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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 March 31, 2002

OR

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

Commission File Number: 000-27743PAC-WEST TELECOMM, INC.(Exact name of registrant as specified in its charter)

|                                                                                            |  |                                                
|------------------------------------------------------------------------------------------- |  | -----------------------------------------------
|California(State or other jurisdiction of
incorporation or organization)                    |  | 68-0383568
(I.R.S. Employer Identification No.)
|                                                                                            |  |                                                
|1776 W. March Lane, Suite 250
Stockton, California
(Address of principal executive offices) |  | 95207
(Zip Code)                               

(209) 926-3300
(Registrants telephone number, including area code)

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 [X] No [   ]

As of April 30, 2002, the Company had an aggregate of 36,148,487 shares of
common stock issued and outstanding.



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TABLE OF CONTENTS



|                          |                                                                                               |                                                                                             |  |  |  |  |  | 
|------------------------- | --------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------- |  |  |  |  |  | 
|PART I                   
|                          | ITEM 1. FINANCIAL STATEMENTS                                                                 
|                          |                                                                                               | Condensed Consolidated Balance Sheets (Unaudited)                                          
|                          |                                                                                               | Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited)
|                          |                                                                                               | Condensed Consolidated Statements of Cash Flows (Unaudited)                                
|                          |                                                                                               | NOTES TO UNAUDITED 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 RISKS                          
|PART II OTHER INFORMATION
|                          | ITEM 1. Legal Proceedings                                                                    
|                          | ITEM 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES               



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##### Table of Contents



PAC-WEST TELECOMM, INC.

Table of Contents

|           |         |    |                                                                                       |                                                                                                                                                 |    |     
|---------- | ------- | -- | ------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------- | -- | ----
|           |         |    |                                                                                       |                                                                                                                                                 |    | PAGE
|           |         |    |                                                                                       |                                                                                                                                                 |    |     
|PART I     |         |    | FINANCIAL INFORMATION                                                                 |                                                                                                                                                 |   
|           |         |    |                                                                                       |                                                                                                                                                 |    |     
|           | Item 1. |    | Financial Statements                                                                  |                                                                                                                                                 |   
|           |         |    |                                                                                       |                                                                                                                                                 |    |     
|           |         |    |                                                                                       | Condensed Consolidated Balance Sheets (Unaudited)  March 31, 2002
and December 31, 2001                                                        |    | 3   
|           |         |    |                                                                                       |                                                                                                                                                 |    |     
|           |         |    |                                                                                       | Condensed Consolidated Statements of Operations and Comprehensive
Income (Loss) (Unaudited)  Three month periods ended
March 31, 2002 and 2001 |    | 4   
|           |         |    |                                                                                       |                                                                                                                                                 |    |     
|           |         |    |                                                                                       | Condensed Consolidated Statements of Cash Flows (Unaudited)  Three
month periods ended March 31, 2002 and 2001                                 |    | 5   
|           |         |    |                                                                                       |                                                                                                                                                 |    |     
|           |         |    |                                                                                       | Notes to Unaudited Condensed Consolidated Financial Statements                                                                                  |    | 6   
|           |         |    |                                                                                       |                                                                                                                                                 |    |     
|           | Item 2. |    | Managements Discussion and Analysis of Financial Condition
and Results of Operations |                                                                                                                                                 | 17
|           |         |    |                                                                                       |                                                                                                                                                 |    |     
|           | Item 3. |    | Quantitative and Qualitative Disclosures About Market Risks                           |                                                                                                                                                 | 25
|           |         |    |                                                                                       |                                                                                                                                                 |    |     
|PART II    |         |    | OTHER INFORMATION                                                                     |                                                                                                                                                 |   
|           |         |    |                                                                                       |                                                                                                                                                 |    |     
|           | Item 1. |    | Legal Proceedings                                                                     |                                                                                                                                                 | 26
|           |         |    |                                                                                       |                                                                                                                                                 |    |     
|           | Item 6. |    | Exhibits and Reports on Form 8-K                                                      |                                                                                                                                                 | 26
|           |         |    |                                                                                       |                                                                                                                                                 |    |     
|SIGNATURES |         | 27

