C>                   <C>           <C>      
Balances at January 1, 1998              43,974   $   749        533,541        (791,417)             144           (256,983)
  Shares issued for cash by ICG 
    Funding, LLC net of selling costs       127         1          3,384               -                -              3,385
  Shares issued for cash in connection 
    with the exercise of options and 
    warrants                                981         9         11,659               -                -             11,668
  Shares issued for cash in connection 
    with the employee stock purchase plan    21         -            884               -                -                884
  Shares issued as contribution to 401(k)
    plan                                     53         1          1,508               -                -              1,509
  Exchange of ICG Holdings (Canada),Inc.
    common shares for ICG common stock        -       (13)            13               -                -                  -
  Cumulative foreign currency
    translation adjustment                    -         -              -               -              (76)               (76)
  Net loss                                    -         -              -        (202,591)               -           (202,591)
                                      ========== ============ ============= ================ ================== ================
Balances at June 30, 1998                45,156       747        550,989        (994,008)              68           (442,204)
                                      ========== ============ ============= ================ ================== ================
</TABLE>


          See accompanying notes to consolidated financial statements.


<PAGE>
                                       6





                    ICG COMMUNICATIONS, INC. AND SUBSIDIARIES

                Consolidated Statements of Cash Flows (unaudited)
                     Six Months Ended June 30, 1997 and 1998
<TABLE>
<CAPTION>

                                                                                          Six months ended June 30,
                                                                                    ---------------------------------------
                                                                                           1997                  1998
                                                                                    -------------------    -----------------
                                                                                                (in thousands)
<S>                                                                                 <C>                         <C>      
Cash flows from operating activities:
      Net loss                                                                      $    (162,741)              (202,591)
      Adjustments to reconcile net loss to net cash used by operating activities:
        Minority interest in share of losses, net of accretion and preferred
          dividends on preferred securities of subsidiaries                                14,869                 26,787
        Depreciation and amortization                                                      35,681                 51,630
        Interest expense deferred and included in long-term debt, net of amounts
          capitalized on assets under construction                                         48,532                 67,695
        Amortization of deferred advertising costs included in selling,
          general and administrative expenses                                               5,799                  3,634
        Amortization of deferred financing costs included in interest expense               1,370                  1,820
        Write-off of non-operating assets                                                     992                      -
        Contribution to 401(k) plan through issuance of common shares                         533                  1,509
        Net (gain) loss on disposal of long-lived assets                                     (897)                   642
        Provision for impairment of long-lived assets                                           -                  1,860
        Change in operating assets and liabilities:
          Receivables                                                                      (1,753)               (25,416)
          Inventory                                                                          (875)                   816
          Prepaid expenses and deposits                                                    (3,204)                 1,323
          Deferred advertising costs                                                       (3,160)                (8,551)
          Accounts payable and accrued liabilities                                         24,199                 20,790
          Deferred revenue                                                                  1,430                  3,714
                                                                                    -------------------    -----------------
            Net cash used by operating activities                                         (39,225)               (54,338)
                                                                                    -------------------    -----------------
Cash flows from investing activities:
      Decrease (increase) in long-term notes receivable from affiliates and others            343                 (4,910)
      Acquisition of property, equipment and other assets, net                           (128,330)              (165,806)
      Payments for construction of new headquarters                                       (10,156)                (4,944)
      Proceeds from disposition of property, equipment and other assets                     1,706                    145
      Proceeds from sale of new headquarters, net of selling and other costs                    -                 29,094
      Sale of short-term investments                                                       20,601                 96,281
      Decrease in restricted cash                                                             633                  3,813
      Purchase of minority interest in subsidiary                                               -                   (355)
                                                                                    -------------------    -----------------
          Net cash used by investing activities                                          (115,203)               (46,682)
                                                                                    -------------------    -----------------
Cash flows from financing activities: 
      Proceeds from issuance of common stock:
        Sales by ICG Funding, LLC                                                               -                  3,385
        Exercise of options and warrants                                                      669                 11,668
        Employee stock purchase plan                                                        1,457                    884
      Proceeds from issuance of subsidiary preferred stock, net of issuance costs          96,000                      -
      Proceeds from issuance of long-term debt                                            101,486                550,574
      Deferred long-term debt issuance costs                                               (3,554)               (17,205)
      Principal payments on capital lease obligations                                     (22,091)                (8,170)
      Principal payments on short-term debt                                                     -                     (1)
      Principal payments on long-term debt                                                   (879)                (2,350)
      Payments of preferred dividends                                                           -                 (4,463)
                                                                                    -------------------    -----------------
         Net cash provided by financing activities                                        173,088                534,322
                                                                                    -------------------    -----------------
         Net increase in cash and cash equivalents                                         18,660                433,302
         Effect of exchange rates on cash                                                    (168)                   (10)
Cash and cash equivalents, beginning of period                                            433,342                182,202
                                                                                    ===================    =================
Cash and cash equivalents, end of period                                            $     451,834                615,494
                                                                                    ===================    =================
                                                                                                                (Continued)
</TABLE>
<PAGE>
                                       7


                   ICG COMMUNICATIONS, INC. AND SUBISIDIARIES

          Consolidated Statements of Cash Flows (unaudited), Continued

<TABLE>
<CAPTION>

                                                                                           Six months ended June 30,
                                                                                    ----------------------------------------
                                                                                           1997                  1998
                                                                                    -------------------    -----------------
                                                                                                (in thousands)
<S>                                                                                 <C>                            <C> 
Supplemental disclosure of cash flow information:
      Cash paid for interest                                                        $       3,751                  7,360
                                                                                    ===================    =================
      Cash paid for income taxes                                                    $          13                     25
                                                                                     ==================     =================
Supplemental schedule of non-cash financing and investing activities - assets
      acquired under capital leases                                                 $       5,533                  2,315
                                                                                    ===================    =================
</TABLE>

          See accompanying notes to consolidated financial statements.


<PAGE>
                                       8




                    ICG COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements
                 December 31, 1997 and June 30, 1998 (unaudited)


(1)  Organization and Basis of Presentation

     (a)  Organization and Nature of Business

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

          On January  21,  1998,  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,  became  automatically  convertible  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
          business combination has been accounted for as a pooling of interests,
          and accordingly,  the accompanying  consolidated  financial statements
          have been  restated  to  include  the  operations  of  NETCOM  for all
          historical periods presented.  NETCOM was incorporated in the state of
          California in August 1992 and  reincorporated in the state of Delaware
          in October 1994. On January 23, 1998, the Company formed ICG Services,
          Inc., a Delaware  corporation and wholly owned subsidiary of ICG ("ICG
          Services").  ICG  Services  is the  parent  company  of NETCOM and ICG
          Equipment,  Inc., a Colorado corporation formed on January 23, 1998 to
          purchase or lease telecommunications  equipment, software and capacity
          and related  services,  and in turn,  lease such  assets to  Holdings'
          subsidiaries. ICG and its subsidiaries, including ICG Services and its
          subsidiaries, are collectively referred to as the "Company."

          The  Company's  principal  business  activity  is   telecommunications
          services,  including  Telecom  Services,  Internet  Services,  Network
          Services and Satellite  Services.  Telecom Services consists primarily
          of the Company's  competitive local exchange carrier  operations which
          provide services to business end users and long distance  carriers and
          resellers.  Internet  Services  consists of the  operations  of NETCOM
          which  includes  Internet  access,  World  Wide Web ("the  Web")  site
          hosting services and other value-added  connectivity  services,  which
          are primarily targeted to small and medium-sized business customers in
          the United States,  Canada and the United  Kingdom.  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.  For the
          periods  presented,  Satellite  Services provides  satellite voice and
          data  services to major  cruise ship lines,  the  commercial  shipping
          industry,  yachts, the U.S. Navy and offshore oil platforms. To better
          focus its efforts on its core Telecom  Services  unit, the Company has
          entered into  definitive  agreements  to sell the capital stock of two
          subsidiaries within its Satellite Services operations (see note 4).

     (b)  Reference to Annual and Transition Reports

          The accompanying  consolidated  financial  statements give retroactive
          effect to the merger of ICG and NETCOM on January 21, 1998,  which has
          been  accounted  for as a  pooling  of  interests,  and  includes  the
          accounts of NETCOM and its  subsidiaries  as of the end of and for the
          periods presented.

          These financial  statements  should be read in conjunction  with ICG's
          Annual  Report on Form 10-K for the fiscal year  December 31, 1997 and
          NETCOM's Annual Report on Form 10-KSB/A for the fiscal year

<PAGE>
                                       9




                    ICG COMMUNICATIONS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements
                 December 31, 1997 and June 30, 1998 (unaudited)


(1)  Organization and Basis of Presentation (continued)

          ended December 31, 1996, 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.  Operating results
          for the six months ended June 30, 1998 are not necessarily  indicative
          of the  results  that  may be  expected  for the  fiscal  year  ending
          December 31, 1998.

     (c)  Deferred Advertising Costs

          The Company  expenses the costs of  advertising  as  incurred,  except
          direct response  advertising expenses which are deferred and amortized
          over the  period in which  the  future  benefits  are  expected  to be
          received, generally 12 to 24 months. Deferred advertising costs relate
          directly  to  customer   solicitations  and  principally  include  the
          printing, production and shipping of Internet starter packages and the
          costs of obtaining  qualified  customer  prospects by various targeted
          direct marketing programs.  No indirect costs are included in deferred
          advertising  costs.  Beginning  in the  second  quarter  of 1998,  the
          amortization  of  deferred  advertising  costs is included in selling,
          general and administrative  expenses in the accompanying  consolidated
          statements  of  operations.   The  amortization  of  these  costs  was
          previously   included   in   depreciation   and   amortization.   This
          reclassification  was made to conform with current industry  practice.
          All prior period  amounts have been  reclassified  to conform with the
          current presentation.

     (d)  Reclassifications

          Certain 1997 amounts have been  reclassified  to conform with the 1998
          presentation.



<PAGE>
                                       10



                    ICG COMMUNICATIONS, INC. AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued


(2)  Long-term Debt and Redeemable Preferred Securities of Subsidiaries

     Long-term debt is summarized as follows:
<TABLE>
<CAPTION>

                                                                       December 31, 1997        June 30, 1998
                                                                      ---------------------    -----------------
                                                                                   (in thousands)

<S>                                                                   <C>                       <C>    
     9 7/8% Senior discount notes, net of discount (a)                $           -               254,338
     10% Senior discount notes, net of discount                                   -               312,050
     11 5/8% Senior discount notes, net of discount                         109,436               115,797
     12 1/2% Senior discount notes, net of discount                         367,494               390,460
     13 1/2% Senior discount notes, net of discount                         407,409               435,432
     Note payable with interest at the 90-day commercial paper 
       rate plus 4 3/4% (10.2% at June 30, 1998), due 2001,
       secured by certain telecommunications equipment                        4,932                 4,490
     Note payable with interest at 11%, paid in full on June 12,
       1998                                                                   1,860                     -
     Mortgage payable with interest at 8 1/2%, due
       monthly through 2009, secured by building                              1,131                 1,107
     Other                                                                       90                    66
                                                                      ---------------------    -----------------
                                                                            892,352             1,513,740
       Less current portion                                                  (1,784)                 (935)
                                                                      =====================    =================
                                                                      $     890,568             1,512,805
                                                                      =====================    =================
</TABLE>


     Redeemable preferred stock of subsidiary is summarized as follows:
<TABLE>
<CAPTION>

                                                                               December 31, 1997         June 30, 1998
                                                                              ---------------------    ------------------
                                                                                           (in thousands)
                     <S>                                                      <C>                            <C>              
                     14% Exchangeable preferred stock, mandatorily
                       redeemable in 2008                                     $          108,022             116,159
                     14 1/4% Exchangeable preferred stock, mandatorily
                       redeemable in 2007                                                184,420             198,431
                                                                              =====================    ==================
                                                                              $          292,442             314,590
                                                                              =====================    ==================
</TABLE>

     (a)  9 7/8% Notes

          On April 27,  1998,  ICG Services  completed a private  placement of 9
          7/8%  Senior  Discount  Notes due 2008 (the "9 7/8%  Notes") for gross
          proceeds  of  approximately  $250.0  million.  Net  proceeds  from the
          offering, after underwriting and other offering costs of approximately
          $7.6 million, were approximately $242.4 million.

