What does it mean when ATC says "altitude indicates"?
"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