2



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PART I

ITEM 1. FINANCIAL STATEMENTS




PAC-WEST TELECOMM, INC.
Condensed Consolidated Balance Sheets
ASSETS

|                                                |                                                                                                                                               |                                            |             |                |             |                   |             |             |             | 
|----------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ----------- | -------------- | ----------- | ----------------- | ----------- | ----------- | ----------- | 
|                                                |                                                                                                                                               |                                            |             | March 31, 2002 |             | December 31, 2001
|                                                |                                                                                                                                               |                                            |             |                |             |                  
|                                                |                                                                                                                                               |                                            |             | (unaudited)    |             |                   |             |            
|Current Assets:                                 |                                                                                                                                               |                                            |             |                |             |                   |             |            
|                                                | Cash and cash equivalents                                                                                                                     |                                            | $           | 41,345,000     |             |                   | $           | 64,029,000  |            
|                                                | Short-term investments                                                                                                                        |                                            |             | 23,537,000     |             |                   |             | 18,471,000  |            
|                                                | Trade accounts receivable, net of allowances of $2,901,000
at March 31, 2002 and $2,630,000 at December 31, 2001                              |                                            |             | 15,948,000     |             |                   |             | 13,621,000  |            
|                                                | Accounts receivable from related parties                                                                                                      |                                            |             | 25,000         |             |                   |             | 80,000      |            
|                                                | Income taxes receivable                                                                                                                       |                                            |             | 4,734,000      |             |                   |             | 291,000     |            
|                                                | Inventories                                                                                                                                   |                                            |             | 3,087,000      |             |                   |             | 2,939,000   |            
|                                                | Prepaid expenses and other current assets                                                                                                     |                                            |             | 2,544,000      |             |                   |             | 3,134,000   |            
|                                                | Deferred financing costs, net                                                                                                                 |                                            |             | 633,000        |             |                   |             | 785,000     |            
|                                                | Deferred tax assets                                                                                                                           |                                            |             | 2,714,000      |             |                   |             | 4,491,000   |            
|                                                |                                                                                                                                               |                                            |             |                |             |                   |             |            
|                                                |                                                                                                                                               | Total current assets                       |             |                | 94,567,000  |                   |             |             | 107,841,000 | 
|Property and equipment, net                     |                                                                                                                                               |                                            | 198,603,000 |                |             |                   | 201,036,000 |            
|Other assets, net                               |                                                                                                                                               |                                            | 5,145,000   |                |             |                   | 5,860,000   |            
|                                                |                                                                                                                                               |                                            |             |                |             |                   |             |            
|                                                |                                                                                                                                               | Total assets                               |             | $              | 298,315,000 |                   |             | $           | 314,737,000 | 
|                                                |                                                                                                                                               |                                            |             |                |             |                   |             |            
|LIABILITIES AND STOCKHOLDERS EQUITY           
|Current Liabilities:                            |                                                                                                                                               |                                            |             |                |             |                   |             |            
|                                                | Current obligations under capital leases                                                                                                      |                                            | $           | 7,881,000      |             |                   | $           | 7,881,000   |            
|                                                | Borrowings under senior credit facility                                                                                                       |                                            |             | 10,000,000     |             |                   |             | 10,000,000  |            