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

<PAGE>
                                       11



                    ICG COMMUNICATIONS, INC. AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued


(2)  Long-term  Debt  and  Redeemable   Preferred   Securities  of  Subsidiaries
     (continued)

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

(3)  Stockholders' Deficit

     (a)  Common Stock

          Common stock  outstanding  at June 30, 1998  represents the issued and
          outstanding  common  stock  of  ICG  and  Class  A  common  shares  of
          Holdings-Canada (not owned by ICG) which are exchangeable at any time,
          on a one-for-one basis, for ICG Common Stock. The following table sets
          forth the number of shares outstanding for ICG and  Holdings-Canada on
          a separate company basis as of June 30, 1998:
<TABLE>
<CAPTION>

                                                                                                           Shares
                                                                                  Shares owned by      owned by third
                                                                                        ICG                parties
                                                                                  -----------------    ----------------
<S>                                                                                   <C>                 <C>
          ICG Common Stock, $.01 par value, 100,000,000
            shares authorized; 45,134,020 shares issued and outstanding 
            at June 30, 1998                                                                   -          45,134,020
          Holdings-Canada Class A common shares, no par value,
            100,000,000 shares authorized; 31,831,558 shares issued
            and outstanding at June 30, 1998:
              Class A common shares, exchangeable on a one-for-one 
                basis for ICG Common Stock at any time                                         -              22,040
              Class A common shares owned by ICG                                      31,809,518                   -
                                                                                                       ----------------
            Total shares outstanding                                                                      45,156,060
                                                                                                       ================
</TABLE>

     (b)  Stock Options

          The ICG Communications,  Inc. 1998 Stock Option Plan (the "1998 Plan")
          was adopted by the Stock Option  Committee of the  Company's  Board of
          Directors  on  February  23,  1998  and  approved  by  the   Company's
          shareholders  on June 3, 1998.  The 1998 Plan  authorizes the grant of
          incentive   and   non-qualified   stock   options  to  employees   and
          non-employee  directors  to  purchase  3,400,000  shares of ICG Common
          Stock.  Also on June 3, 1998, the Stock Option Committee  approved the
          grant of an aggregate of 1,950,210  stock  options under the 1998 Plan
          to all of the Company's  employees at an exercise price of $30.00, the
          closing price of ICG Common Stock on June 3, 1998.  The purpose of the
          1998 Plan is to retain employees and to provide  participants  with an
          incentive for outstanding  performance and thereby promote the success
          and enhance the value of the Company.

     (c)  Net Loss Per Share

          Basic and diluted net loss per share is calculated by dividing the net
          loss by the weighted  average number of shares  outstanding.  Weighted
          average number of shares  outstanding  represents  combined ICG Common
          Stock and Holdings-Canada  Class A common shares  outstanding.  Common
          stock  equivalents,  which include  options,  warrants and convertible
          subordinated  notes and preferred  stock,  are not included in the net
          loss per share calculation as their effect is anti-dilutive.

<PAGE>
                                       12


                    ICG COMMUNICATIONS, INC. AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued


(4)  Sale of Satellite Services Operating Subsidiaries

     On April 1, 1998, the Company  entered into  definitive  agreements to sell
     the capital stock of Maritime  Telecommunications Network, Inc. ("MTN") and
     MarineSat  Communications  Network, Inc. (formerly Maritime  Communications
     Network,  Inc.)  ("MCN"),  the two main operating  subsidiaries  within the
     Company's   Satellite  Services   operations.   In  accordance  with  these
     agreements,  each  party had the  option to  terminate  the  agreements  if
     regulatory approvals were not received and the transactions were not closed
     by June 30, 1998. On July 1, 1998, the Company  terminated  both agreements
     and, on July 17, 1998, entered into separate definitive  agreements to sell
     the capital stock of MCN and Nova-Net  Communications,  Inc.  ("Nova-Net"),
     another subsidiary within the Company's Satellite Services operations.  The
     sale of MCN was  completed  on August 12,  1998.  The sale of  Nova-Net  is
     expected to be  completed  later this year and  remains  subject to certain
     conditions, including regulatory approvals. The combined revenue of MCN and
     Nova-Net  does  not  represent  a  significant  portion  of  the  Company's
     historical consolidated revenue. MTN remains a subsidiary of the Company.

     Prior to April 1998,  the Company  owned a 64.5%  interest in MTN. In April
     1998, the Company  purchased the minority interest in MTN for approximately
     $0.4  million  and  settled  certain  disputes  with  the  former  minority
     shareholders for  approximately  $2.7 million,  which amount is included in
     other  expense,   net  in  the  accompanying   consolidated   statement  of
     operations.

(5)  Assignment of Call Traffic by Zycom

     The Company  owns a 70%  interest  in Zycom  Corporation  ("Zycom")  which,
     through its wholly owned subsidiary, Zycom Network Services, Inc. ("ZNSI"),
     operates an 800/888/900 number services bureau and a switch platform in the
     United States and supplies  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  its  call  transport   provider,   ZNSI  entered  into  a
     conditional  agreement  on July 1, 1998 with an  unaffiliated  entity,  ICN
     Limited ("ICN"),  whereby ZNSI intends to assign the traffic of its largest
     audiotext  customer and its other  900-number  customers to ICN. As part of
     this  agreement,  ICN will assume and Zycom will be released of all minimum
     call traffic volume obligations to AT&T,  Zycom's call transport  provider.
     Zycom and ICN are awaiting the  necessary  approvals  from AT&T to complete
     the  transaction.  The  call  traffic  to be  assigned  to  ICN  represents
     approximately  86% and 87% of Zycom's  revenue  for the  fiscal  year ended
     December 31, 1997 and the six months ended June 30, 1998, respectively, and
     6% and 4% of the Company's  revenue for the fiscal year ended  December 31,
     1997 and the six months ended June 30, 1998, respectively.

(6)  Business Combinations

     As discussed in note 1, on January 21, 1998, the Company completed a merger
     with  NETCOM.  Located in San Jose,  California,  NETCOM is a  provider  of
     Internet  connectivity and Web site hosting services and other  value-added
     Internet  services.  At the effective time of the merger,  each outstanding
     share of NETCOM common stock became  automatically  convertible into shares
     of ICG Common Stock at an exchange  ratio of 0.8628  shares of Common Stock
     per NETCOM common share. As a result of the transaction, the Company issued
     an estimated  10.2 million shares of ICG Common Stock for the NETCOM common
     shares outstanding on January 21, 1998 and may be expected to issue as many
     as 1.7 million  shares of ICG Common Stock  related to common stock options
     of NETCOM  outstanding on the merger closing date.  Cash is paid in lieu of
     fractional shares.  The Company has accounted for the business  combination
     under the  pooling-of-interests  method of accounting and accordingly,  the
     Company's financial statements have been restated to reflect the operations
     of NETCOM and the Company on a combined basis for all historical periods.


<PAGE>
                                       13


                    ICG COMMUNICATIONS, INC. AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued


(6)  Business Combinations (continued)

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

                   Fiscal years ended                                    Fiscal year              Six months ended
                      September 30,            Three months ended           ended                     June 30,
               ----------------------------       December 31,            December 31,      -----------------------------
                   1995            1996               1996                   1997               1997            1998
               -------------    -----------    --------------------    -----------------    -------------    ------------
                                                              (in thousands)
<S>            <C>               <C>                 <C>                    <C>              <C>             <C>    
Revenue:
  ICG          $   111,610        169,094             56,956                 273,354          127,816         181,019
  NETCOM            52,422        120,540             36,379                 160,660           80,025          80,904
               =============    ===========    ====================    =================    =============    ============
     Combined  $   164,032        289,634             93,335                 434,014          207,841         261,923
               =============    ===========    ====================    =================    =============    ============

Net loss:
  ICG              (76,648)      (184,107)           (49,823)               (327,643)        (144,351)       (174,093)
  NETCOM           (14,064)       (44,265)           (11,490)                (33,092)         (18,390)        (28,498)
               =============    ===========    ====================    =================    =============    ============
     Combined  $   (90,712)      (228,372)           (61,313)               (360,735)        (162,741)       (202,591)
               =============    ===========    ====================    =================    =============    ============

Loss per share 
basic and diluted:
  ICG          $     (3.25)         (6.83)             (1.56)                  (10.11)          (4.51)
               =============    ===========    ====================    =================    =============
  NETCOM       $     (1.95)         (4.46)             (1.15)                   (3.27)          (1.83)
               =============    ===========    ====================    =================    =============
      Combined $     (2.94)         (6.19)             (1.46)                   (8.49)          (3.87)          (4.54)
               =============    ===========    ====================    =================    =============    ============
</TABLE>


     On July 27, 1998, the Company acquired  DataChoice  Network Services L.L.C.
     ("DataChoice")  for total  consideration  of $5.9  million,  consisting  of
     145,997 shares of ICG Common Stock and approximately  $1.1 million in cash.
     DataChoice,  a Colorado limited liability company,  provides point-to-point
     data  transmission  resale services  through its long-term  agreements with
     multiple regional carriers and nationwide providers.

     Additionally,  the Company  completed a series of  transactions on July 30,
     1998 to acquire  NikoNET,  Inc.,  CompuFAX  Acquisition  Corp. and Enhanced
     Messaging  Services,  Inc.  (collectively,  "NikoNET").  The  Company  paid
     approximately  $13.8  million in cash,  including  amounts  paid to satisfy
     NikoNET's former line-of-credit, and exchanged 356,318 shares of ICG Common
     Stock with a fair market value of approximately $12.4 million,  for all the
     capital stock of NikoNET.  Located in Atlanta,  Georgia,  NikoNET  provides
     broadcast   facsimile  services  and  value-added   messaging  services  to
     financial institutions, corporate investor and public relations departments
     and other  customers.  The Company believes that the acquisition of NikoNET
     will enable the Company to expand the service offerings currently available
     to its Telecom Services customers.

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

<PAGE>
                                       14



                    ICG COMMUNICATIONS, INC. AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued


(7)  Commitments and Contingencies

     (a)  Network Construction

          In March 1996,  the Company and  Southern  California  Edison  Company
          (ASCE@) 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 $136.5 million at
          June 30, 1998. The agreement has been accounted for as a capital lease
          in the accompanying consolidated balance sheets.

          In May 1997, the Company  entered into a long-term  agreement with the
          Southern  Company   ("Southern")  that  will  permit  the  Company  to
          construct a 100-mile  fiber optic network in the Atlanta  metropolitan
          area.  The Company paid $5.5 million upon  execution of the  agreement
          and is responsible for  reimbursement to Southern for costs of network
          design,   construction,    installation,   maintenance   and   repair.
          Additionally, the Company is also required to pay Southern a quarterly
          fee based on specified  percentages of the Company's  revenue  derived
          from services provided over this network.  Network construction on the
          initial  43-mile  build is expected to be  completed  in  September of
          1998. The Company  estimates costs to complete the initial build to be
          approximately  $3.5  million.  The Company has incurred  approximately
          $7.0 million as of June 30, 1998,  including  the initial $5.5 million
          payment.

          In June 1997, the Company  entered into an  indefeasible  right of use
          ("IRU") agreement with Qwest Communications  Corporation ("Qwest") for
          approximately  1,800  miles  of fiber  optic  network  and  additional
          broadband  capacity in California,  Colorado,  Ohio and the Southeast.
          Network  construction  is ongoing  and is  expected  to be complete in
          December  1998.  The  Company  is  responsible   for  payment  on  the
          construction as segments of the network are completed and has incurred
          approximately  $9.6 million as of June 30, 1998,  with remaining costs
          anticipated  to be  approximately  $25.4  million.  Additionally,  the
          Company has  committed to purchase  $6.0  million in network  capacity
          from Qwest prior to the end of 1999.

     (b)  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 $89.4 million at June 30, 1998.




