##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q

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


For the quarterly period ended September 30, 2003

OR

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


(Commission File Number 1-11965)

ICG COMMUNICATIONS, INC.

(Exact names of registrant as specified in its charter)


Delaware
(State or other jurisdiction of incorporation or organization)
    
    84-1342022
(IRS Employer Identification Number)


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

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

Indicate by check mark whether the registrant: (1) has 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
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes xNo o

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes oNo x

Indicate by check whether the registrant has filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by
a court.
Yes xNo o

As of November 3, 2003, 8,000,000 shares of ICG Communications, Inc. common
stock, $0.01 par value, were deemed issued and outstanding for financial
reporting purposes, of which 7,706,894 shares had actually been distributed to
stockholders.

1



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TABLE OF CONTENTS



|                                               |                                                                                                           |                                                           |  |  |  |  |  | 
|---------------------------------------------- | --------------------------------------------------------------------------------------------------------- | --------------------------------------------------------- |  |  |  |  |  | 
|PART I  FINANCIAL INFORMATION                
|                                               | ITEM 1. FINANCIAL STATEMENTS                                                                             
|                                               |                                                                                                           | Condensed Consolidated Balance Sheets                    
|                                               |                                                                                                           | Condensed Consolidated Statements of Operations          
|                                               |                                                                                                           | Condensed Consolidated Statements of Stockholders' Equity
|                                               |                                                                                                           | Condensed Consolidated Statements of Cash Flows          
|                                               |                                                                                                           | Notes to Condensed Consolidated Financial Statements     
|                                               | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION             AND RESULTS OF OPERATIONS
|                                               | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                       
|                                               | ITEM 4. CONTROLS AND PROCEDURES                                                                          
|PART II  OTHER INFORMATION                   
|                                               | ITEM 1. LEGAL PROCEEDINGS                                                                                
|                                               | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                                 
|SIGNATURES                                    
|EXHIBIT INDEX                                 
|EX-31.1 Rule 13a-14(a)/15d-14(a) Certification
|EX-31.2 Rule 13a-14(a)/15d-14(a) Certification
|EX-32.1 Section 1350 Certifications           



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##### Table of Contents















PART I  FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Reorganized Company)
(Unaudited)

December 31,
    
    September 30,2002
    
    2003(in thousands)AssetsCurrent assets:Cash and cash equivalents
    
    $
    50,729
    
    
    $
    19,962Restricted cash, current (note 4)
    
    
    16,645
    
    
    
    42,152Trade receivables, net of allowance of $9.0 million and $7.0 million at
December 31, 2002 and September 30, 2003, respectively (note 3)
    
    
    26,667
    
    
    
    112,023Other receivables, net of allowance of $4.4 million and $0 at December
31, 2002 and September 30, 2003, respectively
    
    
    1,946
    
    
    
    1,602Prepaid expenses and deposits
    
    
    5,656
    
    
    
    5,608Total current assets
    
    
    101,643
    
    
    
    181,347Property and equipment, net (note 6)
    
    
    231,238
    
    
    
    212,060Restricted cash, non-current
    
    
    34,393
    
    
    
    6,734Deposits
    
    
    7,076
    
    
    
    6,826Deferred financing costs, net of accumulated amortization of $0.3 million
and $1.1 million at December 31, 2002 and September 30, 2003,
respectively (note 4)
    
    
    3,096
    
    
    
    2,285Other assets
    
    
    12
    
    
    
    Total Assets
    
    $
    377,458
    
    
    $
    409,252(continued)


See accompanying notes to condensed consolidated financial statements.

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##### Table of Contents



ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Reorganized Company), Continued
(Unaudited)

December 31,
    
    September 30,2002
    
    2003(in thousands)Liabilities and stockholders equityCurrent liabilities:Accounts payable
    
    $
    8,921
    
    
    $
    5,613Accrued liabilities
    
    
    38,905
    
    
    
    42,415Reorganization accruals (note 9)
    
    
    16,734
    
    
    
    4,365Secured Notes, current portion (note 4)
    
    
    3,790
    
    
    
    56,179Senior Subordinated Term Loan, current portion, net of $3.9
million of debt discount at September 30, 2003 (note 4)
    
    
    
    
    
    
    21,091Other long-term debt, current portion
    
    
    9,183
    
    
    
    8,239Capital lease obligations, current portion (note 5)
    
    
    5,642
    
    
    
    707Deferred revenue, current portion (note 3)
    
    
    12,977
    
    
    
    19,369Total current liabilities
    
    
    96,152
    
    
    
    157,978Long-term liabilities:Secured Notes (note 4)
    
    
    55,359
    
    
    
    Capital lease obligations (note 5)
    
    
    90,943
    
    
    
    79,061Senior Subordinated Term Loan, net of $4.9 million of debt
discount at December 31, 2002 (note 4)
    
    
    20,056
    
    
    
    Other debt
    
    
    16,660
    
    
    
    14,343Deferred revenue
    
    
    16,525
    
    
    
    12,193Other long-term liabilities (note 10)
    
    
    650
    
    
    
    3,765Total liabilities
    
    
    296,345
    
    
    
    267,340Commitments and contingencies (note 7)Stockholders equity:Reorganized Company preferred stock, $0.001 par value, 10,000,000
shares authorized; 0 shares issued and outstanding
    
    
    
    
    
    
    Reorganized Company common stock, $0.01 par value, 100,000,000
shares authorized; 8,000,000 shares deemed issued and outstanding
    
    
    80
    
    
    
    80Additional paid-in capital
    
    
    82,509
    
    
    
    82,509Retained earnings (accumulated deficit)
    
    
    (1,476
    )
    
    
    59,323Total stockholders equity
    
    
    81,113
    
    
    
    141,912Total liabilities and stockholders equity
    
    $
    377,458
    
    
    $
    409,252


See accompanying notes to condensed consolidated financial statements.

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ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)

Predecessor
    
    Reorganized
    
    Predecessor
    
    ReorganizedCompany
    
    Company
    
    Company
    
    CompanyThree months ended September 30,
    
    Nine months ended September 30,2002
    
    2003
    
    2002
    
    2003(in thousands, except per share data)Revenue (note 3):Communications
    
    $
    105,914
    
    
    $
    87,769
    
    
    $
    320,865
    
    
    $
    285,581Early termination
    
    
    
    
    
    
    75,779
    
    
    
    
    
    
    
    75,779Total revenue
    
    
    105,914
    
    
    
    163,548
    
    
    
    320,865
    
    
    
    361,360Operating costs and expenses:Operating costs (note 3)
    
    
    63,053
    
    
    
    59,212
    
    
    
    191,343
    
    
    
    181,738Selling, general and administrative expenses
    
    
    16,128
    
    
    
    24,143
    
    
    
    67,690
    
    
    
    68,908Depreciation
and amortization (note 6)
    
    
    21,442
    
    
    
    11,083
    
    
    
    66,379
    
    
    
    31,233Other expense (income), net
    
    
    (540
    )
    
    
    2,798
    
    
    
    (11
    )
    
    
    2,815Total operating costs and expenses
    
    
    100,083
    
    
    
    97,236
    
    
    
    325,401
    
    
    
    284,694Operating income (loss)
    
    
    5,831
    
    
    
    66,312
    
    
    
    (4,536
    )
    
    
    76,666Other income (expense):Interest expense (note 9)
    
    
    (5,087
    )
    
    
    (5,538
    )
    
    
    (15,390
    )
    
    
    (18,306
    )Interest income (note 9)
    
    
    
    
    
    
    138
    
    
    
    
    
    
    
    595Reorganization expense, net (note 9)
    
    
    (5,673
    )
    
    
    
    
    
    
    (34,405
    )
    
    
    Other income (expense), net
    
    
    (87
    )
    
    
    112
    
    
    
    (4
    )
    
    
    1,844Total other expense, net
    
    
    (10,847
    )
    
    
    (5,288
    )
    
    
    (49,799
    )
    
    
    (15,867
    )Net income (loss)
    
    $
    (5,016
    )
    
    $
    61,024
    
    
    $
    (54,335
    )
    
    $
    60,799Net income (loss) per share:Basic
    
    $
    (0.09
    )
    
    $
    7.63
    
    
    $
    (1.00
    )
    
    $
    7.60Diluted
    
    $
    (0.09
    )
    
    $
    7.18
    
    
    $
    (1.00
    )
    
    $
    7.16Weighted average number of shares deemed
outstanding:Basic
    
    
    55,245
    
    
    
    8,000
    
    
    
    54,608
    
    
    
    8,000Diluted
    
    
    55,245
    
    
    
    8,499
    
    
    
    54,608
    
    
    
    8,488


See accompanying notes to condensed consolidated financial statements.

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ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders Equity (Reorganized Company)
(Unaudited)

RetainedCommon Stock
    
    Additional
    
    Earnings
    
    TotalPaid-in
    
    (Accumulated
    
    Stockholders'Shares
    
    Amount
    
    Capital
    
    Deficit)
    
    EquityBalances at January 1, 2003
    
    
    8,000
    
    
    $
    80
    
    
    $
    82,509
    
    
    $
    (1,476
    )
    
    $
    81,113Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    60,799
    
    
    
    60,799Balances at September 30,
2003
    
    
    8,000
    
    
    $
    80
    
    
    $
    82,509
    
    
    $
    59,323
    
    
    $
    141,912


See accompanying notes to condensed consolidated financial statements.

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ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)

Predecessor
    
    ReorganizedCompany
    
    CompanyNine months ended September 30,2002
    
    2003(in thousands)Cash flows from operating activities:Net income (loss)
    
    $
    (54,335
    )
    
    $
    60,799Adjustments to reconcile net loss to net cash provided by
operating activities before reorganization items:Reorganization expense, net
    
    
    34,405
    
    
    
    Depreciation and amortization
    
    
    66,379
    
    
    
    31,233Provision for uncollectible accounts
    
    
    4,016
    
    
    
    1,100Other
    
    
    3,105
    
    
    
    6,995Changes in operating assets and liabilities:Receivables
    
    
    7,663
    
    
    
    (86,112
    )Prepaid expenses and deposits
    
    
    1,617
    
    
    
    1,138Accounts payable and accrued liabilities
    
    
    (28,435
    )
    
    
    852Deferred revenue
    
    
    (2,535
    
    
    
    2,059Net cash provided by operating activities before reorganization items
    
    
    31,880
    
    
    
    18,064Reorganization items:Reorganization expense, net
    
    
    (34,405
    )
    
    
    Net gain on negotiated settlements and disposal of long-lived assets
    
    
    (3,637
    )
    
    
    Increase in liabilities subject to compromise
    
    
    1,798
    
    
    
    Increase (decrease) in post-petition reorganization accruals
    
    
    10,352
    
    
    
    (12,121
    )Net cash used by reorganization items
    
    
    (25,892
    )
    
    
    (12,121
    )Net cash provided by operating activities
    
    
    5,988
    
    
    
    5,943Cash flows from investing activities:Acquisition of property and equipment
    
    
    (41,285
    )
    
    
    (27,266
    )Change in prepaid expenses, accounts payable and accrued liabilities for
acquisition of property and equipment
    
    
    3,312
    
    
    
    (743
    )Proceeds from disposition of property, equipment and other assets
    
    
    3,369
    
    
    
    577Decrease in restricted cash
    
    
    30
    
    
    
    2,152Decrease in long-term deposits
    
    
    236
    
    
    
    250Net cash used by investing activities
    
    
    (34,338
    )
    
    
    (25,030
    )(continued)




See accompanying notes to condensed consolidated financial statements.

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ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Continued)
(Unaudited)

Predecessor
    
    ReorganizedCompany
    
    CompanyNine months ended September 30,2002
    
    2003(in thousands)Cash flows from financing activities:Principal payments on capital lease obligations
    
    $
    (8,647
    )
    
    $
    (4,579
    )Principal payments on long-term debt
    
    
    
    
    
    
    (7,101
    )Settlement of preferred dividends
    
    
    163
    
    
    
    Net cash used by financing activities
    
    
    (8,484
    )
    
    
    (11,680
    )Net decrease in cash and cash equivalents
    
    
    (36,834
    )
    
    
    (30,767
    )Cash and cash equivalents, beginning of period
    
    
    146,587
    
    
    
    50,729Cash and cash equivalents end of period
    
    $
    109,753
    
    
    $
    19,962Supplemental disclosure of cash flows information:Cash paid for interest
    
    $
    10,542
    
    
    $
    12,621Cash paid for income taxes
    
    $
    
    
    
    $
    Supplemental disclosure of non-cash investing and financing
activities:Increase in property and equipment and asset retirement obligations,
resulting from the Companys adoption of the provisions of SFAS 143
on January 1, 2003 (note 10)
    
    $
    
    
    
    $
    2,531Reduction in property and equipment and capital lease obligations,
resulting from the renegotiation of contractual terms (note 5)
    
    $
    
    
    
    $
    14,621


See accompanying notes to condensed consolidated financial statements.