|                                                | Accounts payable                                                                                                                              |                                            |             | 7,873,000      |             |                   |             | 11,536,000  |            
|                                                | Accrued payroll and related expenses                                                                                                          |                                            |             | 3,490,000      |             |                   |             | 2,884,000   |            
|                                                | Accrued interest on Senior Notes                                                                                                              |                                            |             | 2,909,000      |             |                   |             | 8,438,000   |            
|                                                | Other accrued and other liabilities                                                                                                           |                                            |             | 7,628,000      |             |                   |             | 7,568,000   |            
|                                                | Fiber IRU liability                                                                                                                           |                                            |             | 17,240,000     |             |                   |             | 17,240,000  |            
|                                                |                                                                                                                                               |                                            |             |                |             |                   |             |            
|                                                |                                                                                                                                               | Total current liabilities                  |             |                | 57,021,000  |                   |             |             | 65,547,000  | 
|Senior Notes                                    |                                                                                                                                               |                                            | 129,274,000 |                |             |                   | 150,000,000 |            
|Capital leases, less current portion            |                                                                                                                                               |                                            | 8,220,000   |                |             |                   | 10,192,000  |            
|Deferred revenues, less current portion         |                                                                                                                                               |                                            | 593,000     |                |             |                   | 644,000     |            
|Deferred income taxes                           |                                                                                                                                               |                                            | 10,867,000  |                |             |                   | 3,283,000   |            
|                                                |                                                                                                                                               |                                            |             |                |             |                   |             |            
|                                                |                                                                                                                                               | Total liabilities                          |             |                | 205,975,000 |                   |             |             | 229,666,000 | 
|Commitments and Contingencies (Notes 14 and 17) |                                                                                                                                               |                                            |             |                |             |                   |             |            
|Stockholders Equity:                           |                                                                                                                                               |                                            |             |                |             |                   |             |            
|                                                | Common stock, $.001 par value; 100,000,000 shares
authorized 36,148,487 shares issued and outstanding
at March 31, 2002 and December 31, 2001 |                                            |             | 36,000         |             |                   |             | 36,000      |            
|                                                | Additional paid-in capital                                                                                                                    |                                            |             | 183,550,000    |             |                   |             | 183,550,000 |            
|                                                | Note receivable from stockholder                                                                                                              |                                            |             | (200,000       | )           |                   |             | (200,000    | )          
|                                                | Retained deficit                                                                                                                              |                                            |             | (90,688,000    | )           |                   |             | (98,072,000 | )          
|                                                | Accumulated other comprehensive loss                                                                                                          |                                            |             | (194,000       | )           |                   |             | (53,000     | )          
|                                                | Deferred stock compensation                                                                                                                   |                                            |             | (164,000       | )           |                   |             | (190,000    | )          
|                                                |                                                                                                                                               |                                            |             |                |             |                   |             |            
|                                                |                                                                                                                                               | Total stockholders equity                 |             |                | 92,340,000  |                   |             |             | 85,071,000  | 
|                                                |                                                                                                                                               |                                            |             |                |             |                   |             |            
|                                                |                                                                                                                                               | Total liabilities and stockholders equity |             | $              | 298,315,000 |                   |             | $           | 314,737,000 | 
|                                                |                                                                                                                                               |                                            |             |                |             |                   |             |            