<PAGE>
                                       15


                    ICG COMMUNICATIONS, INC. AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued


(7)  Commitments and Contingencies (continued)

     (c)  Transport and Termination Charges

          The Company has  recorded  revenue of  approximately  $4.9 million and
          $15.1  million for fiscal 1997 and the six months ended June 30, 1998,
          respectively,  for reciprocal  compensation  relating to the transport
          and  termination of local traffic to Internet  service  providers from
          customers of incumbent  local  exchange  carriers  pursuant to various
          interconnection  agreements.  These local  exchange  carriers have not
          paid most of the bills they have  received  from the  Company and have
          disputed  substantially  all of these charges based on the belief that
          such calls are not local traffic as defined by the various  agreements
          and under state and federal laws and public  policies.  The resolution
          of these  disputes  will be based on rulings by state  public  utility
          commissions and/or by the Federal  Communications  Commission ("FCC").
          To date,  there  have been  favorable  final  rulings  from 20 states,
          favorable  preliminary  decisions  from two  additional  states and no
          unfavorable  final rulings by any state public  utility  commission or
          the FCC that would indicate that calls placed by end users to Internet
          service  providers  would not qualify as local traffic  subject to the
          payment of reciprocal compensation. In addition to the two preliminary
          rulings,  cases are pending  before five other  states.  Additionally,
          three federal  district court decisions have upheld  favorable  public
          utility commission  rulings.  The Company has also recorded revenue of
          approximately  $5.5  million  for the six months  ended June 30,  1998
          related to other  transport and  termination  charges to the incumbent
          local  exchange  carriers,  pursuant to the Company's  interconnection
          agreements  with  these  carriers.  Included  in the  Company's  trade
          receivables at December 31, 1997 and June 30, 1998 is $4.4 million and
          $23.5 million,  respectively, for all receivables related to transport
          and termination  charges.  While the Company believes that all revenue
          recorded  through June 30, 1998 is collectible and that future revenue
          from transport and termination charges will be realized,  there can be
          no assurance that such future regulatory  rulings will be favorable to
          the Company.

     (d)  Litigation

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

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

(8)  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.


<PAGE>
                                       16


                    ICG COMMUNICATIONS, INC. AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued


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

     However,  summarized  combined  financial  information for Holdings and its
     subsidiaries is as follows:

                       Condensed Balance Sheet Information
<TABLE>
<CAPTION>

                                                    December 31, 1997           June 30, 1998
                                                ------------------------    ---------------------
                                                                   (in thousands)
<S>                                              <C>                                <C>    
     Current assets                              $        215,817                    223,313
     Property and equipment, net                          632,167                    670,221
     Other non-current assets, net                        122,768                    136,116
     Current liabilities                                   98,351                     91,604
     Long-term debt, less current portion                 890,503                    946,353
     Due to parent                                         30,970                    184,507
     Other long-term liabilities                           66,939                     61,287
     Preferred stock                                      292,442                    314,590
     Stockholder's deficit                               (408,453)                  (568,691)
</TABLE>

    Summarized Consolidated and Combined Statement of Operations Information
<TABLE>
<CAPTION>

                                                  Three months ended June 30,           Six months ended June 30,
                                             -----------------------------------   ---------------------------------
                                                   1997               1998              1997              1998
                                             -----------------    --------------   ---------------   ---------------
                                                                           (in thousands)

<S>                                             <C>                  <C>           <C>               <C>    
    Total revenue                                 64,766              96,700        127,816           182,176
    Total operating costs and expenses           111,553             136,107        215,234           261,159
    Operating loss                               (46,787)            (39,407)       (87,418)          (78,983)
    Net loss                                     (77,490)            (80,735)      (144,119)         (160,238)
</TABLE>

(9)  Condensed Financial Information of ICG Holdings (Canada), Inc.

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

                       Condensed Balance Sheet Information
<TABLE>
<CAPTION>

                                                       December 31, 1997           June 30, 1998
                                                   ------------------------    ---------------------
                                                                     (in thousands)

<S>                                                     <C>                         <C>
     Current assets                                     $     162                        162
     Advances to subsidiaries                              30,790                    184,507
     Non-current assets, net                                3,800                      2,526
     Current liabilities                                      107                        107
     Long-term debt, less current portion                      65                         65
     Due to parent                                         22,162                    174,686
     Share of losses of subsidiary                        408,453                    568,691
     Shareholders' deficit                               (396,035)                  (556,354)

</TABLE>
<PAGE>
                                       17



                    ICG COMMUNICATIONS, INC. AND SUBSIDIARIES

              Notes to Consolidated Financial Statements, Continued


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

                  Condensed Statement of Operations Information
<TABLE>
<CAPTION>

                                               Three months ended June 30,              Six months ended June 30,
                                           ----------------------------------   -----------------------------------------
                                                1997              1998                1997                   1998
                                           ---------------  -----------------   ------------------    -------------------
                                                                        (in thousands)

<S>                                         <C>               <C>                   <C>                     <C>              
     Total revenue                          $        -              -                      -                       -
     Total operating costs and expenses             47             48                    100                      81
     Operating loss                                (47)           (48)                  (100)                    (81)
     Losses of subsidiaries                    (77,490)       (80,735)              (144,119)               (160,238)
     Net loss attributable to common
       shareholders                            (77,537)       (80,783)              (144,219)               (160,319)
</TABLE>

(10) Summarized Financial Information of ICG Funding, LLC

     The 6 3/4% Exchangeable  Limited  Liability  Company  Preferred  Securities
     Mandatorily  Redeemable 2009 (the "6 3/4% Preferred  Securities") issued by
     ICG Funding during fiscal 1997 are guaranteed by ICG. The separate complete
     financial  statements of ICG Funding have not been included  herein because
     such  disclosure  is not  considered to be material to the holders of the 6
     3/4%  Preferred  Securities.  For the six months ended June 30,  1998,  the
     statement  of  operations  of  ICG  Funding  included  only  the  preferred
     dividends paid and accrued on the 6 3/4% Preferred  Securities and interest
     income  earned on the proceeds  from the offering of such  securities.  The
     summarized balance sheet information for ICG Funding is as follows:

                      Summarized Balance Sheet Information
<TABLE>
<CAPTION>

                                                          December 31, 1997            June 30, 1998
                                                        -----------------------    ----------------------
                                                                         (in thousands)
<S>                                                      <C>                               <C>       
     Cash, cash equivalents and short-term
       investments available for sale                    $      108,282                          -
     Restricted cash                                             24,649                     20,836
     Investment in ICG Preferred Stock                                -                    112,412
     Dividends payable                                            1,218                      1,218
     Due to parent                                                    -                          4
     Preferred securities                                       132,250                    132,250
     Additional paid-in capital                                       -                      3,385
     Member deficit                                                (537)                    (3,609)
</TABLE>

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

     The  primary  assets  of  ICG  are  its  investments  in ICG  Services  and
     Holdings-Canada.  Certain  corporate  expenses  of the parent  company  are
     included in ICG's  statement  of  operations  and were  approximately  $0.1
     million  for both the three  months and six months  ended June 30, 1997 and
     $0.5  million and $1.0  million for the three  months and six months  ended
     June 30, 1998, respectively.  ICG has no operations other than those of ICG
     Services, ICG Funding and Holdings-Canada and their subsidiaries.



<PAGE>
                                       18


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,  Internet,  data  and  value-added  services,  continued
development of the Company's network  infrastructure  and actions of competitors
and regulatory  authorities that could cause actual results to differ materially
from the forward-looking  statements.  The results of operations for all periods
presented  represent the combined results of ICG and NETCOM.  The terms "fiscal"
and "fiscal  year" refer to the  Company's  fiscal year ending  December 31. All
dollar amounts are in U.S. dollars.

Company Overview

     The  Company  is  one  of  the  nation's  leading  competitive   integrated
communications  providers  ("ICPs")  based on estimates of the  industry's  1997
revenue.  ICPs seek to  provide  an  alternative  to  incumbent  local  exchange
carriers ("ILECs"), long distance carriers,  Internet service providers ("ISPs")
and other  communications  service  providers for a full range of communications
services in the increasingly deregulated  telecommunications  industry.  Through
its competitive local exchange carrier ("CLEC") operations, the Company operates
networks in four regional clusters covering major metropolitan statistical areas
in California,  Colorado,  Ohio and the  Southeast.  The Company also provides a
wide range of network systems integration  services,  maritime and international
satellite transmission services and subsequent to January 21, 1998, a variety of
Internet connectivity and other value-added Internet services.  Network Services
consist of information  technology  services and selected  networking  products,
focusing on network design,  installation,  maintenance  and support.  Satellite
Services  consist of satellite  voice and data  services to major cruise  lines,
commercial  shipping vessels,  yachts, the U.S. Navy and offshore oil platforms.
To better focus its efforts on its core Telecom  Services  unit, the Company has
entered into definitive agreements to sell the capital stock of two subsidiaries
within its Satellite Services  operations.  The Company will include the results
of  operations  of  these  subsidiaries  within  its  consolidated   results  of
operations through the respective closing dates. As a leading participant in the
rapidly growing competitive local  telecommunications  industry, the Company has
experienced significant growth, with total revenue increasing from approximately
$164.0 million for fiscal 1995 to approximately  $488.1 million for the 12-month
period  ended June 30,  1998.  The  Company's  rapid growth is the result of the
initial  installation,  acquisition and subsequent  expansion of its fiber optic
networks and the expansion of its communication 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.  Due to these
regulatory  changes,  the Company is now permitted to offer all  interstate  and
intrastate  telephone  services,  including  competitive  local dial  tone.  The
Company is marketing and selling local dial tone services in major  metropolitan
areas in the following regions: California, which began services in late January
1997,  followed  by Ohio in  February  1997,  Colorado  in  March  1997  and the
Southeast  in May 1997.  During  fiscal  1997 and the six months  ended June 30,
1998, the Company sold 178,470 and 88,482 local access lines,  respectively,  of
which  237,458 were in service at June 30,  1998.  In  addition,  the  Company's
operating  networks  have grown from 627 fiber  route miles at the end of fiscal
1995 to 3,812  fiber  route  miles  as of June  30,  1998.  The  Company  has 20
operating  high  capacity  digital  voice  switches  and 15 data  communications
switches,  and plans to install  additional  switches as demand  warrants.  As a
complement  to its local  exchange  services,  the Company  has begun  marketing
bundled   service    offerings    which   include   long   distance,    enhanced
telecommunications  services  and  data  services  and  plans to  intensify  the
offerings of such services in the near term.

     The  Company  will  continue to expand its  network  through  construction,
leased  facilities,  strategic  alliances  and  mergers  and  acquisitions.  For
example,  in January  1998,  the Company  completed  its merger with  NETCOM,  a
provider  of  Internet  connectivity  and Web site  hosting  services  and other
value-added services,  located in San Jose, California. For calendar years 1995,
1996 and 1997,  NETCOM  reported  revenue of $52.4  million,  $120.5 million and
$160.7 million, respectively, and EBITDA losses (before nonrecurring charges) of
$(9.1) million, $(32.5) million and $(10.6) million,  respectively.  The Company
has accounted for the business combination under the pooling-of-interests method
of accounting and  accordingly,  the Company's  financial  statements  have been
restated to reflect the operations of NETCOM and the Company on a combined basis
for all historical periods.
<PAGE>
                                       19


     Telecom  Services  revenue has increased from $32.3 million for fiscal 1995
to $232.4  million for the 12-month  period ended June 30, 1998. The Company has
experienced  declining  prices  and  increasing  price  competition  for  access
services which, to date, have been more than offset by increasing network usage.
The Company  expects to continue to experience  declining  prices and increasing
price competition for the foreseeable future.

     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, operating and net losses have generally increased
immediately  preceding and during periods of relatively rapid network  expansion
and development of new services.  Since the quarter ended June 30, 1996,  EBITDA
losses (before nonrecurring charges) have improved for each consecutive quarter.
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 losses will continue to improve in
the near term.