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ICG COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)



|(1) |  | Organization and Description of Business
|--- |  | ----------------------------------------



| |  | ICG Communications, Inc., a Delaware corporation, and its subsidiaries
are collectively referred to as ICG or the Company. The Company
provides voice, data and Internet communication services. Headquartered
in Englewood, Colorado, the Company operates an integrated metropolitan
and nationwide fiber optic infrastructure to offer:
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Corporate Services, primarily retail voice and data services
to businesses.
| | - |  | ---------------------------------------------------------------------------



| |  |  | Point-to-Point Broadband Services, providing traditional
special access service to long-distance and inter-exchange carriers
and medium to large sized corporate customers, as well as switched
access and SS7 services.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Dial-Up Services, including primary rate interface and remote
access services, on a wholesale basis to national and regional
Internet Service Providers (ISPs).
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | On November 14, 2000 (the Petition Date), ICG and its operating
subsidiaries filed voluntary petitions for protection under Chapter 11 of
the United States Bankruptcy Code (the Bankruptcy Code) in the United
States District Court for the District of Delaware (the Bankruptcy
Court). The filings were made in order to facilitate the restructuring
of the Companys debt, trade liabilities and other obligations.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | On December 19, 2001, the Company filed a proposed Plan of Reorganization
and a Disclosure Statement in the Bankruptcy Court. The Company
subsequently filed a First Amended Plan and Disclosure Statement on March
1, 2002. On March 26, 2002, the Company filed a Second Amended Plan and
Disclosure Statement, which were amended on April 3, 2002. The original
Plan of Reorganization, the Disclosure Statement, the First Amended Plan
and Disclosure Statement, and the Second Amended Plan and Disclosure
Statement are collectively referred to herein as the Original Plan. On
April 3, 2002, the Company submitted the Original Plan to the Companys
creditors for approval. On May 21, 2002, the Bankruptcy Court entered an
order confirming the Original Plan.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The Original Plan, however, did not become effective as a result of
certain disagreements relating to exit financing between the Company and
Cerberus Capital Management, L.P. (Cerberus). After engaging in
renegotiations with Cerberus, on July 25, 2002, the Company entered into
an agreement with Cerberus that was embodied in a proposed modification
to the original Plan of Reorganization. The Original Plan, as modified,
is referred to herein as the Modified Plan.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The Company determined that the changes to the Original Plan, as
reflected in the Modified Plan, required a re-solicitation of votes from
certain classes of creditors. Thus, on July 26, 2002, the Company filed
the proposed Modified Plan and a Supplement to the Disclosure Statement
in the Bankruptcy Court. On August 23, 2002, the Company submitted the
Modified Plan to the Companys creditors for approval. On October 9,
2002, the Bankruptcy Court entered an order confirming the Modified Plan.
On October 10, 2002 (the Effective Date), the Companys Modified Plan
became effective and the Company emerged from Chapter 11 bankruptcy
protection.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The implementation of the Modified Plan resulted in, among other things,
Restated Articles of Incorporation and By-laws, a new capital structure,
the satisfaction or disposition of various types of claims against the
Predecessor Company (defined below) and the assumption or rejection of
certain lease agreements and executory contracts. Further, on the
Effective Date, the Company was authorized to issue 8,000,000 shares of
new common stock to the Companys pre-petition creditors. All of the
Companys
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  | Board members resigned as of the Effective Date and the new Board of
Directors officially took control of the Company.
| |  | ----------------------------------------------------------------------------------------------------------------------



| |  | Pursuant to the Modified Plan, on October 10, 2002, the Company received
new financing consisting of a $25 million senior subordinated term loan
(the Senior Subordinated Term Loan). The Companys senior secured
credit facility (the Senior Facility) balance was then cancelled and
replaced with new notes (the Secured Notes). Proceeds from the Senior
Subordinated Term Loan were utilized to pay down the balance of the
Secured Notes to $59 million. As discussed in note 4, the Secured Notes
and the Senior Subordinated Term Loan were terminated in October 2003.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) |  | Summary of Significant Accounting Policies
|--- |  | ------------------------------------------



| |  | Basis of Presentation
| |  | ---------------------



| |  | As used in this Quarterly Report, Predecessor Company refers to the
Company prior to its emergence from bankruptcy. Reorganized Company
refers to the Company after its emergence from bankruptcy.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  | In connection with its emergence from bankruptcy, the Company adopted
Fresh Start (Fresh Start) reporting in October 2002, in accordance with
the requirements of SOP 90-7. The application of SOP 90-7 resulted in
the creation of a new reporting entity for financial reporting purposes
(but not for reporting purposes under applicable United States
securities and income tax laws.) Under Fresh Start reporting, the reorganization value of ICG was
allocated to its assets and liabilities on a basis substantially
consistent with purchase accounting in accordance with Statement of
Financial Accounting Standards (SFAS) No. 141, Business Combinations.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The accompanying interim unaudited financial statements should be read in
conjunction with ICGs Annual Report on Form 10-K for the year ended
December 31, 2002, 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. In the opinion of management, the Companys interim
financial statements reflect all necessary adjustments, which are of a
normal recurring nature, for a fair presentation. Operating results for
the nine months ended September 30, 2003 are not necessarily indicative
of the results that may be expected for the fiscal year ending December
31, 2003. All significant intercompany accounts and transactions have
been eliminated in consolidation. Certain 2002 amounts have been
reclassified to conform to the 2003 presentation.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Management bases its estimates and judgments on
historical experience, current economic and industry conditions and on
various other factors that are believed to be reasonable under the
circumstances. Such information forms the basis for making judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results, however, may differ from
these estimates under different assumptions or conditions.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Comparability of Financial Information
| |  | --------------------------------------



| |  | Due to the adoption of Fresh Start reporting in October 2002, the
Reorganized Companys accompanying post-Fresh Start statement of
operations and statement of cash flows have not been prepared on a
consistent basis with the Predecessor Companys financial statements, and
are therefore not comparable in certain
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

10



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| |  | respects to the financial statements prior to the application of Fresh
Start reporting. In addition, as described in note 3, the Companys
September 30, 2003, balance sheet and results of operations were
materially affected by an agreement with a major customer.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Net Loss Per Share
| |  | ------------------



| |  | The Predecessor Companys weighted average outstanding common shares were
used in calculating basic and diluted net loss per share for the three
and nine months ended September 30, 2002. All outstanding common shares
and potential common shares of the Predecessor Company were cancelled in
October 2002 in connection with the Companys emergence from bankruptcy.
No potential common shares of the Predecessor Company, such as options
and warrants, were included in the calculation, as their effect would
have been anti-dilutive.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The Reorganized Companys weighted average outstanding common shares were
used to calculate basic net income per share for the three and nine
months ended September 30, 2003. The weighted average outstanding common
shares and dilutive options and warrants were used to calculate diluted
net income per share for the three and nine months ended September 30,
2003.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Stock-Based Compensation
| |  | ------------------------



| |  | The Company accounts for its stock-based employee and non-employee
director compensation plans using the intrinsic value based method
prescribed by Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, and related Interpretations (APB 25).
Stock-based instruments issued to third parties are accounted for in
accordance with SFAS No. 123, Accounting for Stock-Based Compensation.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The Company has recorded no compensation expense for the stock options
granted under its employee stock option plan or its non-employee director
compensation plan for the periods presented pursuant to the intrinsic
value based method of APB 25. The following table illustrates the effect
on net income and net income per share for the three and nine months
ended September 30, 2003, if the Company had applied the fair value
recognition provisions of SFAS No. 123 to stock-based employee and
non-employee director compensation (in thousands, except per share data):
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Three Months
    
    Nine MonthsEnded
    
    EndedSeptember 30, 2003Net income:As reported
    
    $
    61,024
    
    
    $
    60,799Deduct: total stock-based employee compensation
expense determined under fair value based method
for all awards
    
    
    (248
    )
    
    
    (920
    )Pro forma
    
    $
    60,776
    
    
    $
    59,879


Three Months Ended
    
    Nine Months EndedSeptember 30, 2003As
    
    Pro
    
    As
    
    Proreported
    
    forma
    
    reported
    
    formaNet income per share:Basic
    
    $
    7.63
    
    
    $
    7.60
    
    
    $
    7.60
    
    
    $
    7.48Diluted
    
    $
    7.18
    
    
    $
    7.15
    
    
    $
    7.16
    
    
    $
    7.05


11



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##### Table of Contents





| |  | The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model with the following
assumptions: option life of 5 years, volatility of 60%, risk-free
interest rate ranging from 2.7% to 3.0%, and no dividends.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The following table summarizes the status of the Reorganized Companys
employee stock option plan and non-employee director compensation plan:
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------

Shares
    
    Weightedunderlying
    
    averageoptions
    
    exercise priceOutstanding at December 31, 2002
    
    
    701,677
    
    
    $
    9.12Granted
    
    
    173,250
    
    
    
    8.30Cancelled
    
    
    (105,000
    )
    
    
    9.12Outstanding at September 30, 2003
    
    
    769,927
    
    
    $
    8.94




|(3) |  | Qwest Agreement
|--- |  | ---------------



| |  | On September 30, 2003, ICG executed an agreement (the Qwest Agreement)
with one of its major customers, Qwest Communications Corporation
(together with its affiliated entities, Qwest), whereby Qwest agreed to
pay ICG approximately $106.8 million in cash, which represented
consideration for data services (the Qwest Dial-Up Services) provided
to Qwest under four separate agreements after June 30, 2003, and
consideration for the early termination of those agreements. The Qwest
Agreement calls for substantially all of the Qwest Dial-Up Services to be
disconnected from ICGs network by December 31, 2003.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Revenue earned pursuant to the Qwest Dial-Up Services agreements,
excluding the early termination revenue portion (the Qwest Early
Termination Revenue) discussed below, is hereinafter referred to as the
Qwest Dial-Up Services Revenue. The $106.8 million Qwest Agreement
amount was comprised of the following:
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (i) |  | $75.8 million of Qwest Early Termination Revenue in
consideration of the early termination of the Qwest Dial-Up Services
agreements. This amount was recorded as revenue in the three months
ended September 30, 2003, and classified as Early termination
revenue in the accompanying statements of operations.
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (ii) |  | $24.6 million of Qwest Dial-Up Services Revenue earned
between June 30, 2003 and September 30, 2003, as required by the
Qwest Dial-Up Services agreements prior to the execution of the
Qwest Agreement. This amount was recorded as revenue in the three
months ended September 30, 2003, and classified as Communications
revenue in the accompanying statements of operations.
| | ---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (iii) |  | $6.4 million for the provision of Qwest Dial-Up Services
between October 1, 2003 and December 31, 2003, primarily to
transition Qwest from ICGs network, as required by the Qwest
Agreement. This amount, which was determined using the estimated
fair market value of the services still to be provided, was recorded
as current deferred revenue as of September 30, 2003.
| | ----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Although the Company does not generally allocate its costs to specific
products or customers due to the nature of the network architecture, it
is managements estimate that the variable gross margin (the Variable
Gross Margin), which represents revenue less incremental direct
operating costs, generated from the Qwest Dial-Up Services Revenue ranged
from between 70% and 80%.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | As of September 30, 2003, the Company had $92.0 million in net trade
receivables due from Qwest,
| |  | ------------------------------------------------------------------------------------------------

12



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##### Table of Contents





| |  | including $90.4 million from the Qwest Agreement. On October 2, 2003,
the balance due as a result of the Qwest Agreement was collected in full.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------



| |  | Revenue statistics for the Companys major customers, including Qwest,
are detailed in note 8.
| |  | ----------------------------------------------------------------------------------------------



|(4) |  | Termination of Secured Notes and Senior Subordinated Term Loan
|--- |  | --------------------------------------------------------------



| |  | The terms of the Companys Secured Notes and Senior Subordinated Term
Loan (collectively referred to herein as the Secured Debt) required the
Company to fully prepay the outstanding balance of the Secured Debt upon
the execution of the Qwest Agreement. Therefore, on or about October 7,
2003, ICG utilized approximately $81.2 million of the Qwest Agreement
proceeds to pay in full its Secured Debt.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Further, as of September 30, 2003, ICG had $42.1 million of cash in a
collateral account for the benefit of the secured lenders, in accordance
with the Secured Debt terms. This amount was classified as Restricted
cash, current in the accompanying balance sheet. In connection with the
Secured Debt termination, the funds in the cash collateral account were
released and became available to ICG for general operational purposes.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The outstanding balance of the Senior Subordinated Term Loan as of
September 30, 2003 was shown net of $3.9 million of unamortized debt
discount in the accompanying balance sheet. In addition, the
accompanying balance sheet included $2.3 million of deferred financing
costs related to obtaining the Secured Debt. The unamortized balances of
the debt discount and deferred financing costs were written off in
October 2003, in connection with the Secured Debt termination.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Interest expense on the Secured Debt amounted to $2.6 million and $7.6
million, respectively, in the three and nine months ended September 30,
2003.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------



|(5) |  | Capital Lease Obligations
|--- |  | -------------------------



| |  | The Company leases certain office facilities and fiber equipment under
various capital lease arrangements. Assets recorded under capitalized
lease agreements included in property and equipment consisted of $45.2
million and $33.6 million, less accumulated amortization of $0.6 million
and $2.1 million, at December 31, 2002 and September 30, 2003,
respectively.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The Company leases certain portions of its network from Southern
California Edison Company (SCE). In the first nine months of 2003 the
Company and SCE completed two transactions that changed the recorded
amounts of assets under capitalized lease agreements and the related
capital lease liability. In January 2003, the Company returned certain
leased dark fiber to SCE, which resulted in corresponding $3.2 million
reductions of property and equipment and capital lease obligations.
Further, in May 2003, the Company and SCE agreed to return additional
assets and to replace the previous contract, as amended, with new
agreements. In connection with the May 2003 termination of the previous
contract and execution of new licenses and leases, the Company recorded
corresponding $11.4 million reductions of property and equipment and
capital lease obligations. Capital lease obligations relating to the SCE
agreements were, and continue to be, recorded using a 15.1% interest
rate.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

13



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##### Table of Contents





| |  | The following table shows contractual payments under the terms of the
Companys capital lease obligations as of December 31, 2002 and September
30, 2003 (in thousands):
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

December 31,
    
    September 30,2002
    
    2003Year:2003*
    
    $
    17,216
    
    
    $
    1,6572004
    
    
    17,235
    
    
    
    10,4742005
    
    
    17,182
    
    
    
    10,4352006
    
    
    10,397
    
    
    
    10,5572007
    
    
    10,584
    
    
    
    10,738Thereafter
    
    
    172,745
    
    
    
    174,761Total minimum lease payments
    
    
    245,359
    
    
    
    218,622Less amounts representing interest
    
    
    148,774
    
    
    
    138,854Present value of net minimum lease payments
    
    $
    96,585
    
    
    $
    79,768


* As of September 30, 2003, the amount of contractual payments
is for the three months ended December 31, 2003.



| |  | The difference in contractual payments for each
of the above periods was
primarily due to the replacement of the SCE capital lease, as described
above.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The weighted average interest rate on capital lease obligations was 13.1%
and 12.7% as of December 31, 2002 and September 30, 2003, respectively.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------



|(6) |  | Property and Equipment
|--- |  | ----------------------



| |  | Property and equipment, including assets held
under capital leases, was
comprised of the following (in thousands):
| |  | ------------------------------------------------------------------------------------------------------------------

December 31,
    
    September 30,2002
    
    2003Buildings and Improvements
    
    $
    29,370
    
    
    $
    29,370Furniture, fixtures and office equipment
    
    
    
    
    
    
    6,685Machinery and equipment
    
    
    3,662
    
    
    
    3,575Fiber optic equipment
    
    
    51,864
    
    
    
    54,289Circuit switch equipment
    
    
    73,964
    
    
    
    72,863Packet switch equipment
    
    
    19,641
    
    
    
    19,940Fiber optic network
    
    
    47,432
    
    
    
    46,157Site improvements
    
    
    99
    
    
    
    2,800Construction in progress
    
    
    11,408
    
    
    
    12,105Assets held for sale
    
    
    1,749
    
    
    
    1,173239,189
    
    
    
    248,957Less accumulated depreciation
    
    
    (7,951
    )
    
    
    (36,897
    )$
    231,238
    
    
    $
    212,060




| |  | Property and equipment included $12.1 million of equipment that had not
been placed in service and $1.2 million of property and
equipment that was
being held for sale at September 30, 2003, that was not being depreciated.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