See notes to these condensed consolidated financial statements.

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PAC-WEST TELECOMM, INC.
Condensed Consolidated Statements of Operations
and Comprehensive Income (Loss) (Unaudited)

|                                                                                |                                                         |                                                                        |            |                          |            |                |            |            |            |  
|------------------------------------------------------------------------------- | ------------------------------------------------------- | ---------------------------------------------------------------------- | ---------- | ------------------------ | ---------- | -------------- | ---------- | ---------- | ---------- | -
|                                                                                |                                                         |                                                                        |            | Three Month Period Ended
|                                                                                |                                                         |                                                                        |            |                         
|                                                                                |                                                         |                                                                        |            | March 31, 2002           |            | March 31, 2001
|                                                                                |                                                         |                                                                        |            |                          |            |               
|Revenues                                                                        |                                                         | $                                                                      | 43,092,000 |                          |            | $              | 40,061,000 |           
|                                                                                |                                                         |                                                                        |            |                          |            |                |            |           
|Costs and Expenses:                                                             |                                                         |                                                                        |            |                          |            |                |            |           
|                                                                                | Operating                                               |                                                                        |            | 13,760,000               |            |                |            | 12,616,000 |           
|                                                                                | Selling, general and administrative                     |                                                                        |            | 14,333,000               |            |                |            | 17,219,000 |           
|                                                                                | Depreciation and amortization                           |                                                                        |            | 9,960,000                |            |                |            | 7,276,000  |           
|                                                                                |                                                         |                                                                        |            |                          |            |                |            |           
|                                                                                |                                                         | Total costs and expenses                                               |            |                          | 38,053,000 |                |            |            | 37,111,000 |  
|                                                                                |                                                         |                                                                        |            |                          |            |                |            |           
|                                                                                |                                                         | Income from operations                                                 |            |                          | 5,039,000  |                |            |            | 2,950,000  |  
|Other Expense (Income):                                                         |                                                         |                                                                        |            |                          |            |                |            |           
|                                                                                | Interest expense                                        |                                                                        |            | 5,140,000                |            |                |            | 4,711,000  |           
|                                                                                | Interest income                                         |                                                                        |            | (466,000                 | )          |                |            | (1,316,000 | )         
|                                                                                | Other expense, net                                      |                                                                        |            |                         |            |                |            | 11,000     |           
|                                                                                |                                                         |                                                                        |            |                          |            |                |            |           
|                                                                                |                                                         | Total other expense, net                                               |            |                          | 4,674,000  |                |            |            | 3,406,0000 |  
|                                                                                |                                                         |                                                                        |            |                          |            |                |            |           
|                                                                                |                                                         | Income (loss) before provision for income taxes and
extraordinary item |            |                          | 365,000    |                |            |            | (456,000   | )
|Provision for income taxes                                                      |                                                         |                                                                        | 146,000    |                          |            |                | 29,000     |           
|                                                                                |                                                         |                                                                        |            |                          |            |                |            |           
|                                                                                |                                                         | Income (loss) before extraordinary item                                |            |                          | 219,000    |                |            |            | (485,000   | )
|Extraordinary item  gain on early retirement of debt, net of
tax of $4,777,000 |                                                         |                                                                        | 7,165,000  |                          |            |                |           |           
|                                                                                |                                                         |                                                                        |            |                          |            |                |            |           
|                                                                                |                                                         | Net income (loss) applicable to common stockholders                    |            | $                        | 7,384,000  |                |            | $          | (485,000   | )
|                                                                                |                                                         |                                                                        |            |                          |            |                |            |           
|Income (loss) per share before extraordinary item:                              |                                                         |                                                                        |            |                          |            |                |            |           
|                                                                                |                                                         | Basic                                                                  |            | $                        | 0.01       |                |            | $          | (0.01      | )
|                                                                                |                                                         | Diluted                                                                |            | $                        | 0.01       |                |            | $          | (0.01      | )
|Income per share from extraordinary item:                                       |                                                         |                                                                        |            |                          |            |                |            |           
|                                                                                |                                                         | Basic                                                                  |            | $                        | 0.19       |                |            | $          |           |  
|                                                                                |                                                         | Diluted                                                                |            | $                        | 0.19       |                |            | $          |           |  
|Net income (loss) per share:                                                    |                                                         |                                                                        |            |                          |            |                |            |           
|                                                                                |                                                         | Basic                                                                  |            | $                        | 0.20       |                |            | $          | (0.01      | )
|                                                                                |                                                         | Diluted                                                                |            | $                        | 0.20       |                |            | $          | (0.01      | )
|Basic weighted average shares outstanding                                       |                                                         |                                                                        | 36,148,487 |                          |            |                | 36,001,304 |           
|Diluted weighted average shares outstanding                                     |                                                         |                                                                        | 36,205,308 |                          |            |                | 36,001,304 |           
|Comprehensive income (loss):                                                    |                                                         |                                                                        |            |                          |            |                |            |           
|                                                                                | Net income (loss)                                       |                                                                        | $          | 7,384,000                |            |                | $          | (485,000   | )         
|                                                                                | Change in accumulated other comprehensive income (loss) |                                                                        |            | (141,000                 | )          |                |            | 423,000    |           
|                                                                                |                                                         |                                                                        |            |                          |            |                |            |           
|                                                                                |                                                         | Comprehensive income (loss)                                            |            | $                        | 7,243,000  |                |            | $          | (62,000    | )
|                                                                                |                                                         |                                                                        |            |                          |            |                |            |           

See notes to these condensed consolidated financial statements.