Results of Operations

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

<TABLE>
<CAPTION>

                                           Three months ended June 30,                      Six months ended June 30,
                               ---------------------------------------------------- -------------------------------------------
                                         1997                       1998                   1997                  1998
                               -------------------------- ------------------------- -------------------- ----------------------
                                     $             %            $            %           $          %         $          %
                               --------------  ---------- --------------- --------- ------------- ------- ---------- ----------
                                                                           (unaudited)
                                                                          (in thousands)
<S>                              <C>             <C>         <C>            <C>      <C>           <C>     <C>            <C>
Statement of Operations Data:                                           
  Revenue:
    Telecom services              41,243          39          69,455         51       79,523        38      134,197        51
    Internet services             41,020          39          40,370         30       80,025        39       80,904        31
    Network services              15,640          15          14,759         11       33,627        16       26,190        10
    Satellite services             7,883           7          11,683          8       14,666         7       20,632         8
                               -------------- ----------- --------------- ----------------------- ---------------------  --------
     Total revenue               105,786         100         136,267        100      207,841       100      261,923       100
 Operating costs:
    Telecom services              42,444                      48,840                  83,894                100,848
    Internet services             23,957                      26,052                  47,337                 51,706
    Network services              12,883                      12,590                  27,418                 23,455
    Satellite services             4,366                       5,869                   7,953                 10,861
                               -------------- ----------- --------------- ----------------------- ---------------------  --------
        Total operating costs     83,650          79          93,351         69      166,602        80      186,870        71
 Selling, general and             
    administrative                58,636          55          61,444         45      112,252        54      122,502        47
 Depreciation and amortization    18,955          18          30,663         22       35,681        17       51,630        20
 Net (gain) loss on disposal
    of long-lived assets            (256)         -              137         -          (897)       -           642         -
 Provision for impairment of
    long-lived assets                  -          -                -         -             -        -         1,860         1
 Merger and restructuring costs    1,712          2            2,185         2         1,712        1         9,931         4
                               -------------- ----------- --------------- ----------------------- ---------------------  --------
    Operating loss               (56,911)        (54)        (51,513)       (38)    (107,509)      (52)    (111,512)      (43)

 Other Data:
 Net cash used by operating      
    activities                   (21,940)                    (39,862)                (39,225)               (54,338)
 Net cash used by investing   
    activities                   (53,684)                    (77,913)               (115,203)               (46,682)
 Net cash (used) provided by
    financing activities          (3,205)                    239,081                 173,088                534,322
 EBITDA (1)                      (37,956)        (36)        (20,850)       (15)     (71,828)      (35)     (59,882)      (23)
 EBITDA (before nonrecurring
    charges) (1)                 (36,500)        (35)        (18,528)       (14)     (71,013)      (34)     (47,449)      (18)
 Capital expenditures (2)         70,004                      95,862                 133,863                168,121

</TABLE>





<PAGE>
                                       20

<TABLE>
<CAPTION>

                                         June 30,       September 30,      December 31,       March 31,         June 30,
                                           1997              1997              1997              1998             1998
                                       -------------    ---------------    --------------    -------------    -------------
                                                                           (unaudited)
<S>                                       <C>          <C>                  <C>               <C>            <C>  
Statistical Data (3):
Full time employees                         2,623          2,861                3,032             3,050         3,089
Telecom services:
    Access lines in service (4)            20,108         50,551              141,035           186,156        237,458
    Buildings connected (5) :
      On-net                                  560            590                  596               637            665
      Hybrid (6)                            1,704          1,726                1,725             3,294          3,733
                                       -------------    ---------------    --------------    -------------    -------------
        Total buildings connected           2,264          2,316                2,321             3,931          4,398
    Customer circuits in service          
      (VGEs) (7)                          917,656      1,006,916            1,111,697         1,171,801      1,250,479   
    Operational switches:
      Voice                                    17             18                   19                20             20
      Data                                     15             15                   15                15             15
                                       -------------    ---------------    --------------    -------------    -------------
        Total operational switches             32             33                   34                35             35
    Switched minutes of use (in               
      millions)                               742            788                  660               639            516
    Fiber route miles (8):
      Operational                           2,898          3,021                3,043             3,194          3,812
      Under construction                        -              -                    -                 -            430
    Fiber strand miles (9):
      Operational                         101,788        109,510              111,435           118,074        124,642
      Under construction                        -              -                    -                 -         11,102
    Wireless miles (10)                       511            511                  511               511            511
Internet services:
    Direct access and Web site
      hosting services subscribers          9,070         10,630               12,275            14,976         18,638
    Average monthly revenue per
      subscriber                     $      23.95          24.24                25.01             25.12          25.87
Satellite services:
    VSATs                                     895            934                  957               921            928
    C-band installations (11)                  57             54                   57                59             66
    L-band installations (12)                 671            768                1,239             1,450          1,636
</TABLE>

(1)  EBITDA  consists  of  earnings  (loss)  before   interest,   income  taxes,
     depreciation and amortization,  other expense, net and minority interest in
     share  of  losses,   or  simply,   operating  loss  plus  depreciation  and
     amortization. EBITDA (before nonrecurring charges) represents EBITDA before
     certain  nonrecurring  charges  such as the net (gain)  loss on disposal of
     long-lived assets, provision for impairment of long-lived assets and merger
     and restructuring  costs.  During the three months ended June 30, 1998, the
     Company  reclassified the amortization of deferred  advertising  costs from
     depreciation  and  amortization  to  selling,  general  and  administrative
     expenses.  Additionally,  the Company reclassified certain costs originally
     recorded as merger and  restructuring  costs  during the three months ended
     March  31,  1998  to  selling,   general   and   administrative   expenses.
     Accordingly,  the Company has restated EBITDA (before nonrecurring charges)
     to reflect these reclassifications in the Company's statement of operations
     for  all   historical   periods   presented.   EBITDA  and  EBITDA  (before
     nonrecurring  charges) are provided because they are measures commonly used
     in the  Internet  and  telecommunications  industries.  EBITDA  and  EBITDA
     (before nonrecurring charges) are presented to enhance the understanding of
     the  Company's  operating  results and are not intended to  represent  cash
     flows or  results of  operations  in  accordance  with  generally  accepted
     accounting principles ("GAAP") for the periods indicated. EBITDA and EBITDA
     (before  nonrecurring  charges) are not measurements under GAAP and are not
     necessarily  comparable with similarly  titled measures of other companies.
     Net cash  flows from  operating,  investing  and  financing  activities  as
     determined using GAAP are also presented in Other Data.

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

(3)  Amounts  presented are for  three-month  periods ended, or as of the end of
     the period presented.
<PAGE>
                                       21


(4)  Access lines in service at June 30, 1998  includes  146,789 lines which are
     provisioned  through  the  Company's  switch  and  90,669  lines  which are
     provisioned through resale and other agreements with various local exchange
     carriers.  Resale  lines  typically  generate  lower  margins  and are used
     primarily to obtain customers.  Although the Company plans to migrate lines
     from resale to higher margin on-switch lines, there is no assurance that it
     will be successful in executing this strategy.

(5)  Prior to the first  quarter of 1998,  the  Company  reported  only  special
     access buildings  connected.  Beginning March 31, 1998, buildings connected
     includes  both  dial  tone and  special  access  buildings  connected.  The
     combined  special access and dial tone buildings  connected at December 31,
     1997 was 3,153.

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

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

(8)  Fiber  route  miles  refers to the  number of miles of fiber  optic  cable,
     including  leased fiber.  As of June 30, 1998,  the Company had 3,812 fiber
     route  miles,  of which 53 fiber route miles were  leased  under  operating
     leases.  Fiber  route  miles  under  construction  represents  fiber  under
     construction  and fiber  which is  expected  to be  operational  within six
     months.

(9)  Fiber strand  miles  refers to the number of fiber route  miles,  including
     leased fiber, along a  telecommunications  path multiplied by the number of
     fiber strands along that path. As of June 30, 1998, the Company had 124,642
     fiber  strand  miles,  of which 2,028 fiber  strand miles were leased under
     operating leases.  Fiber strand miles under  construction  represents fiber
     under construction and fiber which is expected to be operational within six
     months.

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

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

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

Three Months Ended June 30, 1998 Compared to Three Months Ended June 30, 1997

     Revenue.  Revenue for the three months ended June 30, 1998 increased  $30.5
million,  or 29%,  from the three months ended June 30, 1997.  Telecom  Services
revenue  increased  68% to $69.5  million  due to an  increase  in revenue  from
switched local services,  long distance and special access  services,  offset in
part by a decline in average  unit pricing and in  wholesale  switched  services
revenue.  Switched  local  services  revenue  increased from $1.2 million (3% of
Telecom  Services  revenue)  for the three  months  ended June 30, 1997 to $29.5
million  (42% of Telecom  Services  revenue) for the three months ended June 30,
1998.  Revenue from long  distance  generated  $5.8 million for the three months
ended June 30, 1998,  compared to no reported revenue for the three months ended
June  30,  1997.   Switched  access  (terminating  long  distance)  revenue  was
approximately  $11.4 million for the three months ended June 30, 1998,  compared
to $19.7  million  for the  three  months  ended  June  30,  1997.  The  Company
anticipates  that  switched  access  revenue  will  continue  to  decline  as it
de-emphasizes its wholesale switched  services.  The Company has recently raised
prices on its wholesale  switched  services  product in order to improve margins
and free up switch  port  capacity  for its  higher  margin  dial tone  product.
Special access  revenue  increased from $13.5 million for the three months ended
June 30, 1997 to $17.6 million for the three months ended June 30, 1998. Revenue
from data services did not generate a material  portion of total revenue  during
either period.  Also included in Telecom  Services  revenue for the three months
ended June 30, 1998 is $5.2 million generated by Zycom, compared to $6.8 million
for the three months ended June 30, 1997.  The decrease in Zycom revenue for the
three  months ended June 30, 1998 as compared to the same period in 1997 relates
to a general decline in call traffic and the loss of certain customers.

     Internet  Services  revenue  decreased  2% to $40.4  million  for the three
months ended June 30, 1998, compared to $41.0 million for the three months ended
June 30,  1997,  primarily  due to a decrease  in dial-up  services  subscribers
between the  comparative  periods.  Offsetting  this decrease was an increase in
revenue of $0.5 million,  or 7%, from $7.5 million to $8.0 million for the three
<PAGE>
                                       22


months ended June 30, 1997 and 1998, respectively,  generated from the Company's
higher margin direct access and Web site hosting services.

     Network Services revenue decreased 6% to $14.8 million for the three months
ended June 30, 1998,  compared to $15.6  million for the three months ended June
30, 1997.  The decrease in Network  Services  revenue is primarily  due to large
equipment  sales to a single  customer  during the three  months  ended June 30,
1997.

     Satellite  Services  revenue  increased  48% to $11.7 million for the three
months ended June 30, 1998.  This increase is primarily due to the operations of
MTN, which  comprised $8.0 million of total Satellite  Services  revenue for the
three  months  ended June 30,  1998,  compared to $5.3  million  during the same
period in 1997.  This  increase  was due to the addition of six cruise ships and
increased  equipment  sales.  The  remaining  increase can be  attributed to the
general  growth of MCN and  Nova-Net,  which  reported an increase in revenue of
$1.1  million,  compared to the three months  ended June 30,  1997.  On July 17,
1998, the Company  entered into separate  definitive  agreements to sell MCN and
Nova-Net. The sale of MCN was completed on August 12, 1998. The sale of Nova-Net
is  expected  to be  completed  later this year and  remains  subject to certain
conditions, including regulatory approvals.

     Operating costs.  Total operating costs for the three months ended June 30,
1998 increased $9.7 million,  or 12%, from the three months ended June 30, 1997.
Telecom  Services  operating  costs  increased  from $42.4  million,  or 103% of
Telecom  Services  revenue,  for the three months ended June 30, 1997,  to $48.8
million, or 70% of Telecom Services revenue, for the three months ended June 30,
1998.  Telecom Services operating costs consist of payments to ILECs for the use
of network  facilities to support special and switched access services,  network
operating  costs,  right of way fees and other costs.  The increase in operating
costs in absolute  dollars is attributable to the increase in volume of switched
local and special access  services and the addition of network  operating  costs
which include engineering and operations  personnel dedicated to the development
and launch of local  exchange  services.  The decrease in  operating  costs as a
percentage  of total  revenue  is due  primarily  to a greater  volume of higher
margin services,  principally local exchange  services.  The Company expects the
Telecom Services ratio of operating costs to revenue will further improve as the
Company provides a greater 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.

     Internet  Services  operating  costs  increased  9% to  $26.1  million  and
increased as a percentage  of Internet  Services  revenue from 58% for the three
months ended June 30, 1997 to 65% for the three months ended June 30, 1998.  The
increase is due to increased  transport costs due to initiatives  related to the
conversion  from an analog to a digital based network,  which  produced  certain
duplicative costs during the period of conversion.