14



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##### Table of Contents





| |  | The Company leases certain office facilities and fiber equipment under
various capital lease arrangements. Assets recorded under capitalized
lease agreements included in property and equipment consisted of $45.2
million and $33.6 million, less accumulated amortization of $0.6 million
and $2.1 million, at December 31, 2002 and September 30, 2003,
respectively. As discussed in note 5, in 2003 the Company completed two
transactions that changed the recorded amounts of assets under
capitalized lease agreements and the related capital lease liability.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | As described in note 10, ICG adopted SFAS No. 143, Accounting for Asset
Retirement Obligations, effective January 1, 2003.
| |  | ----------------------------------------------------------------------------------------------------------------------------



|(7) |  | Commitments and Contingencies
|--- |  | -----------------------------



| |  | Impact of WorldCom, Inc. Bankruptcy
| |  | -----------------------------------



| |  | On July 21, 2002, WorldCom, Inc. and substantially all of its active U.S.
subsidiaries (collectively referred to as WorldCom) filed voluntary
petitions for reorganization under Chapter 11 of the Bankruptcy Code.
Since WorldComs bankruptcy filing, ICG has continued to provide service
to WorldCom. Revenue from WorldCom accounted for approximately 8% and
10% of Communications revenue in the three and nine months ended
September 30, 2003, respectively.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | In the first quarter of 2003, ICG and MCI WorldCom Network Services, Inc.
reached agreement with regard to the renegotiation and assumption of MCI
WorldCom Network Services, Inc.s pre-petition contract. In May 2003,
WorldComs bankruptcy court approved the settlement and assumption
agreement. Under the terms of the settlement agreement, WorldComs
minimum commitment to ICG decreased by approximately $1.2 million per
month in April 2003 through March 2004, and increased by approximately
$0.8 million per month in April 2004 through September 2004. In
addition, in May 2003, under the terms of the settlement agreement, MCI
WorldCom Network Services, Inc. paid ICG, and ICG recorded as revenue,
approximately $1.5 million relating to amounts earned for services
provided by ICG in July 2002. This amount had not been previously
recognized by ICG due to collection concerns. As of September 30, 2003,
the Company had $1.0 million in net trade receivables due from WorldCom.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Operating Costs and Accrued Liabilities
| |  | ---------------------------------------



| |  | The Company leases certain network facilities, primarily circuits, from
incumbent local exchange carriers (ILECs) and competitive local
exchange carriers (CLECs) to augment its owned infrastructure for which
it is generally billed a fixed monthly fee. The Company also uses the
facilities of other carriers for which it is billed on a usage basis.
The Company issued a significant number of disconnect orders to ILECs and
CLECs for leased circuits throughout 2001 and 2002 as a result of the
Companys optimization of its network and associated operating cost
structure, as well as the curtailment of the Companys expansions plans.
In addition, many of these providers changed the Companys billing
account numbers (BANs) in an attempt to segregate the Companys pre-
and post-Chapter 11 petition billing activity. Disconnected services
were frequently not reflected on a timely basis by these facilities
providers on the Companys invoices, resulting in inaccurate invoices and
disputes, and the assignment of new BANs by these facilities providers
frequently resulted in incorrect balances being carried forward on
invoices. The Company disputes invoices for usage billings when the call
record detail is not adequate to support such charges. As a result of
these and other types of billing disputes, the Company is in settlement
negotiations with certain providers.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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

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##### Table of Contents





| |  | Other Commitments and Contingencies
| |  | -----------------------------------



| |  | The Company emerged from bankruptcy on October 10, 2002. However,
certain post-confirmation proceedings continue in the Bankruptcy Court
relating to pre-petition claims, administrative claims and claims for
damages on rejected executory contracts. As of September 30, 2003, the
Reorganized Companys balance sheet included $4.4 million in estimated
accrued liabilities for the settlement of such claims.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(8) |  | Major Customers
|--- |  | ---------------



| |  | A significant amount of the Companys revenue has been derived from
long-term contracts with certain large customers, including Qwest and
WorldCom, which are discussed in greater detail in notes 3 and 7,
respectively. As
discussed in note 3, on September 30, 2003, ICG and Qwest entered into
the Qwest Agreement.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Revenue statistics for the Companys major customers for the three and
nine months ended September 30, 2003, are summarized in the table below:
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------

Three months
    
    Nine monthsEnded September 30, 2003Percent of Communications revenue:Qwest revenue
    
    
    32
    %
    
    
    30
    %Worldcom revenue
    
    
    8
    %
    
    
    10
    %




|(9) |  | Accounting During Bankruptcy Proceedings
|--- |  | ----------------------------------------



| |  | ICGs financial statements during the Companys bankruptcy proceedings
were prepared in accordance with the provisions of SOP 90-7.
| |  | -----------------------------------------------------------------------------------------------------------------------------------



| |  | Interest Expense
| |  | ----------------



| |  | Contractual interest expense of $64 million and $190 million was not
recorded for the three and nine months ended September 30, 2002, due to
the Companys bankruptcy proceedings.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Interest Income
| |  | ---------------



| |  | Interest income of $0.4 million and $1.4 million for the three and nine
months ended September 30, 2002, was considered earned as a result of the
bankruptcy filing, and was therefore classified as a reorganization item,
in accordance with the requirements of SOP 90-7.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Reorganization Expense, Net
| |  | ---------------------------



| |  | In accordance with SOP 90-7, all costs and expenses incurred in
connection with the Predecessor Companys reorganization from the
Petition Date to the Effective Date were classified as reorganization
items in the accompanying condensed consolidated statements of
operations. The Predecessor Company incurred the following reorganization
items for the three and nine months ended September 30, 2002:
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

16



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##### Table of Contents



Three Months
    
    Nine MonthsEnded September 30, 2002(in
thousands)Severance and employee retention costs
    
    $
    16
    
    
    $
    3,910Legal and professional fees
    
    
    2,767
    
    
    
    9,724Switch site closure costs
    
    
    332
    
    
    
    1,668Contract termination expenses
    
    
    66
    
    
    
    23,374Net loss (gain) on negotiated
settlements and disposal of
long-lived assets
    
    
    3,412
    
    
    
    (3,637
    )Interest income
    
    
    (383
    )
    
    
    (1,371
    )Other
    
    
    (537
    )
    
    
    737Total
    
    $
    5,673
    
    
    $
    34,405




|(10) |  | New Accounting Standards
|---- |  | ------------------------



| |  | Effective January 1, 2003, ICG adopted SFAS No. 143, Accounting for
Asset Retirement Obligations. The statement requires that a liability
for the fair value of an asset retirement obligation be recognized in the
period in which it is incurred, with the offsetting associated asset
retirement cost capitalized as part of the carrying amount of the
long-lived asset. The asset retirement cost is subsequently allocated to
expense using a systematic and rational method over the useful life of
the related asset. Changes in the asset retirement obligation resulting
from the passage of time are recognized as an increase in the carrying
amount of the liability and as accretion expense. The adoption of SFAS
143 resulted in the establishment of asset retirement obligations of $2.5
million, which are included in other long-term liabilities in the
accompanying balance sheet, and an increase to net property and equipment
of $2.5 million. Accretion expense of $0.1 million and $0.3 million for
the three and nine months ended September 30, 2003,
respectively, was included in other
operating income, net, in the accompanying condensed consolidated statements of operations.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

17



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##### Table of Contents











|        |  |                                                                                      
|------- |  | -------------------------------------------------------------------------------------
|ITEM 2. |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Unless the context otherwise requires, the term Company, ICG or
Registrant means the combined business operations of ICG Communications, Inc.
and its subsidiaries.

This section and other parts of this Quarterly Report contain forward looking
statements intended to qualify as safe harbors from liability as established
by the Private Securities Litigation Reform Act of 1995. These forward looking
statements can generally be identified as such because the context of the
statements include words such as intends, anticipates, expects,
estimates, plans, believes and other similar words. Additionally,
statements that describe the Companys future plans, objectives or goals also
are forward-looking statements. All forward-looking statements are subject to
certain risks and uncertainties that could cause actual results or outcomes to
differ materially from those currently anticipated. These risks and
uncertainties, which are described in more detail herein under Liquidity and
Capital Resources, include, but are not limited to the following:



| |  |  | The Companys need for capital and its ability to access capital
markets in a timely manner, at reasonable costs and on satisfactory
terms and conditions;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Companys ability to sustain positive operating income;
| | - |  | -----------------------------------------------------------



| |  |  | Customer concentration and the Companys ability to retain its major customers on profitable terms;
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | The Companys ability to collect reciprocal compensation;
| | - |  | ---------------------------------------------------------



| |  |  | The Companys ability to successfully maintain commercial relationships with its critical suppliers;
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | The Companys ability to manage expansion of its service offerings and its network and infrastructure;
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | Changes in, or the Companys inability to comply with, existing government regulations;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | The performance of the Companys network;
| | - |  | -----------------------------------------



| |  |  | The rapid change of technology within the telecommunications industry;
| | - |  | ----------------------------------------------------------------------



| |  |  | The concentration of control of the Company by two parties;
| | - |  | -----------------------------------------------------------



| |  |  | Potential for business combinations, acquisitions and/or divestitures;
| | - |  | ----------------------------------------------------------------------



| |  |  | General economic conditions and the related impact on demand for the Companys services; and
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | The Companys ability to attract and retain a new CEO and other qualified management and employees.
| | - |  | ---------------------------------------------------------------------------------------------------

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

The following discussion and analysis of the Companys financial condition and
results of operations should be read in conjunction with the unaudited
condensed consolidated financial statements and accompanying notes included in
this Quarterly Report. All dollar amounts are in U.S. dollars.

BUSINESS OVERVIEW

ICG is a facilities-based, nationwide communications provider focused on
providing data and voice services to ISPs, telecommunication carriers and
corporate customers. Headquartered in Englewood, Colorado, ICG is a certified
CLEC in most states, having interconnection agreements with every major local
exchange carrier. ICGs facilities support three primary product offerings:

18



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##### Table of Contents



Corporate Services

The Company offers Internet access, data and voice services to small to medium
sized businesses, with an emphasis on Internet Protocol (IP) telephony
services. Management believes that the Companys Corporate Services offering
represents the most favorable revenue opportunity to leverage the Companys
network infrastructure.

The demand for data services in commercial applications is expected to increase
significantly over the next several years, as businesses address their growing
need for data connections and greater bandwidth. ICG is positioning itself to
take advantage of these industry trends by leveraging its established CLEC
customer base and existing network infrastructure to expand the Corporate
Services business.

The Company continues to add new products and services to its Corporate
Services offering. Growth in the Corporate Services business is anticipated to
come primarily from sales of long distance services, dedicated internet access
services (DIA), voice and Internet converged services, and enhanced voice
services. In February 2003, ICG launched a converged voice and data solution,
VoicePipe , a single solution that bundles long distance and IP business
telephone service, along with high-speed Internet access. VoicePipe  is
available today in most of ICGs markets.

Point-to-Point Broadband Service

The Company provides dedicated bandwidth to connect (i) inter-exchange carriers
to local markets, large corporations and other carrier facilities and (ii)
large corporations to their inter-exchange carrier sites and other corporate
locations. Such dedicated bandwidth sales are focused in areas where ICG
maintains local fiber and buildings on its own network or in close proximity
thereto. Point-to-Point Broadband service also includes switched access and SS7
services.

Dial-Up Services

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

Network

To provide its service offerings, ICG combines its approximately 5,700 route
miles of metropolitan and regional fiber network infrastructure and its 46
voice and data switches with its nationwide fiber optic backbone, data points
of presence, 23 asynchronous transfer mode (ATM) switches, 18 Multi Protocol
Label Switching (MPLS) core routers and numerous private and public Internet
peering arrangements. The design of the physical network permits the Company
to offer flexible, high-speed telecommunications services to its customers.

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

The Company also runs several centrally controlled, logical IP switches (i.e.,
Soft Switches) as part of its IP infrastructure to support part of its
managed modem business, as well as its VoicePipe product line.

19



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##### Table of Contents



REORGANIZATION AND EMERGENCE FROM BANKRUPTCY

The Company filed for bankruptcy protection on November 14, 2000, and emerged
from bankruptcy protection on October 10, 2002. Concurrent with its emergence
from bankruptcy, the Company received new financing, implemented Fresh Start
reporting and issued new common stock. In addition, a new Board of Directors
officially took control of the Company. For a more detailed description of the
Companys reorganization proceedings, please refer to note 1 to the
accompanying financial statements, the description of which is incorporated
herein by reference.

CRITICAL ACCOUNTING POLICIES

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

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

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

Between November 14, 2000, and October 10, 2002, ICG operated as a
debtor-in-possession under the supervision of the Bankruptcy Court. ICGs
financial statements for reporting periods within that timeframe were prepared
in accordance with the provisions of SOP 90-7.

In connection with its emergence from bankruptcy, the Company adopted Fresh
Start reporting in October 2002, in accordance with the requirements of SOP
90-7. The application of SOP 90-7 resulted in the creation of a new reporting
entity for financial reporting purposes (but not for reporting purposes under
applicable United States securities and income tax laws.) Under Fresh Start reporting, the
reorganization value of ICG was allocated to its assets and liabilities on a
basis substantially consistent with purchase accounting in accordance with SFAS
No. 141, Business Combinations.

Revenue Recognition and Accounts Receivable

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

In the past, the Company entered into indefeasible rights-of-use agreements
(IRUs), pursuant to which the Company continues to lease its metropolitan
fiber and other infrastructure to other telecommunications services providers.
If the requirements for sales-type lease accounting were met, the Company
recognized revenue in the period that facilities became available for use by
the customer. If the requirements for sales-type lease accounting

20



---



##### Table of Contents



were not met, as was generally the case, the Company has recognized revenue
ratably over the term of the agreement. Revenue earned on the portion of IRUs
attributable to the provision of maintenance services has been recognized
ratably over the term of the agreement.

The Company records reciprocal compensation and carrier access revenue in
accordance with regulatory authority approval and pursuant to interconnection
agreements with ILECs and interexchange carriers (IXCs) for the origination,
transport and/or termination of traffic originated by ILEC and IXC customers.
The Company recognizes revenue as the service is provided, except in those
cases where historical experience indicates that the revenue would be under
dispute and collection would be uncertain.

The Company recognizes revenue at the amount expected to be realized, which
includes adjustments for billing accuracy and service performance. Valuation
allowances for uncollectible accounts receivable are established through a
charge to selling, general and administrative expenses. The Company assesses
the adequacy of this reserve periodically, evaluating general factors such as
the length of time individual receivables are past due, historical collection
experience, the economic and competitive environment, and changes in the credit
worthiness of customers. The Company also assesses the ability of specific
customers to meet their financial obligations and establishes specific
valuation allowances based on the amount the Company expects to collect from
these customers, as considered necessary. If circumstances relating to
specific customers change or economic conditions improve or worsen such that
past collection experience and assessment of the economic environment are no
longer relevant, the estimate of the recoverability of the Companys trade
receivables may change.

Operating Costs and Accrued Liabilities

The Company leases certain network facilities, primarily circuits, from IXCs,
ILECs and CLECs to augment its owned infrastructure for which it is generally
billed a fixed monthly fee. The Company also uses the facilities of other
carriers for which it is billed on a usage basis. The Company issued a
significant number of disconnect orders to ILECs and CLECs for leased circuits
throughout 2001 and 2002 as a result of the Companys optimization of its
network and associated operating cost structure, as well as the curtailment of
the Companys expansions plans. In addition, many of these providers changed
the Companys BANs in an attempt to segregate the Companys pre- and
post-Chapter 11 petition billing activity. Disconnected services were
frequently not reflected on a timely basis by these facilities providers on the
Companys invoices, resulting in inaccurate invoices and disputes, and the
assignment of new BANs by these facilities providers frequently resulted in
incorrect balances being carried forward on invoices. The Company disputes
invoices for usage billings when the call record detail is not adequate to
support such charges. As a result of these and other types of billing
disputes, the Company is in settlement negotiations with certain providers.

