What does it mean when ATC says "altitude indicates"? I've noticed that ATC sometimes calls out traffic (a traffic advisory?) to aircraft using the "altitude indicates" phraseology, and sometimes a specific altitude is given without the phrase "altitude indicates".

Is there a specific reason for when they use one over the other?
"Altitude indicates" means that the aircraft has a Mode C transponder but it isn't receiving radar service, i.e. it's VFR and not on flight following. In other words, the transponder is reporting an altitude, but because the aircraft isn't in contact with ATC, they can't be sure about its altimeter's integrity or the pilot's intentions.

See the ATC orders 2-1-21:


  For aircraft displaying Mode C, not radar
  identified, issue indicated altitude