     Network  Services  operating  costs  decreased  2%  to  $12.6  million  and
increased as a  percentage  of Network  Services  revenue from 82% for the three
months ended June 30, 1997 to 85% for the three months ended June 30, 1998.  The
decrease  in  operating  costs in  absolute  dollars is due to the  decrease  in
equipment sales and general  business  volume between the  comparative  periods.
Operating costs increased as a percentage of revenue due to cost overruns during
the three months ended June 30, 1998.  Network Services  operating costs include
the cost of  equipment  sold,  direct  hourly labor and other  indirect  project
costs.

     Satellite  Services operating costs increased to $5.9 million for the three
months  ended June 30,  1998,  from $4.4 million for the three months ended June
30,  1997.  Satellite  Services  operating  costs as a  percentage  of Satellite
Services revenue  decreased from 55% for the three months ended June 30, 1997 to
50% for the three  months ended June 30, 1998.  Operating  costs  decreased as a
percentage  of  revenue  as a result of the  increase  in  revenue  from MTN and
Nova-Net  which have  relatively  higher  margins than MCN.  Satellite  Services
operating  costs consist  primarily of  transponder  lease costs and the cost of
equipment sold.

     Selling,  general  and  administrative   expenses.   Selling,  general  and
administrative  ("SG&A")  expenses  for the three  months  ended  June 30,  1998
increased $2.8 million, or 5%, compared to the three months ended June 30, 1997.
This  increase  was  principally  due to the  continued  rapid  expansion of the
Company's  Telecom Services  networks and related  significant  additions to the
Company's management information systems, customer service,  marketing and sales
staffs dedicated to the expansion of the Company's  networks and  implementation
of the Company's expanded services strategy,  primarily the development of local
<PAGE>
                                       23
and long  distance  telephone  services.  SG&A expenses as a percentage of total
revenue  decreased  from 55% for the three months ended June 30, 1997 to 45% for
the three months ended June 30, 1998, 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.  The Company  expects SG&A expenses for Telecom  Services to increase
slightly in absolute  dollars over the near term as a result of hiring new staff
to facilitate the marketing and development of local dial tone, local toll, long
distance and data transmission services.

     Depreciation and  amortization.  Depreciation  and  amortization  increased
$11.7 million, or 62%, for the three months ended June 30, 1998, compared to the
three months  ended June 30, 1997,  primarily  due to  increased  investment  in
depreciable  assets  resulting  from the  continued  expansion of the  Company's
networks and services.  The Company reports high levels of depreciation  expense
relative to revenue during the early years of operation of a new network because
the full cost of a network is depreciated using the straight-line method despite
the low rate of capacity  utilization in the early stages of network  operation.
Additionally,  during the three months ended June 30, 1998, the Company recorded
a  cumulative   adjustment  to   depreciation   and   amortization   expense  of
approximately  $3.7  million for the  aggregate  depreciation  and  amortization
expense on capital and other assets of MTN,  which was not  recorded  during the
period in which MTN was held for sale.  On April 1, 1998,  the  Company  entered
into a  definitive  agreement  to sell the capital  stock of MTN and, on July 1,
1998, the Company exercised its option to terminate the agreement. MTN remains a
subsidiary of the Company.

     Net (gain)  loss on  disposal  of  long-lived  assets.  Net (gain)  loss on
disposal of long-lived assets fluctuated from a net gain of $0.3 million for the
three  months  ended June 30,  1997 to a net loss of $0.1  million for the three
months ended June 30, 1998.  Net gain on disposal of  long-lived  assets for the
three  months  ended June 30,  1997  represents  a gain on the sale of  NETCOM's
investment in the McKinley Group.  For the three months ended June 30, 1998, net
loss on disposal of long-lived assets relates to the loss on the sale of certain
Internet equipment.

     Merger and  restructuring  costs.  Merger and  restructuring  costs for the
three months ended June 30, 1997 of $1.7 million relate to the  restructuring of
NETCOM's  subsidiary  in the United  Kingdom and include $0.7 million in accrued
expenses for costs to terminate excess leased office facilities,  a $0.4 million
write-off of previously  capitalized deferred subscriber acquisition costs and a
$0.6 million write-off of office equipment, furniture and building improvements.
For the three months ended June 30, 1998, merger and restructuring costs include
approximately  $1.6  million of merger costs  associated  with ICG's merger with
NETCOM  in  January  1998,  which  consists  of  additional  severance  and line
termination costs, and $0.6 million in restructuring costs,  primarily severance
costs,  related  to the  decentralization  of  the  Company's  Network  Services
subsidiary.

     Interest  expense.  Interest  expense  increased $13.5 million,  from $28.5
million for the three months ended June 30, 1997, to $42.0 million for the three
months ended June 30, 1998,  which includes $39.9 million of non-cash  interest.
This  increase is  primarily  attributable  to an increase  in  long-term  debt,
primarily  the 10% Senior  Discount  Notes due 2008 (the "10% Notes")  issued in
February  1998 and the 9 7/8%  Notes  issued in April  1998.  In  addition,  the
Company's interest expense increased, and will continue to increase, because the
principal  amount  of its  indebtedness  increases  until the  Company's  senior
indebtedness begins to pay interest in cash.

     Interest income.  Interest income increased $1.7 million, from $7.8 million
for the three months  ended June 30, 1997,  to $9.5 million for the three months
ended June 30, 1998.  The increase is  attributable  to the increase in cash and
invested  cash  balances  from  the  proceeds  from the  issuance  of the 6 3/4%
Preferred  Securities in September  and October 1997,  the 10% Notes in February
1998 and the 9 7/8% Notes in April 1998.

     Other  expense,  net.  Other  expense,  net increased from $0.1 million net
expense for the three months ended June 30, 1997 to $3.2 million net expense for
the three months ended June 30, 1998. Other expense,  net recorded for the three
months ended June 30, 1997 consists  primarily of litigation  settlement  costs.
For the three months ended June 30, 1998, other expense,  net primarily includes
approximately  $2.7  million in  settlement  costs  paid to the former  minority
shareholders of MTN.

     Income tax expense.  Income tax expense for the three months ended June 30,
1997 and 1998 is  attributable  to state and foreign  income taxes  incurred and
paid by NETCOM.
<PAGE>
                                       24


     Minority  interest  in share of  losses,  net of  accretion  and  preferred
dividends on preferred securities of subsidiaries. Minority interest in share of
losses,  net of accretion  and  preferred  dividends on preferred  securities of
subsidiaries  increased  $4.5  million,  from $9.1  million for the three months
ended June 30, 1997 to $13.6  million for the three  months ended June 30, 1998.
The increase is due primarily to the issuance of the 6 3/4% Preferred Securities
in September  and October  1997.  Minority  interest in share of losses,  net of
accretion  and  preferred  dividends on  preferred  securities  of  subsidiaries
recorded  during the three months ended June 30, 1998  consists of the accretion
of issuance  costs ($0.3  million) and the accrual of the  preferred  securities
dividends ($13.3 million) associated with the 6 3/4% Preferred  Securities,  the
14% Preferred Stock Mandatorily  Redeemable 2008 (the "14% Preferred Stock") and
the 14 1/4%  Exchangeable  Preferred Stock  Mandatorily  Redeemable 2007 (the 14
1/4% Preferred Stock").

     Net loss. Net loss increased  $14.1 million,  or 16%,  primarily due to the
increases as a percentage of revenue of depreciation  and  amortization,  merger
and  restructuring  costs,  interest  expense and minority  interest in share of
losses,  net of accretion  and  preferred  dividends on preferred  securities of
subsidiaries as noted above.

Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997

     Revenue.  Revenue for the six months  ended June 30, 1998  increased  $54.1
million,  or 26%,  from the six months  ended June 30,  1997.  Telecom  Services
revenue  increased  69% to $134.2  million due to an  increase  in revenue  from
switched local services,  long distance and special access  services,  offset in
part by a decline in average  unit pricing and in  wholesale  switched  services
revenue.  Switched  local  services  revenue  increased from $1.2 million (1% of
Telecom  Services  revenue)  for the six  months  ended  June 30,  1997 to $52.6
million  (39% of Telecom  Services  revenue)  for the six months  ended June 30,
1998.  Revenue from long  distance  generated  $10.9  million for the six months
ended June 30,  1998,  compared to no reported  revenue for the six months ended
June  30,  1997.   Switched  access  (terminating  long  distance)  revenue  was
approximately  $25.6 million for the six months ended June 30, 1998, compared to
$38.3  million for the six months ended June 30, 1997.  Special  access  revenue
increased  from $25.6  million  for the six months  ended June 30, 1997 to $33.6
million for the six months ended June 30, 1998.  Revenue from data  services did
not generate a material  portion of total  revenue  during either  period.  Also
included in Telecom  Services  revenue for the six months ended June 30, 1998 is
$11.5 million generated by Zycom,  compared to $14.4 million for the same period
in 1997.  Substantially  all of the decrease in Zycom revenue for the six months
ended June 30, 1998 as compared to the same period in 1997  relates to a general
decline in call traffic and the loss of certain customers.

     Internet  Services revenue increased 1% to $80.9 million for the six months
ended June 30, 1998, compared to $80.0 million for the six months ended June 30,
1997 due to an increase in revenue of $3.4  million,  or 28%, from the Company's
higher  margin  direct  access and Web site hosting  services.  Offsetting  this
increase is a decrease  in the  Company's  dial-up  services  revenue,  due to a
decrease in dial-up services subscribers between the comparative periods.

     Network Services revenue  decreased 22% to $26.2 million for the six months
ended June 30, 1998, compared to $33.6 million for the six months ended June 30,
1997. The decrease in Network  Services  revenue is primarily due to the decline
in projects  from new and  existing  customers  and large  equipment  sales to a
single customer during the six months ended June 30, 1997.

     Satellite  Services  revenue  increased  41% to $20.6  million  for the six
months ended June 30, 1998.  This increase is primarily due to the operations of
MTN, which comprised $13.5 million of total Satellite  Services  revenue for the
six months ended June 30, 1998,  compared to $9.8 million during the same period
in 1997.  The remaining  increase can be attributed to the general growth of MCN
which  increased  $1.7 million,  from $2.8 million for the six months ended June
30, 1997 to $4.5 million for the six months ended June 30, 1998.

     Operating  costs.  Total  operating costs for the six months ended June 30,
1998 increased  $20.3  million,  or 12% from the six months ended June 30, 1997.
Telecom  Services  operating  costs  increased  from $83.9  million,  or 106% of
Telecom  Services  revenue,  for the six months ended June 30,  1997,  to $100.8
million,  or 75% of Telecom Services revenue,  for the six months ended June 30,
1998. The increase in operating costs in absolute dollars is attributable to the
increase  in volume  of  switched  local and  special  access  services  and the
addition of engineering and operations personnel dedicated to the development of
local  exchange  services.  The decrease in operating  costs as a percentage  of
total  revenue is due primarily to a greater  volume of higher margin  services,
principally local exchange services.
<PAGE>
                                       25


     Internet  Services  operating  costs  increased  9% to  $51.7  million  and
increased  as a  percentage  of Internet  Services  revenue from 59% for the six
months ended June 30, 1997 to 64% for the six months  ended June 30,  1998.  The
increase is due to increased  transport costs due to initiatives  related to the
conversion  from an analog to a digital based network,  which  produced  certain
duplicative costs during the period of conversion.

     Network  Services  operating  costs  decreased  14% to  $23.5  million  and
increased as a percentage  of revenue from 82% for the six months ended June 30,
1997 to 90% for the six months  ended June 30,  1998.  The decrease in operating
costs in absolute  dollars is due to the decrease in equipment sales and general
business volume between the comparative periods.  Operating costs increased as a
percentage of revenue due to cost overruns  during the six months ended June 30,
1998.

     Satellite  Services  operating costs increased to $10.9 million for the six
months ended June 30, 1998,  from $8.0 million for the six months ended June 30,
1997.  Satellite  Services operating costs as a percentage of Satellite Services
revenue decreased from 54% for the six months ended June 30, 1997 to 53% for the
six months  ended June 30,  1998.  This  decrease is due to an increase in MTN's
sales, which provide higher margins than other maritime services.