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

Property and Equipment

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

Pursuant to the adoption of Fresh Start in October 2002, the Company wrote down
the value of its property and equipment by $392 million, or 63%, and wrote off
the $126 million balance of accumulated depreciation. The total Fresh Start
value of the long-lived assets was generally allocated on a pro rata basis to
the individual asset categories based on asset appraisals obtained in November
2001 and March 2002. The adjusted property and equipment values are being
depreciated over the remaining useful lives of the assets.

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

Equipment held under capital leases is stated at the lower of the fair value of
the asset or the net present value of the minimum lease payments at the
inception of the lease. Amortization of equipment held under capital leases is
included in depreciation and amortization expense, and is calculated on a
straight-line basis over the estimated useful lives of the assets, or the
related lease term, whichever is shorter.

The Company provides for the impairment of long-lived assets pursuant to SFAS
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets,
which requires that long-lived assets and certain identifiable intangibles held
and used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying value of its assets may not be
recoverable. An impairment loss is recognized when the assets carrying value
exceeds both the assets estimated undiscounted future cash flows, excluding
interest, and the assets estimated fair value. Measurement of the impairment
loss is then based on the estimated fair value of the assets. Considerable
judgment is required to project such future cash flows and, if required, to
estimate the fair value of the long-lived assets and the amount of the
impairment.

The Company reviewed its long-lived asset balances for impairment in accordance
with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, as of September 30, 2003. As a result of this review, management
believes that the estimated fair value of the Companys long-lived assets as of
September 30, 2003, exceeds their carrying value.

LIQUIDITY AND CAPITAL RESOURCES

Introduction

On September 30, 2003, ICG executed an agreement with Qwest that is expected to
result in the loss of approximately 28% of Communications revenue in future
periods. On or about October 7, 2003, ICG used the proceeds from this
agreement to pay in full its secured debt obligations. As a result of these
transactions, ICG is no longer subject to restrictive debt covenants. However,
to offset the significant revenue loss, ICG must improve liquidity through
various operating initiatives and the sale of certain non-strategic assets. In
addition, the Company will need to obtain additional funding through debt or
equity financing no later than the first quarter of 2004, unless sufficient
asset sales occur first. There can be no certainty that the Company will solve
its liquidity issue and continue as a going concern.

Qwest Agreement

On September 30, 2003, ICG executed the Qwest Agreement, whereby Qwest agreed
to pay ICG approximately $106.8 million in cash, which represented
consideration for the Qwest Dial-Up Services provided to Qwest under four
separate agreements after June 30, 2003, and consideration for the early
termination of those agreements. The Qwest Agreement calls for substantially
all of the Qwest Dial-Up Services to be disconnected from ICGs network by
December 31, 2003.

The $106.8 million Qwest Agreement amount was comprised of the following:

(i)
    
    $75.8 million of Qwest Early Termination Revenue in consideration of the
early termination of the Qwest Dial-Up Services agreements. This amount
was recorded as revenue in the three months ended September 30, 2003, and
classified as Early termination revenue in the accompanying statements
of operations.


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(ii)
    
    $24.6 million of Qwest Dial-Up Services Revenue earned between June 30,
2003 and September 30, 2003, as required by the Qwest Dial-Up Services
agreements prior to the Qwest Agreement. This amount was recorded as
revenue in the three months ended September 30, 2003, and classified as
Communications revenue in the accompanying statements of operations.(iii)
    
    $6.4 million for the provision of Qwest Dial-Up Services between October
1, 2003 and December 31, 2003, primarily to transition Qwest from ICGs
network, as required by the Qwest Agreement. This amount, which was
determined using the estimated fair market value of the services still to
be provided, was recorded as current deferred revenue as of September 30,
2003.


Although the Company does not generally allocate its costs to specific products
or customers due to the nature of the network architecture, it is managements
estimate that the Variable Gross Margin generated from the Qwest Dial-Up
Services Revenue ranged from between 70% and 80%.

As of September 30, 2003, the Company had $92.0 million in net trade
receivables due from Qwest, including $90.4 million from the Qwest Agreement.
On October 2, 2003, the balance due as a result of the Qwest Agreement was
collected in full.

Revenue statistics for the Companys major customers, including Qwest, are
detailed under Assessment of Risks and Uncertainties.

Secured Notes and Senior Subordinated Term Loan termination

The terms of the Secured Debt required the Company to fully prepay the
outstanding balance of the Secured Debt upon the execution of the Qwest
Agreement. Therefore, on or about October 7, 2003, ICG utilized approximately
$81.2 million of the Qwest Agreement proceeds to pay the Secured Debt in full.
ICG intends to use the remaining proceeds for working capital and to support
ICGs continued investment in its Corporate Services product offering.

Further, as of September 30, 2003, ICG had $42.1 million of cash in a
collateral account for the benefit of the secured lenders, in accordance with
the Secured Debt terms. This amount was classified as Restricted cash,
current in the accompanying balance sheet. In connection with the Secured
Debt termination, which occurred in October 2003, the funds in the cash
collateral account were released and became available to ICG for general
operational purposes.

The outstanding balance of the Senior Subordinated Term Loan as of September
30, 2003 was shown net of $3.9 million of unamortized debt discount in the
accompanying balance sheet. In addition, the accompanying balance sheet
included $2.3 million of deferred financing costs related to obtaining the
Secured Debt. The unamortized balances of the debt discount and deferred
financing costs were written off in October 2003, in connection with the
Secured Debt termination.

Interest expense on the Secured Debt amounted to $2.6 million and $7.6 million,
respectively, in the three and nine months ended September 30, 2003. As a
result of the Secured Debt repayment, the Companys future interest expense is
expected to decrease accordingly.

Pro Forma Effect of the Transactions

At September 30, 2003, the Company had cash, cash equivalents and restricted
cash totaling $68.8 million, which was comprised of the following: (i) cash and
cash equivalents of $20.0 million; (ii) restricted cash  current of $42.1
million, which represents funds held in a cash collateral account in accordance
with the Secured Debt terms; and (iii) restricted cash  non-current of $6.7
million.

As of September 30, 2003, the Company had $92.0 million in net trade
receivables due from Qwest, including $90.4 million from the Qwest Agreement.
On October 2, 2003, the balance due as a result of the Qwest Agreement was
collected in full.

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On or about October 7, 2003, ICG
utilized approximately $81.2 million of such proceeds to pay in full its
Secured Debt. In addition, the $42.1 million of funds held in a cash
collateral account and classified as current in the Companys September 30,
2003, balance sheet was released and became available to ICG for general
operational purposes.

The termination of the Qwest Agreement and the repayment of the Secured Debt
are hereinafter collectively referred to as the Transactions. Management
believes that a pro forma presentation excluding the effect of the Transactions
is useful in showing the full impact of the Transactions on the Companys
financial condition, results of operations and liquidity going forward.

The following table sets forth a pro forma analysis of the Companys financial
condition as of September 30, 2003, assuming that all aspects of the
Transactions were complete as of September 30, 2003:

Selected Balance Sheet DataAs of September 30, 2003Receipt ofQwest
    
    Secured DebtAs
    
    Agreement
    
    terminationReported
    
    funds(1)
    
    (2)
    
    Pro Forma(in thousands of dollars)Assets:Cash
    
    
    19,962
    
    
    
    90,400
    
    
    
    (39,027
    )
    
    
    71,335Restricted cash
    
    
    48,886
    
    
    
    
    
    
    
    (42,152
    )
    
    
    6,734Total cash and restricted cash
    
    
    68,848
    
    
    
    90,400
    
    
    
    (81,179
    )
    
    
    78,069Trade receivables, net
    
    
    112,023
    
    
    
    (90,400
    )
    
    
    
    
    
    
    21,623Deferred financing costs, net of
accumulated amortization of $1.1 million
at September 30, 2003
    
    
    2,285
    
    
    
    
    
    
    
    (2,285
    )
    
    
    Other
    
    
    226,096
    
    
    
    
    
    
    
    
    
    
    
    226,096Total assets
    
    
    409,252
    
    
    
    
    
    
    
    (83,464
    )
    
    
    325,788Liabilities and stockholders equity:Secured Notes and Senior Subordinated Term
Loan, net of discount of $3.9 million at
September 30, 2003(2)
    
    
    77,270
    
    
    
    
    
    
    
    (77,270
    )
    
    
    Other debt
    
    
    22,582
    
    
    
    
    
    
    
    
    
    
    
    22,582Capital lease obligations
    
    
    79,768
    
    
    
    
    
    
    
    
    
    
    
    79,768Total debt and capital lease obligations
    
    
    179,620
    
    
    
    
    
    
    
    (77,270
    )
    
    
    102,350Other liabilities
    
    
    87,720
    
    
    
    
    
    
    
    
    
    
    
    87,720Stockholders equity
    
    
    141,912
    
    
    
    
    
    
    
    (6,194
    )
    
    
    135,718Total liabilities and stockholders equity
    
    
    409,252
    
    
    
    
    
    
    
    (83,464
    )
    
    
    325,788


Notes:



---

|(1) |  | Assumes full collection of the $90.4 million related to the Qwest Agreement as of September 30, 2003.                                                                                                                                                                                                                                                                                             
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Assumes payment in full of the Secured Debt balance as of September 30, 2003. Cash of $81.2 million was required to retire the Secured
Debt balance of $77.3 million. The unamortized deferred financing costs of $2.3 million and the unamortized debt discount of $3.9 million as of September
30, 2003, were written off, resulting in a charge of $6.2 million to the statement of operations.

24



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The following tables set forth pro forma analyses of the Companys results of
operations for the three and nine months ended September 30, 2003,
respectively. The analyses assume that all aspects of the Transactions were
complete as of close of business December 31, 2002 and that
the Variable Gross Margin generated from the Qwest Dial-Up Services Revenue
(which is classified as Communications revenue) was 75%:

Selected
Results of Operations and Cash Flow DataAs
    
    Qwest
    
    Secured DebtReported
    
    Agreement
    
    termination
    
    Pro Forma(in thousands of dollars)Three months ended September 30, 2003Revenue:Communications
    
    
    87,769
    
    
    
    (24,626
    )
    
    
    
    
    
    
    63,143Early termination
    
    
    75,779
    
    
    
    (75,779
    )
    
    
    
    
    
    
    Total revenue
    
    
    163,548
    
    
    
    (100,405
    )
    
    
    
    
    
    
    63,143Operating costs and expenses:Operating costs
    
    
    59,212
    
    
    
    (6,156
    )
    
    
    
    
    
    
    53,056Selling, general and administrative expenses
    
    
    24,143
    
    
    
    
    
    
    
    
    
    
    
    24,143Depreciation and amortization
    
    
    11,083
    
    
    
    
    
    
    
    
    
    
    
    11,083Other expense, net
    
    
    2,798
    
    
    
    
    
    
    
    
    
    
    
    2,798Total operating costs and expenses
    
    
    97,236
    
    
    
    (6,156
    )
    
    
    
    
    
    
    91,080Operating income (loss)
    
    
    66,312
    
    
    
    (94,249
    )
    
    
    
    
    
    
    (27,937
    )Other income (expenses):Interest expense
    
    
    (5,538
    )
    
    
    
    
    
    
    2,575
    
    
    
    (2,963
    )Other
    
    
    250
    
    
    
    
    
    
    
    
    
    
    
    250Total other expense, net
    
    
    (5,288
    )
    
    
    
    
    
    
    2,575
    
    
    
    (2,713
    )Net income (loss)
    
    
    61,024
    
    
    
    (94,249
    )
    
    
    2,575
    
    
    
    (30,650
    )Principal payments on long-term debt and
capital lease obligations
    
    
    5,507
    
    
    
    
    
    
    
    (2,111
    )
    
    
    3,396Capital expenditures
    
    
    4,155
    
    
    
    
    
    
    
    
    
    
    
    4,155


Nine months ended September 30, 2003Revenue:Communications
    
    
    285,581
    
    
    
    (73,879
    )
    
    
    
    
    
    
    211,702Early termination
    
    
    75,779
    
    
    
    (75,779
    )
    
    
    
    
    
    
    Total revenue
    
    
    361,360
    
    
    
    (149,658
    )
    
    
    
    
    
    
    211,702Operating costs and expenses:Operating costs
    
    
    181,738
    
    
    
    (18,470
    )
    
    
    
    
    
    
    163,268Selling, general and administrative expenses
    
    
    68,908
    
    
    
    
    
    
    
    
    
    
    
    68,908Depreciation and amortization
    
    
    31,233
    
    
    
    
    
    
    
    
    
    
    
    31,233Other expense, net
    
    
    2,815
    
    
    
    
    
    
    
    
    
    
    
    2,815Total operating costs and expenses
    
    
    284,694
    
    
    
    (18,470
    )
    
    
    
    
    
    
    266,224Operating income (loss)
    
    
    76,666
    
    
    
    (131,188
    )
    
    
    
    
    
    
    (54,522
    )Other income (expenses):Interest expense
    
    
    (18,306
    )
    
    
    
    
    
    
    7,584
    
    
    
    (10,722
    )Other
    
    
    2,439
    
    
    
    
    
    
    
    
    
    
    
    2,439Total other expense, net
    
    
    (15,867
    )
    
    
    
    
    
    
    7,584
    
    
    
    (8,283
    )Net income (loss)
    
    
    60,799
    
    
    
    (131,188
    )
    
    
    7,584
    
    
    
    (62,805
    )Principal payments on long-term debt and
capital lease obligations
    
    
    11,680
    
    
    
    
    
    
    
    (2,970
    )
    
    
    8,710Capital expenditures
    
    
    27,266
    
    
    
    
    
    
    
    
    
    
    
    27,266


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The Pro Forma Condensed Statement of Operations for the three months ended
September 30, 2003, reflects a net loss before depreciation charges of
approximately $20 million, principal payments on long-term debt and capital
lease obligations of approximately $3 million and capital expenditures of
approximately $4 million, resulting in a net consumption of cash of
approximately $27 million. Pro forma revenue for the three and nine months
ended September 30, 2003, excludes the Qwest Dial-Up Services Revenue, which
accounted for approximately 28% and 26% of Communications revenue in the three
and nine months ended September 30, 2003, respectively, and the Qwest Early
Termination Revenue. Pro forma operating costs reflect a reduction amounting
to 25% of the Qwest Dial-Up Services Revenue.

The
pro forma balance sheet as of September 30, 2003, reflects an
unrestricted cash position
of approximately $71 million, and total debt and capital lease obligations of
approximately $102 million. Although the balance sheet position has been
significantly strengthened as a result of the Transactions, the loss of future
revenue will negatively affect the Companys operating results and will have a
material negative effect on the Companys liquidity.