     Selling,  general  and  administrative   expenses.   Selling,  general  and
administrative  ("SG&A")  expenses  for the  six  months  ended  June  30,  1998
increased $10.3 million,  or 9%, compared to the six months ended June 30, 1997.
This  increase  was  principally  due to the  continued  rapid  expansion of the
Company's  Telecom Services  networks and related  significant  additions to the
Company's management information systems, customer service,  marketing and sales
staffs dedicated to the expansion of the Company's  networks and  implementation
of the Company's expanded services strategy,  primarily the development of local
and long  distance  telephone  services.  SG&A expenses as a percentage of total
revenue decreased from 54% for the six months ended June 30, 1997 to 47% for the
six months ended June 30, 1998.

     Depreciation and  amortization.  Depreciation  and  amortization  increased
$15.9 million,  or 45%, for the six months ended June 30, 1998,  compared to the
six  months  ended June 30,  1997,  primarily  due to  increased  investment  in
depreciable  assets  resulting  from the  continued  expansion of the  Company's
networks and services. Additionally,  during the six months ended June 30, 1998,
the Company  recorded a cumulative  adjustment to depreciation  and amortization
expense of  approximately  $3.7  million,  for the  aggregate  depreciation  and
amortization  expense on capital and other  assets of MTN which was not recorded
during the period in which MTN was held for sale.

     Net (gain)  loss on  disposal  of  long-lived  assets.  Net (gain)  loss on
disposal of long-lived assets fluctuated from a net gain of $0.9 million for the
six months  ended June 30, 1997 to a net loss of $0.6 million for the six months
ended June 30,  1998.  Net gain on  disposal  of  long-lived  assets for the six
months ended June 30, 1997 consists primarily of a gain on the sale of Satellite
Services' Mexico  subsidiary and NETCOM's  investment in the McKinley Group. For
the six months ended June 30, 1998,  net loss on disposal of  long-lived  assets
relates to the write-off of certain  installation costs of disconnected  special
access  customers of $0.5  million and the loss on the sale of certain  Internet
equipment of $0.1 million.

     Provision for  impairment of  long-lived  assets.  For the six months ended
June 30,  1998,  provision  for  impairment  of  long-lived  assets  includes  a
provision for the remaining net book value of goodwill  associated  with Zycom's
purchase of certain operating assets.

     Merger and restructuring  costs. Merger and restructuring costs for the six
months  ended  June 30,  1997 of $1.7  million  relate to the  restructuring  of
NETCOM's subsidiary in the United Kingdom, consisting of $0.7 million in accrued
expenses for costs to terminate excess leased office facilities,  a $0.4 million
write-off of previously  capitalized deferred subscriber acquisition costs and a
$0.6 million write-off of office equipment, furniture and building improvements.
For the six months ended June 30, 1998, merger and  restructuring  costs include
approximately  $9.3  million of merger costs  associated  with ICG's merger with
NETCOM. These costs consist of $4.4 million of investment advisory and legal and
accounting  fees, $3.7 million relating to penalties and abandonment of projects
of NETCOM  resulting from the merger and $1.2 million of other costs  associated
with the merger.  Additionally,  for the six months ended June 30, 1998,  merger
and restructuring costs include $0.6 million in restructuring  costs,  primarily
severance  costs,  related  to the  decentralization  of the  Company's  Network
Services subsidiary.
<PAGE>
                                       26


     Interest  expense.  Interest  expense  increased $23.3 million,  from $53.6
million for the six months  ended June 30,  1997,  to $76.9  million for the six
months ended June 30, 1998,  which included $69.5 million of non-cash  interest.
This  increase was  primarily  attributable  to an increase in  long-term  debt,
primarily  the 10% Notes issued in February  1998 and the 9 7/8% Notes issued in
April 1998. In addition,  the Company's  interest  expense  increased,  and will
continue to increase, because the principal amount of its indebtedness increases
until Holdings' senior indebtedness begins to pay interest in cash.

     Interest income. Interest income increased $2.2 million, from $13.9 million
for the six months  ended June 30,  1997,  to $16.1  million  for the six months
ended June 30, 1998.  The increase is  attributable  to the increase in cash and
invested  cash  balances from the proceeds of the issuances of the 11 5/8% Notes
and 14%  Preferred  Stock in March  1997,  the 6 3/4%  Preferred  Securities  in
September and October 1997,  the 10% Notes in February 1998 and the 9 7/8% Notes
in April 1998.

     Other  expense,  net.  Other  expense,  net increased from $0.6 million net
expense in the six months ended June 30, 1997 to $3.5 million net expense in the
six months ended June 30, 1998.  Other expense,  net recorded for the six months
ended June 30, 1997 consists primarily of litigation  settlement costs and other
miscellaneous  gains and losses.  For the six months ended June 30, 1998,  other
expense,  net primarily includes  approximately $2.7 million in settlement costs
paid to the former minority shareholders of MTN.

     Income tax  expense.  Income tax expense for the six months  ended June 30,
1997 and 1998 is  attributable  to state and foreign  income taxes  incurred and
paid by NETCOM.

     Minority  interest  in share of  losses,  net of  accretion  and  preferred
dividends on preferred securities of subsidiaries. Minority interest in share of
losses,  net of accretion  and  preferred  dividends on preferred  securities of
subsidiaries  increased  $11.9  million,  from $14.9  million for the six months
ended June 30, 1997 to $26.8 million for the six months ended June 30, 1998. The
increase is due primarily to the issuance of the 14% Preferred Stock Mandatorily
Redeemable  2008 in March 1997 and the 6 3/4% Preferred  Securities in September
and October  1997.  Minority  interest in share of losses,  net of accretion and
preferred dividends on preferred securities of subsidiaries  recorded during the
six months ended June 30, 1998 consists of the accretion of issuance costs ($2.7
million) and the accrual of the preferred  security  dividends  ($24.1  million)
associated with the 6 3/4% Preferred Securities, the 14% Preferred Stock and the
14 1/4% Exchangeable Preferred Stock.

     Net loss. Net loss increased $39.9 million, or 24%, due to the increases as
a  percentage  of  revenue  of  depreciation   and   amortization,   merger  and
restructuring costs,  interest expense and minority interest in share of losses,
net of accretion and preferred dividends on preferred securities of subsidiaries
as noted above.

Liquidity and Capital Resources

     The Company's growth has been funded through a combination of equity,  debt
and lease  financing.  As of June 30,  1998,  the Company had current  assets of
$754.2  million,   including  $631.5  million  of  cash,  cash  equivalents  and
short-term  investments,  which exceeded current  liabilities of $154.7 million,
providing working capital of $599.6 million. The Company invests excess funds in
short-term,  interest-bearing  investment-grade  securities until such funds are
used to fund the  capital  investments  and  operating  needs  of the  Company's
business.  The Company's short-term investment objectives are safety,  liquidity
and yield, in that order.

Cash Used By Operating Activities

     The Company's operating activities used $39.2 million and $54.3 million for
the six  months  ended  June  30,  1997 and  1998,  respectively.  Cash  used by
operations  is  primarily  due to net  losses,  which  are  partially  offset by
non-cash  expenses,  such as depreciation  and  amortization  expense,  deferred
interest expense,  preferred  dividends on subsidiary  preferred  securities and
changes in working capital items.

     The Company 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
<PAGE>
                                       27


experiencing  decelerating  increases  in  personnel  and  other  SG&A  expenses
supporting  its  operations,  any or all of which  may not  occur,  the  Company
anticipates  that cash used by operating  activities will continue to improve in
the near term.

Cash Used By Investing Activities

     Investing  activities  used $115.2  million  and $46.7  million for the six
months  ended  June 30,  1997 and 1998,  respectively.  Cash  used by  investing
activities includes cash expended for the acquisition of property, equipment and
other assets, of $128.3 million and $165.8 million for the six months ended June
30, 1997 and 1998, respectively. Additionally, cash used by investing activities
includes  payments  for  construction  of the  Company's  headquarters  of $10.2
million  and $4.9  million  for the six  months  ended  June 30,  1997 and 1998,
respectively.  Offsetting the expenditures for investing  activities for the six
months ended June 30, 1998 are the proceeds  from the sale of the  Company's new
headquarters  of $29.1 million and the sale of short-term  investments  of $96.3
million.  The Company will continue to use cash in 1998 and  subsequent  periods
for the  construction of new networks,  the expansion of existing  networks and,
potentially, for acquisitions.  The Company acquired assets under capital leases
of $2.3 million for the six months ended June 30, 1998.

Cash Provided By Financing Activities

     Financing activities provided $173.1 million and $534.3 million for the six
months ended June 30, 1997 and 1998,  respectively.  Cash  provided by financing
activities for these periods primarily includes cash received in connection with
the private  placement  of the 11 5/8% Senior  Discount  Notes due 2007 (the "11
5/8% Notes") and the 14%  Preferred  Stock in March 1997,  and the 10% Notes and
the 9 7/8% Notes in February  and April 1998,  respectively.  Historically,  the
funds to finance the  Company's  business  acquisitions,  capital  expenditures,
working capital  requirements  and operating  losses have been obtained  through
public  and  private  offerings  of  ICG  and  Holdings-Canada   common  shares,
convertible subordinated notes, convertible preferred shares of Holdings-Canada,
capital lease financings and various working capital  sources,  including credit
facilities,  in addition to the private  placement of the securities  previously
mentioned and other securities offerings.

     On February 12, 1998,  ICG  Services  completed a private  placement of 10%
Notes  for net  proceeds,  after  underwriting  and  other  offering  costs,  of
approximately $291.0 million.  Interest will accrue at 10% per annum,  beginning
February 15, 2003,  and is payable  each  February 15 and August 15,  commencing
August 15, 2003. The 10% Notes will be redeemable at the option of ICG Services,
in whole or in part, on or after February 15, 2003.

     On April 27,  1998,  ICG Services  completed a private  placement of 9 7/8%
Notes,  for net  proceeds,  after  underwriting  and other  offering  costs,  of
approximately  $242.4  million.  Interest  will  accrue  at 9  7/8%  per  annum,
beginning  May 1, 2003,  and is payable  each May 1 and  November 1,  commencing
November  1,  2003.  The 9 7/8% Notes  will be  redeemable  at the option of ICG
Services, in whole or in part, on or after May 1, 2003.

     As of June 30, 1998,  the Company had an aggregate of  approximately  $72.8
million of  capitalized  lease  obligations  and an aggregate  accreted value of
approximately  $1.5 billion was outstanding under the 13 1/2% Notes, the 12 1/2%
Notes,  the 11 5/8% Notes, the 10% Notes and the 9 7/8% Notes. The 13 1/2% Notes
require payments of interest to be made in cash commencing on March 15, 2001 and
mature on September 15, 2005. The 12 1/2% Notes require  payments of interest to
be made in cash commencing on November 1, 2001 and mature on May 1, 2006. The 11
5/8%  Notes  require  payments  of  interest  to be made in cash  commencing  on
September 15, 2002 and mature on March 15, 2007. The 10% Notes require  payments
of interest in cash commencing August 15, 2003 and mature February 15, 2008. The
9 7/8 Notes require payments of interest in cash commencing November 1, 2003 and
mature  May 1,  2008.  The 6  3/4%  Preferred  Securities  require  payments  of
dividends to be made in cash through  November  15, 2000.  In addition,  the 14%
Preferred Stock and 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, 1998, the Company had $5.7 million of other  indebtedness  outstanding.
The Company's cash on hand and amounts  expected to be available  through vendor
financing  arrangements will provide  sufficient funds necessary for the Company
to expand its business as currently  planned and to fund its operating  deficits
through 1999.  With respect to  indebtedness  outstanding  on June 30, 1998, the
Company has cash interest payment obligations of approximately $113.3 million in
2001,  $158.0  million  in 2002 and  $212.6  million  in 2003.  With  respect to
preferred  securities  currently  outstanding,  the  Company  has cash  dividend
<PAGE>
                                       28


obligations of  approximately  $4.5 million  remaining in 1998,  $8.9 million in
each of 1999 and 2000,  $21.5  million in 2001,  $57.0 million in 2002 and $70.9
million in 2003.  Accordingly,  the Company may have to refinance a  substantial
amount of indebtedness  and obtain  substantial  additional funds prior to March
2001.  The Company's  ability to do so will depend on, among other  things,  its
financial condition at the time,  restrictions in the instruments  governing its
indebtedness, and other factors, including market conditions, beyond the control
of the  Company.  There can be no  assurance  that the  Company  will be able to
refinance such indebtedness,  including such capitalized  leases, or obtain such
additional  funds,  and if the Company is unable to effect such  refinancings or
obtain  additional  funds, the Company's  ability to make principal and interest
payments  on its  indebtedness  or make  payments of cash  dividends  on, or the
mandatory redemption of, its preferred stock, would be adversely affected.

Capital Expenditures

     The  Company's  capital  expenditures   (including  assets  acquired  under
capitalized  leases and excluding payments for construction of the Company's new
headquarters)  were $69.9  million and $95.8  million for the three months ended
June 30, 1997 and 1998, respectively,  and $133.9 million and $168.1 million for
the six  months  ended  June  30,  1997  and  1998,  respectively.  The  Company
anticipates  that  the  expansion  of  existing  networks,  construction  of new
networks and further  development  of the  Company's  products and services will
require capital  expenditures of approximately  $272.0 million during the second
half  of  1998,  including  capital  expenditure   requirements  of  NETCOM.  To
facilitate  the expansion of its services and networks,  the Company has entered
into equipment purchase  agreements with various vendors under which the Company
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  Company's   unaudited
Consolidated  Financial  Statements  for the six  months  ended  June  30,  1998
included elsewhere herein.

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

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

Year 2000 Compliance

     The Company is performing a  comprehensive  review of its  information  and
support systems to determine  whether such systems will properly function in the
year 2000 and thereafter. Systems under review principally include the Company's
network  operations and monitoring  systems,  billing and financial  systems and
systems supporting the Company's  communications  equipment  premises,  building
facilities and other office equipment.  Although the Company relies primarily on
<PAGE>
                                       29


systems  developed with current  technology and many of the systems currently in
operation were designed to be year 2000  compliant,  the Company expects that it
will have to replace,  upgrade or reprogram  certain  systems to ensure that all
interfacing  technology  will be year 2000 compliant when running  jointly.  The
Company's  due  diligence   also  includes  an  evaluation  of   vendor-provided
technology and the  implementation of new policies to require vendors to confirm
that they have disclosed and will correct any year 2000 compliance issues.

         The  Company's  evaluation  process is expected  to be complete  during
1998.  Certain minor  conversions  and system upgrades are already under way and
the Company plans to have all identified compliance issues resolved by mid-1999.
The costs associated with resolving year 2000 compliance  issues are expensed as
incurred and, in the  aggregate,  are not expected to have a material  impact on
the Company's  financial  condition or results of operations.  While the Company
believes that its software  applications will be year 2000 compliant,  there can
be no assurance  until the year 2000 occurs that all systems will then  function
adequately.  Further,  if the software  applications of local exchange carriers,
long distance  carriers or others on whose services the Company  depends are not
year 2000  compliant,  it could have a material  adverse effect on the Company's
financial condition and results of operations.



<PAGE>
                                       30


                                     PART II


ITEM 1. LEGAL PROCEEDINGS

     See Note 7 (d) to the Company's unaudited Consolidated Financial Statements
     for  the six  months  ended  June  30,  1998  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 SECURITY HOLDERS

     The Annual Meeting of Stockholders of ICG Communications,  Inc. was held on
     June 3, 1998 (the "Annual Meeting").  At the Annual Meeting,  three matters
     were  considered and acted upon: (1) the election of two directors to serve
     until the 2001 Annual Meeting of  Stockholders  and until their  successors
     have been duly elected and  qualified;  (2) the approval of the adoption of
     the  ICG   Communications,   Inc.  1998  Stock  Option  Plan  and  (3)  the
     ratification  of the  appointment  of KPMG Peat Marwick LLP as  independent
     auditors of ICG  Communications,  Inc. and its  subsidiaries for the fiscal
     year ending December 31, 1998.

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

                                                      Votes
                                     -----------------------------------------
                                           For                   Withheld
                                     ----------------      -------------------
           Leontis Teryazos             40,179,233                158,839
           Walter Threadgill            40,191,465                146,607

     In connection with the vote on the adoption of the ICG Communications, Inc.
     1998 Stock Option Plan, 26,643,251 votes were cast in favor of the approval
     of such adoption and 13,647,001 votes were cast in opposition thereto.

     In connection  with the vote on the  ratification of the appointment of the
     independent   auditors,   10,264,349  votes  were  cast  in  favor  of  the
     appointment and 47,301 votes were cast in opposition thereto.

ITEM 5. OTHER INFORMATION

     None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

     (A)  Exhibits.

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

               4.1  Indenture,  between ICG  Services,  Inc.  and  Norwest  Bank
                    Colorado,  National Association,  dated as of April 27, 1998
                    [Incorporated  by reference to Exhibit 4.4 to ICG  Services,
                    Inc.  Registration  Statement on Form S-4 No. 333-60653,  as
                    amended].
<PAGE>
                                       31



          (10) Material Contracts.

               10.1:Employment Agreement,  dated as of July 1, 1998, between ICG
                    Communications, Inc. and Harry R. Herbst.

               10.2:ICG   Communications,    Inc.   1998   Stock   Option   Plan
                    [Incorporated   by   reference   to   Attachment  A  to  ICG
                    Communications,  Inc.'s Proxy  Statement for the fiscal year
                    ended December 31, 1997].

          (27) Financial Data Schedules.

               27.1:Restated Financial Data Schedule of ICG Communications, Inc.
                    for the Six Months Ended June 30, 1997.

               27.2:Financial Data Schedule of ICG Communications,  Inc. for the
                    Six Months Ended June 30, 1998.

     (B)  Reports on Form 8-K. The  following  reports on Form 8-K were filed by
          the registrants during the three months ended June 30, 1998:

          (i)  Current  Report on Form 8-K dated April 20, 1998,  regarding  the
               announcement  of the private  placement of $200 million of Senior
               Discount Notes by ICG Services, Inc.

          (ii) Current  Report on Form 8-K dated June 12,  1998,  regarding  the
               consolidated financial statements of ICG Communications, Inc. for
               the fiscal  years ended  September  30, 1995 and 1996,  the three
               months  ended  December  31,  1996,  and the  fiscal  year  ended
               December 31, 1997,  restated to include the  operations of NETCOM
               On-Line Communication Services, Inc. for all historical periods.



<PAGE>




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



                                  EXHIBIT 10.1

             Employment Agreement, dated as of July 1, 1998, between
                   ICG Communications, Inc. and Harry Herbst


<PAGE>

                              EMPLOYMENT AGREEMENT


     THIS EMPLOYMENT AGREEMENT  ("Agreement") is made as of the 1st day of July,
1998 by and between ICG Communications,  Inc.  ("Employer" or the "Company") and
Harry R. Herbst ("Employee").

                                 R E C I T A L S

     WHEREAS,  Employer  desires to hire and employ  Employee as Executive  Vice
President and Chief Financial Officer of the Company,  or in such other position
as Employer may from time-to-time decide, as provided herein; and

     WHEREAS, Employee desires to be employed by Employer as provided herein.

     NOW,  THEREFORE,  in  consideration  of the mutual covenants and agreements
contained herein, the parties agree as follows:

     1.  Employment.  The Company agrees to employ  Employee and Employee hereby
agrees to be employed by the Company or by such of its  subsidiary  corporations
as determined by the Company,  on a full-time basis, for the period and upon the
terms and conditions hereinafter set forth.

     2. Capacity and Duties. Employee shall serve as Executive Vice President of
Employer  beginning  July 1,  1998 and as  Executive  Vice  President  and Chief
Financial  Officer of Employer  beginning August 1, 1998. During his employment,
Employee  shall  perform the duties and bear the  responsibilities  commensurate
with his position and shall serve the Employer faithfully and to the best of his
ability.  Employee  shall  devote 100% of his working  time to carrying  out his
obligations hereunder.

     3. Compensation and Benefits.

          3.1 The Company shall pay Employee  during the Term of this  Agreement
     an annual base salary,  payable  semi-monthly  in arrears.  The annual base
     salary will be Two Hundred Twenty-Five Thousand Dollars ($225,000.00).

          3.2 In addition to the base salary,  Employee  will be eligible for an
     annual  performance  bonus in an exact amount to be determined by the Board
     of Directors of the Company or the Compensation Committee of the Board. The
     annual bonus will be determined  in  accordance  with the bonus plan of the
     Company and will be based on  objectives  and goals set for the Company and
     the  Employee  (the annual  bonus is expected  to be  approximately  50% of
     annual base salary if all objectives and goals are met).

          3.3 In addition to salary and bonus  payments as provided  above,  the
     Company will provide Employee,  during the Term of this Agreement, with the
     benefits of such insurance plans,  hospitalization  plans, club memberships
     and similar benefits as shall be generally  provided to executive  officers
     of the Company of this level and for which  Employee may be eligible  under
     the terms and  conditions  thereof.  Employee  will also be entitled to all
     benefits provided under any directors and officers  liability  insurance or
     errors and omissions  insurance  maintained by the Company.  Throughout the
     Term of this  Agreement,  the  Company  will  provide  Employee  with a car
     allowance in the amount of Seven Hundred and 00/100  Dollars  ($700.00) per
     month.
<PAGE>

          3.4 Throughout the Term of this Agreement,  the Company will reimburse
     Employee for all reasonable  out-of-pocket expenses incurred by Employee in
     connection  with the  business of the Company  and the  performance  of his
     duties under this Agreement,  upon  presentation to the Company by Employee
     of an itemized accounting of such expenses with reasonable supporting data.

          3.5 Employee shall retain all stock options  previously granted to him
     by the Company in his capacity as a non-employee director,  including those
     granted in 1998 but not vested.  In  addition,  the Company will provide to
     Employee stock options  pursuant to and subject to the terms and conditions
     of the Company's  1998 Stock Option Plan.  Employee will receive a grant of
     100,000 stock options upon  employment  with an exercise price equal to the
     closing  price of ICG common stock on the date of this  Agreement  (July 1,
     1998).

     4.  Term.  The  initial  term of this  Agreement  will be for one (1) year,
commencing on July 1, 1998  ("Term").  Upon  completion of the first twelve (12)
months of the Term, this Agreement will automatically  renew from month-to-month
such that there will always be twelve (12) months remaining in the Term,  unless
and until  either party shall give at least thirty (30) days notice to the other
of his or its desire to terminate  this  Agreement (in such case, the Term shall
end upon the date  indicated  in such  notice).  The  applicable  provisions  of
Section 6, 7, 8, 9 and 10 shall  remain in full force and effect as provided and
for the time periods specified in such Sections  notwithstanding the termination
of this Agreement; all other obligations of either party to the other under this
Agreement shall terminate at the end of the Term.

     5. Termination.

          5.1 If Employee  dies during the Term of this  Agreement,  the Company
     will pay his estate the compensation payable to him under the terms of this
     Agreement.

          5.2 If, during the Term of this Agreement,  Employee is prevented from
     performing  his duties by reason of illness or  incapacity  for one hundred
     forty (140) days in any one hundred  eighty  (180) day period,  the Company
     may terminate this Agreement, upon thirty (30) days prior notice thereof to
     Employee  or  his  duly  appointed  legal  representative.  Notwithstanding
     anything  contained in  Subsection  5.2,  Employee  will be entitled to all
     benefits provided under any disability plans of the Company.

          5.3 The Company or the Employee may terminate  this  Agreement upon at
     least  thirty  (30) days  prior  notice  upon the  happening  of any of the
     following events:

               5.3.1 The sale by the Company of substantially  all of its assets
          to a single  purchaser or associated  group of purchasers  who are not
          affiliates of the Company.
<PAGE>

               5.3.2  The sale,  exchange  or other  disposition  in one or more
          related  transactions  resulting  in a change  of  ownership  of fifty
          percent (50%) or more of the  outstanding  voting stock of the Company
          to or with a person,  firm or corporation not then an affiliate of the
          Company.

               5.3.3 The merger or consolidation of the Company in a transaction
          not involving an affiliate of the Company in which the shareholders of
          the Company  receive less than fifty (50%) of the  outstanding  voting
          stock of the new continuing corporation.