Under the terms of the Secured Debt, the Company was required to adhere to a
number of affirmative, negative and financial covenants. As a result of the
termination of the Secured Debt, the Company is no longer subject to these
covenants, which has enhanced the Companys financial and operational
flexibility.

Impact of the Transactions on Liquidity

To offset the significant future loss of the Qwest Dial-Up Services Revenue,
the Company has commenced several operating initiatives to increase sales and
reduce operating expenses and capital expenditures. In addition, management is
evaluating the possible sale of certain non-strategic assets. Each of these
initiatives is described in further detail below.



| |  |  | Initiatives to increase sales: The Company is in the process of
significantly expanding its quota-bearing sales personnel within its
Corporate Services line of business. As of September 30, 2003, the
total number of quota-bearing sales personnel was 150. During the
third quarter, the Company commenced a plan to increase its
quota-bearing sales personnel to a total of approximately
250. Management anticipates that this sales force will be fully
deployed by the second quarter of 2004.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Initiatives to reduce operating and capital expenditures:
| | - |  | ---------------------------------------------------------



| |  |  | Operating costs:
| | - |  | ----------------



| |  |  | Line costs: The Company is aggressively
eliminating those incremental direct operating costs that
were incurred in support of the Qwest Dial-Up Services
Revenue and to re-configure the remaining transport network
in a more cost-efficient manner.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Network operating costs: As a result of the
loss of the Qwest Dial-Up Services Revenue, a significant
amount of switching capacity within the Companys network
will be under-utilized. The Company intends to
re-configure the switching network in a more cost-efficient
manner through
the consolidation of network traffic and the elimination of
excess network facilities.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Capital expenditures: The Company is
aggressively managing its capital expenditures and will be
deferring all capital expenditures unless such expenditures
support near term revenue growth with high returns and
short paybacks, or are required to maintain either the
integrity of the network or services to existing customers.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | SG&A expenses: The Company continues to evaluate its
SG&A expenses in the context of its existing and projected
revenues and plans to reduce those SG&A expenses that are not
critical to the support of sales initiatives or the support of
services being provided to existing customers.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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##### Table of Contents





| |  |  | Initiatives to sell non-strategic assets: The Company is evaluating
the opportunity to increase its liquidity through the potential
disposition of assets including excess network transport equipment,
switches and other assets which are either not optimized or
under-performing. As of September 30, 2003, such assets were in
service and classified as held and used under the requirements of SFAS
144, Accounting for the Impairment or Disposal of Long-Lived Assets.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

There can be no assurance, however, that the aforementioned operating
initiatives and potential sales of assets will be successful in sufficiently
improving the Companys liquidity.

Based upon the Companys current projections, management believes that in
addition to the foregoing operating initiatives and potential asset sales, the
Company will need to borrow additional funds or acquire funds through equity
financing in 2004, and by the first quarter of 2004 if sufficient asset sales
do not occur first. Although management anticipates that the Companys reduced
debt burden and unencumbered asset base will enhance the Companys ability to
raise needed capital, there can be no assurance that financing will be
available to the Company on acceptable terms, or at all. Such financing is
contingent upon market conditions and the Companys results of operations and
other factors, and is therefore not assured.

If the Companys efforts to increase revenue, reduce costs, sell non-strategic
assets and obtain additional financing are not successful, ICGs business,
results of operations and financial condition would be adversely affected in a
material manner and the Company would not have the ability to continue as a
going concern.

Capital Commitments

Contractual Cash Commitments

Primarily as a result of the transactions described below, capital lease
commitments, which were presented in the Contractual Cash Commitmentstable in
the Companys Form 10-K for the year ended December 31, 2002, were modified.
The total of such future capital lease commitments has declined from $96.6
million as of December 31, 2002, to $79.8 million at September 30, 2003,
primarily due to the replacement of the SCE capital lease. In addition, as a
result of the Secured Debt termination on or about October 7, 2003, the
Companys long-term debt obligations were reduced from $110.6 million as of
December 31, 2002 to approximately $22.6 million as of October 7, 2003. In
addition, as of December 31, 2002, the Company had operating lease obligations,
purchase obligations and line cost commitments of approximately $110 million,
$20 million and $40 million, respectively.

27



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##### Table of Contents



As of September 30, 2003, as reported and pro forma future minimum principal
payments associated with capital lease obligations and long-term debt were as
follows:

Total Debt and CapitalDebt Maturities
    
    Capital Lease Maturities
    
    Lease MaturitiesAs Reported
    
    Pro Forma(1)
    
    As Reported
    
    Pro Forma(1)
    
    As Reported
    
    Pro Forma(1)(in thousands of dollars)2003(2)
    
    
    87,100
    
    
    
    5,921
    
    
    
    
    
    
    
    
    
    
    
    87,100
    
    
    
    5,9212004
    
    
    8,794
    
    
    
    8,794
    
    
    
    
    
    
    
    
    
    
    
    8,794
    
    
    
    8,7942005
    
    
    5,409
    
    
    
    5,409
    
    
    
    
    
    
    
    
    
    
    
    5,409
    
    
    
    5,4092006-2007
    
    
    2,458
    
    
    
    2,458
    
    
    
    1,211
    
    
    
    1,211
    
    
    
    3,669
    
    
    
    3,6692008-2022
    
    
    
    
    
    
    
    
    
    
    78,557
    
    
    
    78,557
    
    
    
    78,557
    
    
    
    78,557Total
    
    
    103,761
    
    
    
    22,582
    
    
    
    79,768
    
    
    
    79,768
    
    
    
    183,529
    
    
    
    102,350


Notes:



---

|(1) |  | Assumes that all aspects of the Transactions were complete as of close of business September 30, 2003. See
reconciliation of 2003 As Reported and Pro Forma debt maturities under Pro Forma Effect of the Transactionsherein.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | The full amount of the Secured Debt is included in the 2003 amount as it was fully paid in October 2003.                                                                                                                         

The Company leases certain portions of its network from Southern California
Edison Company (SCE). In the first nine months of 2003 the Company and SCE
completed two transactions that changed the recorded amounts of assets under
capitalized lease agreements and the related capital lease liability. In
January 2003, the Company returned certain leased dark fiber to SCE, which
resulted in corresponding $3.2 million reductions of property and equipment and
capital lease obligations. Further, in May 2003, the Company and SCE agreed to
return additional assets and to replace the previous contract, as amended, with
new agreements. In connection with the May 2003 termination of the previous
contract and execution of new licenses and leases, the Company recorded
corresponding $11.4 million reductions of property and equipment and capital
lease obligations.

Capital Expenditures

Capital expenditures, exclusive of amounts required to sustain network
functionality, will be driven primarily by customer demand for the Companys
services. If customer demand for new services does not meet managements
expectations, capital expenditures will be proportionally reduced. The Company
anticipates that approximately $9 million will be required in the fourth
quarter of 2003 for capital expenditures, $2.5 million of which is expected to
be related to network infrastructure upgrades, enhancements to back office
systems, and to sustain the current network functionality. The Company has
significant capacity available on its data backbone, metropolitan and regional
fiber networks, and in its modem banks. It is the Companys objective to use
this capacity to generate future revenue streams.

Assessment of Risks and Uncertainties

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

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

As
discussed further herein under ProForma Effect of the Transactionsand Impact of the Transactions on Liquidity, to
offset the significant future loss of the Qwest Dial-Up Services Revenue, the
Company has commenced several operating initiatives to increase sales and
reduce operating expenses and capital expenditures. In addition, management is
evaluating the possible sale of certain non-strategic assets. Based upon the
Companys current projections, management believes that in addition to
operating initiatives and potential asset sales, the Company will need to
borrow additional funds or acquire funds

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through equity financing in 2004, and
possibly as early as the first quarter of 2004. Although management
anticipates that the Companys reduced debt burden and unencumbered asset base
will enhance the Companys ability to raise needed capital, there can be no
assurance that financing will be available to the Company on acceptable terms,
or at all. Such financing is contingent upon market conditions and the
Companys results of operations and other factors, and is therefore not
assured.

If the Company is able to secure additional financing, current shareholders may
experience dilution of their ownership interest, and the newly issued
securities may have rights superior to those of common stock. If the Company
raises additional funds through borrowings, it may once again become subject to
restrictive debt covenants that could limit its operating flexibility.

If the Companys efforts to increase revenue, reduce costs, sell non-strategic
assets and obtain additional financing are not successful, ICGs business,
results of operations and financial condition would be adversely affected in a
material manner and the Companys ability to continue as a going concern would
be uncertain.

The Companys ability to sustain positive operating income

Since the third quarter of 2002, the Company has experienced positive operating
income. However, the Company does not expect to generate any additional cash
flow from the Qwest Dial-Up Services subsequent to the October 2003 receipt of
the Qwest Agreement proceeds. Management anticipates that the reduction in
revenue from Qwest in future periods will be offset in part by growth in
revenues from other services and customers. Additionally, in an effort to
enhance liquidity, management is evaluating numerous alternatives to reduce
operating costs and capital expenditures.

It is uncertain, however, when, if ever, the Company will be able to fully
offset the loss of the Qwest Dial-Up Services Revenue. On a pro forma basis, if
the Transactions had occurred effective December 31, 2002, the Company would
have recorded operating losses of $27.9 million and $54.5 million,
respectively, in the three and nine months ended September 30, 2003, assuming
no growth in revenues from other services and customers and no reduction in
operating costs and capital expenditures. See additional discussion herein
under Pro Forma Effect of the Transactions. Therefore, there can be no
assurance that the Company will continue to experience positive operating
income.

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

A significant amount of the Companys revenue is derived from long-term
contracts with certain large customers.

Communications revenue, excluding the Qwest Dial-Up Services Revenue, is
hereinafter defined as Ongoing Communications Revenue. The foregoing revenue
statistics are summarized in the table below:

Three months
    
    Nine monthsEnded September 30, 2003(in thousands of dollars)Communications revenue
    
    
    87,769
    
    
    
    285,581Less: Qwest Dial-Up Services Revenue
    
    
    24,626
    
    
    
    73,879Ongoing Communications Revenue
    
    
    63,143
    
    
    
    211,702


Management believes that a presentation of certain revenue statistics measured
against Ongoing Communications Revenue is useful for estimating the impact of
the Qwest Agreement on future revenue and liquidity.

In the third quarter of 2003, four customers (the Top Four Customers) each
represented more than 5% of Communications revenue: Qwest, WorldCom, and two
large national ISPs (hereinafter referred to as ISP #1 and ISP #2.)

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Revenue statistics for these large customers for the three and nine months
ended September 30, 2003, are summarized in the table below.

Three months ended
    
    Nine months endedSeptember 30, 2003
    
    September 30, 2003Ongoing
    
    
    
    
    
    OngoingCommunications
    
    Communications
    
    Communications
    
    Communicationsrevenue
    
    Revenue
    
    revenue
    
    Revenue($ amounts in thousands)Communications revenue
    
    $
    87,769
    
    
    
    
    
    
    $
    285,581Qwest revenue(1)
    
    
    32
    %
    
    
    
    
    
    
    30
    %Worldcom revenue
    
    
    8
    %
    
    
    
    
    
    
    10
    %ISP #1 revenue
    
    
    9
    %
    
    
    
    
    
    
    9
    %ISP #2 revenue
    
    
    7
    %
    
    
    
    
    
    
    7
    %Top Four Customers
revenue(1)
    
    
    56
    %
    
    
    
    
    
    
    56
    %Ongoing Communications Revenue
    
    
    
    
    
    $
    63,143
    
    
    
    
    
    
    $
    211,702Qwest revenue(2)
    
    
    
    
    
    
    5
    %
    
    
    
    
    
    
    5
    %Worldcom revenue
    
    
    
    
    
    
    11
    %
    
    
    
    
    
    
    13
    %ISP #1 revenue
    
    
    
    
    
    
    12
    %
    
    
    
    
    
    
    12
    %ISP #2 revenue
    
    
    
    
    
    
    10
    %
    
    
    
    
    
    
    9
    %Top Four Customers
ongoing revenue(2)
    
    
    
    
    
    
    38
    %
    
    
    
    
    
    
    39
    %




---

|(1) |  | excludes Qwest Early Termination Revenue.                                   
|--- |  | ----------------------------------------------------------------------------
|   
|(2) |  | excludes Qwest Early Termination
Revenue and Qwest Dial-Up Services Revenue.

As a result of the Qwest Agreement effective September 30, 2003, revenue from
Qwest is expected to decrease significantly in the future. Future revenue from
the Qwest Dial-Up Services is expected to be eliminated by December 31, 2003,
pursuant to the Qwest Agreement. See additional discussion under Pro Forma
Effect of the Transactions.

In general, upon the contractual expiration of the Companys agreements with
its customers, including the Top Four Customers, there can be no assurance that
customers will elect to continue such agreements. In fact, they may elect to
significantly reduce service levels, negotiate lower pricing, or disconnect
services completely. In addition, certain material customer agreements do not
require the customer to maintain minimum commitments at their current levels.
There can be no assurance that such customers will continue to purchase the
same amount of services from ICG.

During the third quarter of 2003, ISP #1, which accounted for 9% of
Communications revenue in the three and nine months ended September 30, 2003,
renegotiated its contract. As a result, contract pricing, which was previously
based on a fixed price per line for a fixed term, is now based on actual
month-to-month usage. Management anticipates that the renegotiation of
contract terms will result in an approximately 30% reduction in revenue earned
from ISP #1 in the future.

Certain other customers have also approached ICG about possibly settling or
restructuring future rates and/or levels of service provided under their
service contracts. If the Company agrees to
settle or restructure the future provisions of any significant customer
contract, ICGs results of operations and financial condition could be
materially adversely affected.

During 2002, a number of the Companys customers filed for bankruptcy
protection. As of September 30, 2003, customers who have filed for bankruptcy
protection, including WorldCom, represented approximately 14% of Ongoing
Communications Revenue. Under the Bankruptcy Code, customers who file for
bankruptcy protection may

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choose to affirm or reject their pre-petition
contracts with the Company. If they choose to reject those contracts, ICGs
recourse is to pursue an unsecured claim in the customers bankruptcy
proceeding for damages associated with rejection of the contract. The ultimate
amount and nature of recovery on such claims is highly uncertain and specific
to each proceeding. Given the depressed state of the national economy and the
telecommunications sector in particular, there can be no assurance that the
Company will not lose significant recurring revenue due to customer
bankruptcies.

WorldCom filed for bankruptcy protection on July 21, 2002. Since WorldComs
bankruptcy filing, ICG has continued to provide service to WorldCom. In the
first quarter of 2003, ICG and MCI WorldCom Network Services, Inc. reached
agreement with regard to the renegotiation and assumption of MCI WorldCom
Network Services, Inc.s pre-petition contract. In May 2003, WorldComs
bankruptcy court approved the settlement and assumption agreement. Under the
terms of the settlement agreement, WorldComs minimum commitment to ICG
decreased by approximately $1.2 million per month in April 2003 through March
2004, and increased by approximately $0.8 million per month in April 2004
through September 2004. In addition, in May 2003, under the terms of the
settlement agreement, MCI WorldCom Network Services, Inc. paid ICG, and ICG
recorded as revenue, approximately $1.5 million relating to amounts earned for
services provided by ICG in July 2002. This amount had not been previously
recognized by ICG due to collection concerns. As of September 30, 2003, the
Company had $1.0 million in net trade receivables due from WorldCom.