               5.3.4 A bona  fide  decision  by the  Company  to  terminate  its
          business and liquidate its assets (but only if such liquidation is not
          part  of a  plan  to  carry  on the  Company's  business  through  its
          shareholders).

               5.3.5  Any  constructive  dismissal  of  the  Employee.  For  the
          purposes hereof "constructive dismissal" means, unless consented to by
          the Employee in writing, any of the following actions by the Company:

               (i)  any material  reduction in the  Employee's  office,  titles,
                    positions,  duties,  responsibilities,  powers or  reporting
                    relationships;

               (ii) any reduction in the annual salary of the Employee;

               (iii)any  requirement  to relocate  to another  state or country;
                    and

               (iv) any  material  reduction  in the  value  of  the  Employee's
                    benefits plans and programs, including, without limiting the
                    generality of the foregoing, bonus arrangements.

For the purpose of this Agreement,  the term "affiliate" means a person, firm or
corporation  that directly or  indirectly,  through one or more  intermediaries,
controls, is controlled by, or is under common control with the Company.

          5.4 The Company may terminate  this  Agreement  immediately  for gross
     negligence or intentional misconduct by the Employee.

          5.5 The Company may  terminate  this  Agreement  immediately  upon the
     conviction of Employee of any felony or upon a material  breach by Employee
     of any obligation or covenant created by or under this Agreement.

          5.6 If this  Agreement is terminated by the Company under Section 4 or
     Subsection 5.1, 5.2 or 5.4 above during the Term hereof,  the Company shall
     pay  Employee  a  termination  fee equal to two (2) times his  annual  base
     salary.  Such termination fee will be paid in a lump sum within thirty (30)
     days from the date of  termination.  If this Agreement is terminated by the
     Company or by Employee  within 90 days after the  occurrence  of any of the
     events  described  in Section 5.3 above,  the Company  will pay  Employee a
     termination  fee  equal to two (2)  times  his  annual  base  salary.  Such
     termination fee will be paid in a lump sum within thirty (30) days from the
     date of  termination.  In addition,  all options to purchase  shares of the
     Company which have been granted but not yet vested will immediately vest on
     the date of termination  and the Employee will be entitled to exercise such
     options  in  accordance  with the plans  and  agreements  relating  to such
     options.
<PAGE>

     6. Covenant Not to Compete.

          6.1 During the Term of this Agreement (or, if longer,  during the term
     of Employee's employment with the Company or any of its affiliates) and for
     a period of twelve (12) months after  termination of this Agreement (or, if
     later,  termination of Employee's employment with the Company or any of its
     affiliates),  Employee  shall not,  directly or  indirectly,  own,  manage,
     operate,  control,  be  employed  by,  or  participate  in  the  ownership,
     management,  operation or control of a business that is engaged in the same
     business as the Company  within any area or at any  location  constituting,
     during  the term of  Employee's  employment  and/or at the time  Employee's
     employment is terminated, a Relevant Area. For the purposes of this Section
     6,  including all  subsections of this Section 6, the business in which the
     Company is engaged is the business commonly known as the competitive access
     and network  services  business and all other services the Company provides
     during the term of Employee's employment ("Services").  The "Relevant Area"
     shall be defined for the  purposes of this  Agreement  as any area  located
     within,  or within fifty (50) miles of, the legal  boundaries  or limits of
     any city within  which the Company or any  affiliate  thereof is  providing
     Services,  has commenced the acquisition of any  authorizations,  rights of
     way or facilities or has commenced the  construction  of facilities for the
     purpose  of  providing  Services,  or in which  the  Company  has  publicly
     announced  or  privately  disclosed  to  Employee  that it plans to provide
     Services.

          6.2 During the Term of this Agreement (or, if longer,  during the term
     of Employee's employment with the Company or any of its affiliates) and for
     a period of twelve (12) months after  termination of this Agreement (or, if
     later,  termination of Employee's employment with the Company or any of its
     affiliates), Employee shall not (i) directly or indirectly cause or attempt
     to cause any employee of the Company or any of its  affiliates to leave the
     employ of the Company or any affiliate,  (ii) in any way interfere with the
     relationship  between the Company and any  employee or between an affiliate
     and any  employee  of the  affiliate,  or (iii)  interfere  or  attempt  to
     interfere  with  any  transaction  in  which  the  Company  or  any  of its
     affiliates  was involved  during the Term of this  Agreement or  Employee's
     employment, whichever is longer.

          6.3 Employee agrees that, because of the nature and sensitivity of the
     information  to which he will be privy and  because of the nature and scope
     of the Company's business, the restrictions contained in this Section 6 are
     fair and reasonable.

          6.4 Notwithstanding the foregoing,  at any time after the Term of this
     Agreement,  Employee may request the Chief Executive Officer of the Company
     to waive any terms of the covenant not to compete  obligations  of Employee
     hereunder.  The Chief  Executive  Officer of the Company shall consider any
     such request and will not  unreasonably  withhold his consent in connection
     with any such request.
<PAGE>

     7. Confidential Information.

          7.1 The  relationship  between  the  Company  and  Employee  is one of
     confidence and trust.  This  relationship and the rights granted and duties
     imposed by this Section shall continue until a date ten (10) years from the
     date Employee's employment is terminated.

          7.2 As used in this  Agreement (i)  "Confidential  Information"  means
     information disclosed to or acquired by Employee about the Company's plans,
     products,  processes  and services  including the Services and any Relevant
     Area, including information relating to research, development,  inventions,
     manufacturing,     purchasing,    accounting,    engineering,    marketing,
     merchandising, selling, pricing and tariffed or contractual terms, customer
     lists and prospect lists or other market  information,  with respect to any
     of the Company's then current business  activities;  and (ii)  "Inventions"
     means any inventions,  discoveries,  concepts and ideas, whether patentable
     or not, including,  without limitation,  processes,  methods, formulas, and
     techniques (as well as related  improvements  and knowledge) that are based
     on or related to  Confidential  Information,  that pertain in any manner to
     the Company's  then currently  used  technology,  expertise or business and
     that are made or  conceived  by  Employee,  either  solely or jointly  with
     others,  and  while  employed  by the  Company  or  within  six (6)  months
     thereafter,  whether or not made or conceived  during working hours or with
     the use of the Company's facilities, materials or personnel.

          7.3  Employee  agrees  that he shall at no time during the term of his
     employment or at any time thereafter disclose any Confidential  Information
     or component  thereof to any person,  firm or  corporation to any extent or
     for any reason or purpose or use any Confidential  Information or component
     thereof for any purpose other than the conduct of the Company's business.

          7.4 Any Confidential Information or component thereof that is directly
     or indirectly originated,  developed or perfected to any degree by Employee
     during the term of his  employment  by the Company  shall be and remain the
     sole  property  of the  Company  and shall be deemed  trade  secrets of the
     Company.

          7.5 Upon termination of Employee's  employment  pursuant to any of the
     provisions herein,  Employee or his legal  representative  shall deliver to
     the  Company  all  originals  and  all  duplicates  and/or  copies  of  all
     documents,  records,  notebooks,  and similar repositories of or containing
     Confidential Information then in his possession, whether prepared by him or
     not.

          7.6 Employee  agrees that the  covenants and  agreements  contained in
     this Section 7 are fair and reasonable  and that no waiver or  modification
     of this  Section or any  covenant or  condition  set forth  herein shall be
     valid unless set forth in writing and duly executed by the parties  hereto.
     Employee  agrees to  execute  such  separate  and  further  confidentiality
     agreements  embodying  the  provisions of this Section 7 as the Company may
     reasonably request.
<PAGE>

     8. Injunctive Relief.  Upon a material breach or threatened material breach
by Employee of any of the provisions of Sections 6 and 7 of this Agreement,  the
Company  shall be  entitled  to an  injunction  restraining  Employee  from such
breach.  Nothing  herein  shall be  construed  as  prohibiting  the Company from
pursuing any other  remedies  for such breach or  threatened  breach,  including
recovery of damages from Employee.

     9. No Waiver.  A waiver by the Company of a breach of any provision of this
Agreement  by  Employee  shall not  operate or be  construed  as a waiver of any
subsequent or other breach by Employee.

     10.  Severability.  It is the  desire and  intent of the  parties  that the
provisions of this Agreement shall be enforced to the fullest extent permissible
under  the  laws and  public  policies  applied  in each  jurisdiction  in which
enforcement is sought.  Accordingly,  if any particular  provision or portion of
this  Agreement  shall be  adjudicated  to be  invalid  or  unenforceable,  this
Agreement  shall  be  deemed  amended  to  delete  therefrom  the  portion  thus
adjudicated  to be invalid or  unenforceable,  such  deletion to apply only with
respect to the operation of such Section in the particular jurisdiction in which
such adjudication is made.

     11.  Notices.  All  communications,  requests,  consents and other  notices
provided for in this Agreement  shall be in writing and shall be deemed given if
mailed by first  class  mail,  postage  prepaid,  certified  or  return  receipt
requested to the last known address of the recipient.

     12.  Governing Law. This  Agreement  shall be governed by and construed and
enforced in accordance with the laws of the State of Colorado.

     13.  Assignment.  The Company may assign its rights and  obligations  under
this  Agreement to any affiliate of the Company and all covenants and agreements
hereunder  shall  inure to the benefit of and be  enforceable  by or against any
such assignee.  Neither this Agreement nor any rights or duties hereunder may be
assigned or delegated by Employee.

     14. Amendments.  No provision of this Agreement shall be altered,  amended,
revoked or waived except by an  instrument  in writing,  signed by each party to
this Agreement.

     15. Binding Effect.  Except as otherwise  provided  herein,  this Agreement
shall be binding  upon and shall inure to the benefit of the parties  hereto and
their respective legal representatives, heirs, successors and assigns.

     16. Execution in Counterparts. This Agreement may be executed in any number
of  counterparts,  each of which shall be deemed an  original,  but all of which
together shall constitute one and the same instrument.

     17. Entire  Agreement.  This Agreement sets forth the entire  agreement and
understanding of the parties and supersedes all prior understandings, agreements
or  representations  by or between the parties,  whether written or oral,  which
relate in any way to the subject matter hereof.
<PAGE>

     IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.


                                   /s/ Harry R. Herbst
                                  --------------------------------------
                                  HARRY R. HERBST



                                  ICG COMMUNICATIONS, INC.



                                  By: /s/ Don Teague
                                      --------------------------------------

                                  Name:  Don Teague
                                        ------------------------------------
   
                                  Title: Exec. V.P.
                                        ------------------------------------



<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, 1998.



                             ICG COMMUNICATIONS, INC.





Date:  August 13, 1998       By: /s/ Harry R. Herbst
                                 ----------------------------------------------
                                 Harry R. Herbst, Executive Vice President and
                                 Chief Financial Officer 
                                 (Principal Financial Officer)







Date:  August 13, 1998       By: /s/ Richard Bambach
                                 ----------------------------------------------
                                 Richard Bambach, Vice President and Corporate
                                 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, 1998.



                             ICG FUNDING, LLC




                             By: ICG Communications, Inc.
                                 Common Member and Manager





Date:  August 13, 1998       By: /s/ Harry R. Herbst
                                 ----------------------------------------------
                                 Harry R. Herbst, Executive Vice President and
                                 Chief Financial Officer 
                                 (Principal Financial Officer)

<PAGE>
                                       


                                   SIGNATURES


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



                             ICG HOLDINGS (CANADA), INC.





Date:  August 13, 1998       By: /s/ Harry R. Herbst
                                 ----------------------------------------------
                                 Harry R. Herbst, Executive Vice President and
                                 Chief Financial Officer 
                                 (Principal Financial Officer)







Date:  August 13, 1998       By: /s/ Richard Bambach
                                 ----------------------------------------------
                                 Richard Bambach, Vice President and Corporate
                                 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, 1997.



                             ICG HOLDINGS, INC.





Date:  August 13, 1998       By: /s/ Harry R. Herbst
                                 ----------------------------------------------
                                 Harry R. Herbst, Executive Vice President and
                                 Chief Financial Officer 
                                 (Principal Financial Officer)







Date:  August 13, 1998       By: /s/ Richard Bambach
                                 ----------------------------------------------
                                 Richard Bambach, Vice President and Corporate
                                 Controller (Principal Accounting Officer)