While management continues to evaluate and plan for the expiration of certain
contracts with large customers and the replacement of monthly recurring revenue
from customers currently involved in bankruptcy proceedings, the loss of any
one or more of these customers, some of whom are significant to the Company,
could have a material adverse effect on the Companys operating results.

The Companys ability to collect reciprocal compensation

Reciprocal compensation rates are negotiated elements of inter-carrier
compensation established pursuant to interconnection agreements between the
parties. The Company has executed interconnection agreements with all regional
bell operating companies (RBOCs) and most other ILECs and, while the initial
terms of some of those agreements have expired or are soon expiring, the
Company is in the process of renegotiating and extending the terms of the
interconnection agreements.

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

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

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

The Company relies in part on other telecommunications service providers to
provide voice and data communications capacity via leased telecommunications
lines. If its suppliers are unable or unwilling to provide or expand their
current levels of service to the Company in the future, or are unable to
provide these services in a timely manner, ICGs operations could be materially
affected. Although leased telecommunications lines are available from several
alternative suppliers, there can be no assurance that ICG could obtain
substitute services from other providers at reasonable prices or in a timely
fashion. ICG is also subject to risks relating to potential disruptions in its
suppliers services, and there is no assurance that such interruptions will not
occur. Service interruptions could produce substantial customer dissatisfaction
and possibly cause the Company to fail to meet its minimum network performance
commitments, which could adversely affect the Companys results of operations
and financial condition.

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

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



| |  |  | Obtaining any required governmental permits and rights-of-way;
| | - |  | --------------------------------------------------------------



| |  |  | Implementing interconnection agreements with ILECs and addressing
other regulatory matters;
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | Designing, acquiring and installing transmission, switching and data facilities;
| | - |  | --------------------------------------------------------------------------------



| |  |  | Attracting new customers and selling new services to existing customers;
| | - |  | ------------------------------------------------------------------------



| |  |  | Training and managing the Companys employee base; and
| | - |  | ------------------------------------------------------



| |  |  | Accurately predicting and managing the cost and timing of
associated capital expenditure programs.
| | - |  | --------------------------------------------------------------------------------------------------

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

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

Communication services are subject to significant regulation at the federal,
state and local levels. Assumptions inherent in ICGs business plan are
consistent with both existing, as well as recently enacted regulatory changes.
Adverse changes to the regulatory environment, such as the following, could
negatively impact the Company:



| |  |  | Delays in receiving required regulatory approvals or the imposition
of onerous conditions for these approvals;
| | - |  | --------------------------------------------------------------------------------------------------------------



| |  |  | Difficulties in completing and obtaining regulatory approval of
interconnection agreements, which provide for the interconnection of
ICGs networks with existing local telephone companies networks;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Enactment of new, adverse legislation or regulatory requirements or
changes in the interpretation of existing laws or regulations; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Enactment of new, adverse legislation that increases the Companys
tax burden or the tax burden of the Companys customers.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------

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

The performance of the Companys network

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

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

The rapid change of technology within the telecommunications industry

ICG believes its telecommunications infrastructure enables the Company to
provide superior service and reliability to its customers. Nevertheless, the
Company continuously evaluates emerging technologies in light of its planned
service offerings and the demands of its customer base in order to maintain the
Companys competitive positioning within the industry (i.e. functionality,
operating cost structure, etc.).

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

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

The concentration of control of the Company by two parties

Currently, Huff and Cerberus control approximately 22% and 16%, respectively,
of the voting securities of the Reorganized Company. Pursuant to the Modified
Plan, the Companys Amended and Restated Certificate of Incorporation and the
Companys Restated By-laws, the Companys Board of Directors is comprised of
five directors, with the Company currently being obligated to nominate for
election (in connection with any meeting of or written consent solicited from
the stockholders of the Company called for the purpose of electing directors)
two individuals designated by Cerberus, two individuals designated by Huff and
the individual acting as the Companys Chief Executive Officer. Under the
Restated By-laws, each of Cerberus and Huffs respective nomination rights
terminate with respect to one of their director nominees
when their beneficial ownership of shares of the Companys common stock
decreases below 5%, and with respect to their other nominee when their
beneficial ownership decreases below 1%.

The number of directors comprising the Companys Board of Directors may only be
increased above five by the affirmative vote of all but one of the directors
then in office. Additionally, the provisions of the Restated By-Laws regarding
each of Huffs and Cerberus director nomination rights may not be amended,
altered or repealed without their prior consent unless Cerberus, with respect
to its director nominees, and Huff, with respect to its director nominees, in
each instance, beneficially owns less than 1% of the Companys common stock at
the time of the amendment.

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

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Potential for business combinations, acquisitions and/or divestitures

The Company continuously evaluates the feasibility and possible strategic
benefits of potential business combinations and other transactions that would
extend its geographic markets, increase customer density within existing
markets, expand its services, or enlarge the capacity of the Companys
networks. Any material transaction that the Company would undertake
could result in an increase in the Companys indebtedness or the issuance of
additional common stock or both, or a change of control. There can be no
assurance that the Company will enter into any such transaction or, if it does,
on what terms.

The Company also evaluates opportunities to divest certain operations from time
to time. Such divestitures may generate cash and allow the Company to focus
its resources on opportunities that are more profitable or better aligned with
the Companys strategic objectives. In fact, as described under Impact of the Transactions on Liquidity
herein, the Company is currently evaluating the opportunity to increase its
liquidity through the potential disposition of assets including excess network
transport equipment, switches and other assets that are either not optimized or
under-performing.

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

The national economy, and the telecommunications industry in particular, have
been significantly affected by the current economic slowdown. Many of the
Companys customers have continued to experience financial difficulties. The
financial difficulties of the Companys customers could have a material impact
if the Company is unable to collect revenue from these customers. In addition,
customers experiencing financial difficulty are less likely to order additional
services, and the Companys business plan is predicated upon increasing both
the number of customers and the services current customers order.

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

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

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

The Companys ability to attract and retain a new CEO and other qualified
management and employees

On October 1, 2003, the Company announced that Randall E. Curran, the Companys
Chairman of the Board of Directors and Chief Executive Officer, would be
leaving the Company. As of the date of this filing, Mr. Curran continues to
serve as the Companys Chairman of the Board of Directors and Chief Executive
Officer. Mr. Curran is expected to leave the Company no later than November
30, 2003. The Company has not yet named Mr. Currans successor.

The Company is highly dependent on the services of its management and other key
personnel. The loss of the services of other senior executives or other key
personnel could cause the Company to make less successful strategic decisions,
which could hinder the introduction of new services or make the Company less
prepared for technological or marketing problems, which could reduce the
Companys ability to serve its customers or lower the quality of its services.

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Management believes that a critical component for the Companys success will be
the timely attraction of key personnel, particularly a new CEO, as well as
their retention. If the Company fails to attract and retain key personnel, its
ability to generate revenue, operate its business, obtain financing and compete
could be adversely affected.

Historical Cash Activities

Due to the adoption of Fresh Start reporting in October 2002, the Reorganized
Companys post-Fresh Start statement of cash flows has not been prepared on a
consistent basis with, and is therefore generally not comparable to, that of
the Predecessor Company prior to the application of Fresh Start. In accordance
with SOP 90-7, the Reorganized Companys statement of cash flows has been
presented separately from that of the Predecessor Company.

Cash and cash equivalents decreased $36.8 million and $30.8 million in the nine
months ended September 30, 2002 and 2003, respectively.

Net Cash Provided By Operating Activities

The Reorganized Companys operating activities provided $5.9 million of cash in
the nine months ended September 30, 2003. Operating activities before
reorganization items provided $18.1 million of cash, which consisted of net
income of $60.8 million and net non-cash charges of $39.3 million, offset by
net cash used by working capital of $82.0 million. Net cash used by working
capital consisted of an increase in receivables of $86.1 million, offset by a
decrease in prepaid expenses of $1.1 million and increases in accounts payable
and accrued liabilities of $0.9 million and deferred revenue of $2.1 million.
Receivables increased due primarily to the $90.4 million due from Qwest as of
September 30, 2003, pursuant to the Qwest Agreement. This amount was fully
collected from Qwest on October 2, 2003. Reorganization items, consisting of
the change in post-petition restructuring accruals, used $12.1 million of cash.

The Predecessor Companys operating activities provided $6.0 million of cash in
the nine months ended September 30, 2002. Operating activities before
reorganization items provided $31.9 million of cash, which consisted of net
non-cash charges of $73.5 million, offset by a net loss before reorganization
items of $19.9 million and net cash used by working capital of $21.7 million.
Reorganization items used $25.9 million of cash, which consisted primarily of
net reorganization expense of $34.4 million and net gain on negotiated
settlements and disposal of long-lived assets of $3.6 million, offset by an
increase in liabilities subject to compromise of $1.8 million and an increase
in post-petition restructuring accruals of $10.3 million.

Net Cash Used By Investing Activities

The Reorganized Companys investing activities used $25.0 million of cash in
the nine months ended September 30, 2003, which was comprised primarily of
$27.3 million of capital expenditures for network infrastructure upgrades,
enhancements to back office systems and labor costs associated with the
installation of new services. Offsetting the capital expenditures, restricted
cash balances decreased $2.2 million.

The Predecessor Companys investing activities used $34.3 million of cash in
the nine months ended September 30, 2002. Net cash used by investing
activities was comprised primarily of capital expenditures of $41.3 million,
proceeds of $3.4 million from the disposition of property, equipment and other
assets, and a $3.3 million decrease in working capital balances attributable to
capital expenditures.

Net Cash Used By Financing Activities

The Reorganized Companys financing activities used $11.7 million of cash in
the nine months ended September 30, 2003, which included $7.1 million of
principal payments on long-term debt and $4.6 million of principal payments on
capital lease obligations.

The Predecessor Companys financing activities used $8.5 million of cash in the
nine months ended September 30, 2002, which was comprised primarily of
principal payments on capital lease obligations.

35



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Supplemental Disclosure of Non-cash Investing and Financing Activities

The Companys property and equipment and asset retirement obligations each
increased by $2.5 million in the nine months ended September 30, 2003, as a
result of the Companys adoption of the provisions of SFAS 143 on January 1,
2003. In addition, in the first nine months of 2003, the Company renegotiated
the contractual terms of certain capital lease obligations, as discussed
further under Contractual Cash Commitmentsherein, which resulted in a $14.6
million decrease in property and equipment and a corresponding decrease in
capital lease obligations.

RESULTS OF OPERATIONS

Due to the adoption of Fresh Start reporting in October 2002, the Reorganized
Companys post-Fresh Start statement of operations has not been prepared on a
consistent basis with, and is therefore generally not comparable to, that of
the Predecessor Company prior to the application of Fresh Start. In accordance
with SOP 90-7, the Reorganized Companys statement of operations has been
presented separately from that of the Predecessor Company. However, the
Reorganized Companys revenue (except as noted below), operating costs, and
selling, general and administrative expenses were not affected by the adoption
of Fresh Start reporting, and are therefore comparable to those of the
Predecessor Company.

Statement of Operations Data (unaudited)Predecessor
    
    Reorganized
    
    Predecessor
    
    ReorganizedCompany
    
    Company
    
    Company
    
    CompanyThree months ended September 30,
    
    Nine months ended September 30,2002
    
    2003
    
    2002
    
    2003$
    
    %(2)
    
    $
    
    %(2)
    
    $
    
    %(2)
    
    $
    
    %(2)($ amounts in thousands)Revenue:Communications(1)
    
    
    105,914
    
    
    
    100
    
    
    
    87,769
    
    
    
    100
    
    
    
    320,865
    
    
    
    100
    
    
    
    285,581
    
    
    
    100Early termination
    
    
    
    
    
    
    N/A
    
    
    
    75,779
    
    
    
    N/A
    
    
    
    
    
    
    
    N/A
    
    
    
    75,779
    
    
    
    N/ATotal revenue
    
    
    105,914
    
    
    
    N/A
    
    
    
    163,548
    
    
    
    N/A
    
    
    
    320,865
    
    
    
    N/A
    
    
    
    361,360
    
    
    
    N/AOperating costs and
expenses:Operating costs
    
    
    63,053
    
    
    
    60
    
    
    
    59,212
    
    
    
    67
    
    
    
    191,343
    
    
    
    59
    
    
    
    181,738
    
    
    
    64Selling, general
and administrative
    
    
    16,128
    
    
    
    15
    
    
    
    24,143
    
    
    
    28
    
    
    
    67,690
    
    
    
    21
    
    
    
    68,908
    
    
    
    24Depreciation and
amortization(3)
    
    
    21,442
    
    
    
    20
    
    
    
    11,083
    
    
    
    13
    
    
    
    66,379
    
    
    
    21
    
    
    
    31,233
    
    
    
    11Other expense
(income), net
    
    
    (540
    )
    
    
    (1
    )
    
    
    2,798
    
    
    
    3
    
    
    
    (11
    )
    
    
    
    
    
    
    2,815
    
    
    
    1Total operating
costs and
expenses
    
    
    100,083
    
    
    
    94
    
    
    
    97,236
    
    
    
    111
    
    
    
    325,401
    
    
    
    101
    
    
    
    284,694
    
    
    
    100


36



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##### Table of Contents



Statistical DataPredecessorCompany
    
    
    
    
    
    Reorganized CompanySept. 30,
    
    Dec. 31,
    
    March 31,
    
    June 30,
    
    Sept. 30,2002
    
    2002
    
    2003
    
    2003
    
    2003Full time employees
    
    
    1,147
    
    
    
    1,146
    
    
    
    1,150
    
    
    
    890
    
    
    
    953Access lines in service, in thousands(4)
    
    
    870
    
    
    
    903
    
    
    
    937
    
    
    
    862
    
    
    
    736Buildings connected:On-net
    
    
    909
    
    
    
    909
    
    
    
    908
    
    
    
    904
    
    
    
    905Hybrid(5)
    
    
    4,413
    
    
    
    4,262
    
    
    
    4,121
    
    
    
    4,266
    
    
    
    4,338Total buildings connected
    
    
    5,322
    
    
    
    5,171
    
    
    
    5,029
    
    
    
    5,170
    
    
    
    5,243Operational switches:Circuit
    
    
    46
    
    
    
    47
    
    
    
    46
    
    
    
    46
    
    
    
    46ATM
    
    
    26
    
    
    
    24
    
    
    
    23
    
    
    
    23
    
    
    
    23Total operational switches
    
    
    72
    
    
    
    71
    
    
    
    69
    
    
    
    69
    
    
    
    69Operational regional fiber route miles(6)
    
    
    5,704
    
    
    
    5,726
    
    
    
    5,731
    
    
    
    5,660
    
    
    
    5,660Operational regional fiber strand miles(7)
    
    
    166,228
    
    
    
    172,574
    
    
    
    180,494
    
    
    
    182,305
    
    
    
    182,305Collocations with ILECs(8)
    
    
    158
    
    
    
    162
    
    
    
    145
    
    
    
    145
    
    
    
    148




---

|(1) |  | Communications revenue of the Reorganized Company is comparable to that
of the Predecessor Company, except with respect to revenue recognition of
certain deferred revenue. Due to the write down of the deferred revenue
balance in connection with the application of Fresh Start reporting,
revenue was reduced by approximately $1 million per quarter.                                                                                                                                                          
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Amounts represent percentages of Communications revenue.                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   
|(3) |  | Depreciation and amortization amounts of the Reorganized Company periods
are not comparable to those of the Predecessor Company periods primarily
due to the adoption of Fresh Start in October 2002. Pursuant to the
adoption of Fresh Start, the Company wrote down the value of its property
and equipment by $392 million, or 63%, and wrote off the $126 million
balance of accumulated depreciation. The new property and equipment
values are being depreciated over the remaining useful lives of the
assets.
|   
|(4) |  | Access lines in service include only provisioned lines generating
revenue. The number of access lines in service decreased from June 30,
2003 to September 30, 2003 due to ISP #1 transitioning to a usage-based
contract. See additional discussion herein under Assessment of Risks and
Uncertainties.                                                                                                                                                                                                             
|   
|(5) |  | Hybrid buildings connected represent buildings connected to the Companys
network via another carriers facilities.                                                                                                                                                                                                                                                                                                                                                                                                  
|   
|(6) |  | Regional fiber route miles refers to the number of miles of fiber optic
cable, including leased fiber. As of September 30, 2003, the Company had
5,660 regional fiber route miles, 3,653 of which were leased.                                                                                                                                                                                                                                                                                                       
|   
|(7) |  | Regional fiber strand miles refers to the number of regional fiber route
miles, including leased fiber, along a telecommunications path multiplied
by the number of fiber strands
along that path. As of September 30, 2003, the Company had 182,305
regional fiber strand miles, 43,738 of which were leased.                                                                                                                                                                                                       
|   
|(8) |  | The Company consolidated certain collocations during the first three
months of 2003 to reduce operating costs.                                                                                                                                                                                                                                                                                                                                                                                                       

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##### Table of Contents



Overview

The general economic downturn and the severe downturn in the telecommunications
industry have resulted in an oversupply of network infrastructure. In
addition, the slowing economy has resulted in many of the Companys customers
ceasing operations, filing for bankruptcy protection, or looking for
opportunities to cut costs. The effects on the Company include higher levels
of customer disconnections and increased pricing pressure on new and existing
customer contracts. In addition, customers are taking longer to make buying
decisions, thus lengthening the sales cycle. These trends have been partially
offset by increased Dial-Up revenue earned from the Companys ISP customers.

THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2002

Revenue

Predecessor
    
    ReorganizedCompany
    
    CompanyThree Months Ended September 30,2002
    
    2003$
    
    %
    
    $
    
    %$ amounts in thousandsDial-Up
    
    
    45,959
    
    
    
    43
    
    
    
    48,654
    
    
    
    56Point-to-Point Broadband
    
    
    23,291
    
    
    
    22
    
    
    
    20,144
    
    
    
    23Corporate Services
    
    
    17,902
    
    
    
    17
    
    
    
    12,468
    
    
    
    14Reciprocal Compensation
    
    
    18,762
    
    
    
    18
    
    
    
    6,503
    
    
    
    7Communications revenue
    
    
    105,914
    
    
    
    100
    
    
    
    87,769
    
    
    
    100


Communications revenue decreased $18.1 million, or 17%, for the three months
ended September 30, 2003, as compared to the three months ended September 30,
2002. The decrease was due primarily to decreases of $5.4 million, $3.2
million and $12.3 million in Corporate Services, Point-to-Point Broadband and
Reciprocal Compensation revenue, respectively, offset by an increase of $2.7
million in Dial-Up revenue. In addition, to Communications revenue, the
Company had $75.8 million of Early termination revenue in the three months
ended September 30, 2003. This amount was comprised of the Qwest Early Termination
revenue, which was earned in consideration of the early termination of the
Qwest Dial-Up Services agreements.

Dial-Up

Dial-Up revenue is earned by providing PRI ports (one- and two- way) and
managed modem (RAS) services to ISPs and other communication service companies.
Dial-Up revenue is comprised of (i) monthly recurring revenue, which includes
fixed monthly service revenue and service revenue directly attributable to
usage and (ii) non-recurring revenue, which includes installation revenue,
billing adjustments and credits, and other non-recurring items.

Dial-Up revenue increased 6% from $46.0 million in the third quarter of 2002 to
$48.7 million in the third quarter of 2003. Dial-Up revenue increased due
primarily to the acquisition of a new customer, ISP #2, in late
2002. In addition, ISP #1 significantly
increased its service levels for the three months ended September 30, 2003, as
compared to the three months ended September 30, 2002. Offsetting the above
increases, revenue from WorldCom decreased significantly due to a 2003
settlement agreement, as discussed further under Liquidity and
Capital Resources. Dial-Up revenues contribution to Communications revenue
rose from 43% in the third quarter of 2002 to 56% in the third quarter of 2003.

As discussed above under Liquidity and Capital Resources, on September 30,
2003, ICG entered into the Qwest Agreement. Approximately $24.6 million of
Qwest Dial-Up Services Revenue was included in Dial-Up revenue for

38



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##### Table of Contents



the three
months ended September 30, 2003. The Qwest Agreement calls for substantially
all of the Qwest Dial-Up Services to be disconnected from ICGs network by
December 31, 2003. Deferred revenue as of September 30, 2003 included
approximately $6.4 million for the provision of Qwest Dial-Up Services between
October 1, 2003 and December 31, 2003. Future revenue from the Qwest Dial-Up
Services is expected to be eliminated by December 31, 2003, pursuant to the
Qwest Agreement.

In addition, during the third quarter of 2003, ISP #1, which accounted for 9% of
Communications revenue in the three months ended September 30, 2003, renegotiated its contract, as described
under Liquidity and Capital Resources.
Management anticipates that the renegotiation of contract terms will result in an approximately 30% reduction in revenue earned from ISP #1 in the future.

Point-to-Point Broadband

Point-to-Point Broadband revenue is generated primarily from service provided
to IXCs and end-user business customers. This service provides dedicated
bandwidth and offers DS1 to OC-192 capacity to connect: (i) long-haul carriers
to local markets, large companies and other long-haul carrier facilities; and
(ii) large companies to their long distance carrier facilities and other
facilities.

Point-to-Point Broadband revenue decreased 14% from $23.3 million in the third
quarter of 2002 to $20.1 million in the third quarter of 2003. The decrease in
Point-to-Point Broadband revenue was comprised of decreases in special access,
switched access and SS7 revenues of 11%, 74% and 3%, respectively. Special
access, switched access and SS7 revenue represented 94%, 1% and 5%,
respectively of total Point-to-Point Broadband revenue in the third quarter of
2003. Special access revenue decreased primarily due to churn related to IXC
customers reducing network capacity and a loss of end-users as a result of the
economic downturn. Switched access and SS7 revenues decreased primarily due to
the loss of customers.

Point-to-Point Broadband revenues contribution to Communications revenue
increased from 22% in the third quarter of 2002 to 23% in the third quarter of
2003.

Corporate Services

Corporate Services revenue includes: (i) local enhanced telephony (Voice);
(ii) DIA provided to businesses over ICGs major metropolitan fiber optic
networks or lines leased from the ILECs; and (iii) other business services.
Other business services include carrier access billing service (CABS), which
is generated from the origination and termination of switched access traffic.

Corporate Services revenue decreased 30% from $17.9 million in the third
quarter of 2002 to $12.5 million in the third quarter of 2003, due primarily to
a $1.3 million, or 14%, decrease in monthly recurring revenue. The decrease in
monthly recurring revenue was due to an 3% decrease in the average billed line
count, which was primarily due to customer churn, and an 11% decrease in the
average monthly revenue per line. In addition, CABS revenue decreased $4.8
million, or 69%, due to rate reductions and reduced call volume.

Corporate Services revenues contribution to Communications revenue declined
from 17% in the third quarter of 2002 to 14% in the third quarter of 2003.

Reciprocal compensation

Reciprocal compensation revenue is primarily earned pursuant to interconnection
agreements with ILECs for the transport and termination of calls originated by
ILEC customers, including Internet bound calls.

Reciprocal compensation revenue decreased 65% from $18.8 million in the third
quarter of 2002 to $6.5 million in the third quarter of 2003. Reciprocal
compensation revenue includes $7.4 million and $1.8 million from customer
settlements in the three months ended September 30, 2002 and 2003,
respectively. Excluding revenue from customer settlements, reciprocal
compensation revenue would have decreased 59%, primarily due to contractual and
regulated rate reductions. The Company anticipates that reciprocal compensation
revenue will continue to decline in the future based on future negotiated and
regulated rate reductions and the expiration of agreements currently in effect
between ICG and the major ILECs.

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##### Table of Contents



Reciprocal compensations contribution to Communications revenue decreased from
18% in the third quarter of 2002 to 7% in the third quarter of 2003.

Operating costs

Operating costs consist primarily of payments to ILECs, other CLECs, and long
distance carriers for the use of network facilities to support local, special,
switched access services, and long distance services as well as internal
network operating costs, right of way fees and other operating costs. Internal
network operating costs include the cost of engineering and operations
personnel dedicated to the operations and maintenance of the network.

Total operating costs decreased 6% from $63.1 million in the third quarter of
2002 to $59.2 in the third quarter of 2003. As a percentage of Communications
revenue, operating costs increased from 60% in the third quarter of 2002 to 67%
in the third quarter of 2003. It is managements estimate that the Variable
Gross Margin on the Qwest Dial-Up Services Revenue ranged from between 70% and
80%.

Operating costs reflected higher external line costs incurred as a result of the
Companys network footprint expansion. The Company initiated the expansion of
its network to new markets in 2003 in order to serve its customers,
particularly a new major ISP customer acquired in late 2002. In addition, in
the third quarter of 2002, the Company reversed its annual bonus accrual
recorded in the first six months of 2002, after the Company determined that the
criteria for paying the annual bonus were unlikely to be met. These increases
were offset by a decrease in other personnel expenses due to a
reduction in headcount in the third quarter of 2003, as compared to the third
quarter of 2002, which occurred as a result of a reduction in force initiated
by the Company in the second quarter of 2003. In addition, network operations
expenses decreased due primarily to the consolidation and closure of switch
sites and reduction in repairs and maintenance expenses.

Selling, general and administrative expenses (SG&A)

SG&A expenses increased 50% from $16.1 million in the three months ended
September 30, 2002 to $24.1 million in the three months ended September 30,
2003. SG&A expenses represented 15% and 28% of Communications revenue in the
first nine months of 2002 and 2003, respectively.

SG&A expenses for the three months ended September 30, 2002 are shown net of
approximately $6 million that was recorded in the third quarter
of 2002 to reverse the annual bonus accrual recorded in the first six
months of 2002. The Company reversed the annual bonus accrual after management
determined that the criteria for paying the annual bonus were unlikely to be
met.

The Company initiated and completed a reduction in force in the second quarter
of 2003. The reduction in force resulted in a 19% reduction in average
headcount in the third quarter of 2003, as compared to the third quarter of
2002. As a result, personnel expenses, excluding severance and bonus expenses,
decreased 14% in the third quarter of 2003, as compared to the third quarter of
2002.

Other significant fluctuations in SG&A expenses for the third quarter of 2003,
as compared to the third quarter of 2002, were as follows:



| |  | Business taxes decreased due primarily to lower
assessed valuations and revised estimates calculated in the third quarter of 2003.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------



| |  | Professional fees increased due primarily to agency recruiting fees incurred to recruit marketing and sales professionals,
accounting and legal fees incurred to comply with the provisions of the Sarbanes-Oxley Act of 2002, and legal and
investment banker fees incurred to assist the Company with contract negotiations.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Severance expenses increased due primarily to the Companys announcement on September 30, 2003, that its current CEO,
Randall E. Curran, would be leaving the Company.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

40



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##### Table of Contents



Depreciation and amortization

The Reorganized Companys depreciation and amortization expense was $11.1
million in the third quarter of 2003. The average remaining useful life of
property and equipment in service is approximately 6 years.

The Predecessor Companys depreciation and amortization expense was $21.4
million in the third quarter of 2002. Pursuant to the adoption of Fresh Start
in October 2002, the Company wrote down the book value of its property and
equipment by $392 million, or 63%, and wrote off the $126 million balance of
accumulated depreciation. The total Fresh Start value of the long-lived assets
was allocated pro rata to the individual asset categories based on recent asset
appraisals. The adjusted property and equipment values are being depreciated
over the remaining useful lives of the assets.

Other operating income, net

Other
operating expense (income), net, included a net loss (gain) on disposals of
long-lived assets of ($0.5) million and $2.7 million in the third quarter of
2002 and 2003, respectively, as well as $0.1 million of SFAS 143 accretion
expense in the third quarter of 2003.

Interest expense

The Reorganized Company incurred $5.5 million in interest expense in the third
quarter of 2003, primarily on the Secured Notes, the Senior Subordinated Term
Loan, other debt and capital leases. Interest expense included $0.6 million of
non-cash amortization of deferred financing costs and debt discount, as well as
$0.7 million of non-cash accreted interest that is included in capital lease
obligations.

The Predecessor Company incurred $15.4 million in interest expense in the third
quarter of 2002, primarily on the Senior Facility, which was refinanced on the
Effective Date, and capital leases. Interest expense included $0.2 million of
non-cash amortization of deferred financing costs, as well as $1.1 million of
non-cash accreted interest that was included in capital lease obligations.
Contractual interest expense of $64 million was not recorded for the three
months ended September 30, 2002, due to the Companys bankruptcy proceedings.

Interest income

The Reorganized Companys interest income of $0.1 million in the third quarter
of 2003 was included in Interest Income in the condensed consolidated statement
of operations.

The Predecessor Companys interest income of $0.4 million in the third quarter
of 2002 was considered earned as a result of the bankruptcy filing, and was
therefore classified as a reorganization item, in accordance with the
requirements of SOP 90-7.

Reorganization expense, net

The Predecessor Company recorded net reorganization expense of $5.7 million in
the third quarter of 2002. Reorganization items consisted of income and
expenses associated with the bankruptcy proceedings that were not directly
attributable to the ongoing operations of the Company. Significant
reorganization items included legal and professional fees and net loss on
negotiated settlements and disposal of long-lived assets.

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NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 2002

Revenue

Predecessor
    
    ReorganizedCompany
    
    CompanyNine Months Ended September 30,2002
    
    2003$
    
    %
    
    $
    
    %$ amounts in thousandsDial-Up
    
    
    135,237
    
    
    
    42
    
    
    
    152,213
    
    
    
    54Point-to-Point Broadband
    
    
    80,261
    
    
    
    25
    
    
    
    65,866
    
    
    
    23Corporate Services
    
    
    55,588
    
    
    
    17
    
    
    
    40,854
    
    
    
    14Reciprocal Compensation
    
    
    49,779
    
    
    
    16
    
    
    
    26,648
    
    
    
    9Communications revenue
    
    
    320,865
    
    
    
    100
    
    
    
    285,581
    
    
    
    100


Communications revenue decreased $35.3 million, or 11%, for the nine months
ended September 30, 2003, as compared to the nine months ended September 30,
2002. The decrease was due primarily to decreases of $14.7 million, $14.4
million and $23.1 million in Corporate Services, Point-to-Point Broadband and
Reciprocal Compensation revenue, respectively, offset by an increase in Dial-Up
revenue of $17.0 million. In addition, to Communications revenue, the Company
had $75.8 million of Early termination revenue in the nine months ended
September 30, 2003. This amount was comprised of the Qwest Early Termination
revenue, which was earned in consideration of the early termination of the
Qwest Dial-Up Services agreements.

Dial-Up

Dial-Up revenue increased 13% from $135.2 million in the nine months ended
September 30, 2002, to $152.2 million in the nine months ended September 30,
2003. Dial-Up revenue increased due primarily to the acquisition of a new
customer, ISP #2, in late 2002. In addition,
ISP #1 significantly increased its service levels for the nine
months ended September 30, 2003, as compared to the nine months ended September
30, 2002. Offsetting the above increases, revenue from WorldCom decreased
significantly due to a 2003 settlement agreement, as discussed
further under Liquidity and Capital Resources. Dial-Up revenues contribution
to Communications revenue rose from 42% in the first nine months of 2002 to 54%
in first nine months of 2003.

As discussed above in the Liquidity and Capital Resourcessection, on September
30, 2003, ICG entered into the Qwest Agreement. Approximately $73.9 million of
Qwest Dial-Up Services Revenue was included in Dial-Up revenue for the nine
months ended September 30, 2003. The Qwest Agreement calls for substantially
all of the Qwest Dial-Up Services to be disconnected
from ICGs network by December 31, 2003. Deferred revenue as of September 30,
2003 included approximately $6.4 million for the provision of Qwest Dial-Up
Services between October 1, 2003 and December 31, 2003. Future revenue from
the Qwest Dial-Up Services is expected to be eliminated by December 31, 2003,
pursuant to the Qwest Agreement.

In
addition, during the third quarter of 2003, ISP #1, which accounted
for 9% of Communications revenue in the nine months ended September
30, 2003, renegotiated its contract, as described under Liquidity and
Capital Resources. Management anticipates that the renegotiation
of contract terms will result in an approximately 30% reduction in
revenue earned from ISP #1 in the future.

Point-to-Point Broadband

Point-to-Point Broadband revenue decreased 18% from $80.3 million in the first
nine months of 2002 to $65.9 million in the first nine months of 2003. The
decrease in Point-to-Point Broadband revenue was comprised of decreases in
special access, switched access and SS7 revenues of 16%, 35% and 40%,
respectively. Special access, switched access and SS7 revenue represented 92%,
4% and 4%, respectively of total Point-to-Point Broadband revenue in the first
nine months of 2003. Special access revenue decreased primarily due to churn
related to IXC customers reducing network capacity and a loss of end-users as a
result of the economic downturn. Switched access and SS7 revenues decreased
primarily due to the loss of customers.

42



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##### Table of Contents



Point-to-Point Broadband revenues contribution to Communications revenue
declined from 25% in the first nine months of 2002 to 23% in the first nine
months of 2003.

Corporate Services

Corporate Services revenue decreased 27% from $55.6 million in the first nine
months of 2002 to $40.9 million in the first nine months of 2003, due primarily
to a $7.2 million, or 22%, decrease in monthly recurring revenue. The decrease
in monthly recurring revenue was due to a 12% decrease in the average billed
line count, which was primarily due to customer churn, and a 12% decrease in
the average monthly revenue per line. In addition, CABS revenue decreased $8.9
million, or 51%, due to rate reductions and reduced call volume.

Corporate Services revenues contribution to Communications revenue declined
from 17% in the first nine months of 2002 to 14% in the first nine months of
2003.

Reciprocal compensation

Reciprocal compensation revenue decreased 46% from $49.8 million in the first
nine months of 2002 to $26.6 million in the first nine months of 2003.
Reciprocal compensation revenue includes $12.3 million and $4.6 million from
customer settlements in the nine months ended September 30, 2002 and 2003,
respectively. Excluding revenue from customer settlements, reciprocal
compensation revenue would have decreased 41%, primarily due to contractual and
regulated rate reductions. The Company anticipates that reciprocal
compensation revenue will continue to decline in the future based on future
negotiated and regulated rate reductions and the expiration of agreements
currently in effect between ICG and the major ILECs.

Reciprocal compensations contribution to Communications revenue decreased from
16% in the first nine months of 2002 to 9% in the first nine months of 2003.

Operating
costs

Total operating costs decreased 5% from $191.3 million in the first nine months
of 2002 to $181.7 million in the first nine months of 2003. As a percentage of
Communications revenue, operating costs increased from 59% in the first nine
months of 2002 to 64% in the first nine months of 2003. It is managements
estimate that the Variable Gross Margin on the Qwest Dial-Up Services Revenue
ranged from between 70% and 80%.

Operating
costs reflected a decrease in personnel and network operations
expenses, which were offset by higher external line costs incurred as a result
of the Companys network footprint expansion. The Company initiated the
expansion of its network to new markets in 2003 in order to serve its
customers, particularly a new major ISP customer acquired in late 2002.
Personnel expenses decreased due to a reduction in headcount in the
first nine months of 2003, as compared to the first nine months of 2002, which
occurred as a result of two separate reductions in force initiated by the
Company in the second quarter of 2002 and in the second quarter of 2003.
Network operations expenses decreased due primarily to the consolidation and
closure of switch sites and reduction in repairs and maintenance expenses.

Selling, general and administrative expenses (SG&A)

SG&A expenses increased 2% from $67.7 million in the first nine months of 2002
to $68.9 million in the first nine months of 2003. SG&A expenses represented
21% and 24% of Communications revenue in the first nine months of 2002 and
2003, respectively.

The Company initiated and completed two separate reductions in force in the
second quarter of 2002 and in the second quarter of 2003. The reductions in
force resulted in a 17% reduction in average headcount in the first nine months
of 2003, as compared to the first nine months of 2002. As a result, personnel
expenses, excluding severance expense, decreased 13% in the first nine months
of 2003, as compared to the first nine months of 2002.

43



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Other significant fluctuations in SG&A expenses for the nine months ended
September 30, 2003, as compared to the nine months ended September 30, 2002,
were as follows:



| |  | Business taxes decreased due primarily to lower
assessed valuations and revised estimates calculated in the third quarter of 2003.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------



| |  | The provision for doubtful accounts in the first nine months of 2003 decreased to $1.1 million, from $4.0 million in the
first nine months of 2002.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Professional fees increased due primarily to agency recruiting fees incurred to recruit marketing and sales professionals,
accounting and legal fees incurred to comply with the provisions of the Sarbanes-Oxley Act of 2002, and legal and
investment banker fees incurred to assist the Company with contract negotiations.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Severance expenses increased due primarily to the Companys announcement on September 30, 2003, that its current CEO,
Randall E. Curran, would be leaving the Company. In addition, severance expenses incurred in connection with the 2003
reduction in force are included in SG&A. In 2002, severance expenses associated with the 2002 reduction in force were
included in reorganization expenses in the accompanying statements of operations.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Software maintenance expenses decreased due primarily to the expiration of a significant software maintenance agreement and
its replacement with less expensive maintenance agreements.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Depreciation and
amortization

The Reorganized Companys depreciation and amortization expense was $31.2
million in the first nine months of 2003. The average remaining useful life of
property and equipment in service is approximately 6 years.

The Predecessor Companys depreciation and amortization expense was $66.4
million in the first nine months of 2002. Pursuant to the adoption of Fresh
Start in October 2002, the Company wrote down the book value of its property
and equipment by $392 million, or 63%, and wrote off the $126 million balance
of accumulated depreciation. The total Fresh Start value of the long-lived
assets was allocated pro rata to the individual asset categories based on
recent asset appraisals. The adjusted property and equipment values are being
depreciated over the remaining useful lives of the assets.

Other operating expense (income), net

Other
operating expense (income), net, included a net loss (gain) on disposals of
long-lived assets of ($0.7) million and $2.5 million in the first nine months
of 2002 and 2003, respectively, as well as $0.3 million of SFAS 143 accretion
expense in the first nine months of 2003 and provision for impairment of
long-lived assets of $0.7 million in the first nine months of 2002.

Interest expense

The Reorganized Company incurred $18.3 million in interest expense in the first
nine months of 2003, primarily on the Secured Notes, the Senior Subordinated
Term Loan, other debt and capital leases. Interest expense included $1.8
million of non-cash amortization of deferred financing costs and debt discount,
as well as $2.5 million of non-cash accreted interest that is included in
capital lease obligations.

The Predecessor Company incurred $15.4 million in interest expense in the first
nine months of 2002, primarily on the Senior Facility, which was refinanced on
the Effective Date, and capital leases. Interest expense included $0.5 million
of non-cash amortization of deferred financing costs, as well as $2.9 million
of non-cash accreted interest that was included in capital lease obligations.
Contractual interest expense of $190 million was not recorded for the nine
months ended September 30, 2002, due to the Companys bankruptcy proceedings.

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Interest income

The Reorganized Companys interest income of $0.6 million in the first nine
months of 2003 was included in Interest Income in the condensed consolidated
statement of operations.

The Predecessor Companys interest income of $1.4 million in the first nine
months of 2002 was considered earned as a result of the bankruptcy filing, and
was therefore classified as a reorganization item, in accordance with the
requirements of SOP 90-7.

Reorganization expense, net

The Predecessor Company recorded net reorganization expense of $34.4 million in
the first nine months of 2002. The largest component of net reorganization
expense was contract termination expenses, which amounted to $23.4 million.
Other significant reorganization items included severance and employee
retention costs, legal and professional fees, switch site closure costs and net
gain on negotiated settlements and disposal of long-lived assets.
Reorganization items consisted of income and expenses associated with the
bankruptcy proceedings that were not directly attributable to the ongoing
operations of the Company.

Other income (expense), net

Other income, net of $1.8 million for the nine months ended September 30, 2003
was comprised primarily of $1.3 million related to a withholding tax refund due
from the Internal Revenue Service.

NEW ACCOUNTING STANDARDS

Effective January 1, 2003, ICG adopted SFAS No. 143, Accounting for Asset
Retirement Obligations. The statement requires that a liability for the fair
value of an asset retirement obligation be recognized in the period in which it
is incurred, with the offsetting associated asset retirement cost capitalized
as part of the carrying amount of the long-lived asset. The asset retirement
cost is subsequently allocated to expense using a systematic and rational
method over the useful life of the related asset. Changes in the asset
retirement obligation resulting from the passage of time are recognized as an
increase in the carrying amount of the liability and as accretion expense. The
adoption of SFAS 143 resulted in the establishment of asset retirement
obligations of $2.5 million, which are included in other long-term liabilities
in the accompanying balance sheet, and an increase to net property and
equipment of $2.5 million. Accretion expense of $0.1 million and $0.3 million
for the three and nine months ended September 30, 2003,
respectively, was included in other
operating expense (income), net, in the accompanying condensed
consolidated statements of operations.

In July 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. This Statement addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force Issue No. 94-
3, Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring). This Statement requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability
is incurred, not at the date of an entitys commitment to an exit plan, as was
required under Issue 94-3. Examples of costs covered by the standard include
lease termination costs and certain employee severance costs that are
associated with a restructuring, discontinued operation, plant closing, or
other exit or disposal activity. This Statement also establishes that fair
value is the objective for initial measurement of the liability. The
provisions of this Statement are effective for exit or disposal activities that
are initiated after December 31, 2002.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As of September 30, 2003, the Company was subject to market risks arising from
changes in interest rates. The Companys primary interest rate exposure
resulted from changes in LIBOR or the prime rate, which were used to determine
the interest rate applicable to the Secured Notes outstanding principal
balance. The weighted average interest rate applicable to the Secured Notes
outstanding principal balance at September 30, 2003, was 7.5%.

A hypothetical
change in annual interest rate of 1% per annum applied to the Secured Notes
outstanding principal balance on September 30, 2003, would have resulted in
additional interest expense of $0.6 million.

As noted under Item 2, Managements Discussion and Analysis of Financial
Condition and Results of Operations, the Company terminated the Secured Notes
in October 2003. As a result, the Company no longer has any interest rate risk
relating to its remaining outstanding debt.

The Company does not, in the normal course of business, use derivative
financial instruments for trading or speculative purposes.







ITEM 4. CONTROLS AND PROCEDURES



|(a) |  | Disclosure Controls and Procedures. The Companys management, with the
participation of the Companys Chief Executive Officer and Chief Financial
Officer, has evaluated the effectiveness of the Companys disclosure
controls and procedures (as such term is defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the
Exchange Act)) as of the end of the period covered by this report.
Based on such evaluation, the Companys Chief Executive Officer and Chief
Financial Officer have concluded that, as of the end of such period, the
Companys disclosure controls and procedures are effective in recording,
processing, summarizing and reporting, on a timely basis, information
required to be disclosed by the Company in the reports that it files or
submits under the Exchange Act.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(b) |  | Internal Control Over Financial Reporting. There have not been any
changes in the Companys internal control over financial reporting (as
such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act) during the fiscal quarter to which this report relates that have
materially affected, or are reasonably likely to materially affect, the
Companys internal control over financial reporting.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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PART II  OTHER INFORMATION







ITEM 1. LEGAL PROCEEDINGS

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

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







ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



| | (A) |  | EXHIBITS
| | --- |  | --------

31.1
    
    Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer.31.2
    
    Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer.32.1
    
    Section 1350 Certifications.




| | (B) |  | REPORTS ON FORM 8-K
| | --- |  | -------------------



| |  |  | None.
| |  |  | -----

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SIGNATURES

Pursuant to the requirements 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 November 14, 2003.

ICG
COMMUNICATIONS, INC.BY:Date:
    
    November 14, 2003
    
    /s/ Richard E. Fish, Jr.Richard E. Fish, Jr.Executive Vice President and Chief Financial Officer(On behalf of the Company and as PrincipalFinancial Officer)Date:
    
    November 14, 2003
    
    /s/ John V. ColganJohn V. ColganSenior Vice President and Controller(On behalf of the Company and as PrincipalAccounting Officer)


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EXHIBIT INDEX

31.1
    
    Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer.31.2
    
    Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer.32.1
    
    Section 1350 Certifications.


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