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PAC-WEST TELECOMM, INC.
Condensed Consolidated Statements of Cash Flows (Unaudited)

|                           |                                                                                                                |                                              |                                                             |                                                     |           |                          |             |                |           |            |             |  
|-------------------------- | -------------------------------------------------------------------------------------------------------------- | -------------------------------------------- | ----------------------------------------------------------- | --------------------------------------------------- | --------- | ------------------------ | ----------- | -------------- | --------- | ---------- | ----------- | -
|                           |                                                                                                                |                                              |                                                             |                                                     |           | Three Month Period Ended
|                           |                                                                                                                |                                              |                                                             |                                                     |           |                         
|                           |                                                                                                                |                                              |                                                             |                                                     |           | March 31, 2002           |             | March 31, 2001
|                           |                                                                                                                |                                              |                                                             |                                                     |           |                          |             |               
|Operating Activities:      |                                                                                                                |                                              |                                                             |                                                     |           |                          |             |               
|                           | Income (loss) before extraordinary item                                                                        |                                              | $                                                           | 219,000                                             |           |                          | $           | (485,000       | )        
|                           | Adjustments to reconcile income (loss) before extraordinary
item to net cash provided by operating activities: |                                              |                                                             |                                                     |           |                          |             |                |          
|                           |                                                                                                                | Depreciation and amortization                |                                                             |                                                     | 9,960,000 |                          |             |                | 7,276,000 |           
|                           |                                                                                                                | Amortization of deferred financing costs     |                                                             |                                                     | 226,000   |                          |             |                | 213,000   |           
|                           |                                                                                                                | Amortization of deferred stock compensation  |                                                             |                                                     | 26,000    |                          |             |                | 54,000    |           
|                           |                                                                                                                | Provision for doubtful accounts receivable   |                                                             |                                                     | 761,000   |                          |             |                | 322,000   |           
|                           |                                                                                                                | Loss on disposal of property                 |                                                             |                                                     |          |                          |             |                | 11,000    |           
|                           |                                                                                                                | Deferred income tax provision                |                                                             |                                                     | 4,589,000 |                          |             |                | 29,000    |           
|                           |                                                                                                                | Changes in operating assets and liabilities: |                                                             |                                                     |           |                          |             |                |           |           
|                           |                                                                                                                |                                              | Accounts receivable                                         |                                                     |           | (3,033,000               | )           |                |           | (3,641,000 | )          
|                           |                                                                                                                |                                              | Income taxes receivable                                     |                                                     |           | (4,443,000               | )           |                |           | 1,961,000  |            
|                           |                                                                                                                |                                              | Inventories                                                 |                                                     |           | (148,000                 | )           |                |           | 522,000    |            
|                           |                                                                                                                |                                              | Prepaid expenses and other current assets                   |                                                     |           | 590,000                  |             |                |           | (949,000   | )          
|                           |                                                                                                                |                                              | Other assets                                                |                                                     |           | 55,000                   |             |                |           | 38,000     |            
|                           |                                                                                                                |                                              | Accounts payable, accrued liabilities and other liabilities |                                                     |           | (3,054,000               | )           |                |           | (3,164,000 | )          
|                           |                                                                                                                |                                              | Accrued interest on Senior Notes                            |                                                     |           | (5,292,000               | )           |                |           | (5,062,000 | )          
|                           |                                                                                                                |                                              |                                                             |                                                     |           |                          |             |               
|                           |                                                                                                                |                                              |                                                             | Net cash provided by (used in) operating activities |           |                          | 456,000     |                |           |            | (2,875,000  | )
|                           |                                                                                                                |                                              |                                                             |                                                     |           |                          |             |               
|Investing activities:      |                                                                                                                |                                              |                                                             |                                                     |           |                          |             |               
|                           | Purchase of property and equipment                                                                             |                                              |                                                             | (7,488,000                                          | )         |                          |             | (18,187,000    | )        
|                           | Proceeds from disposal of property and equipment                                                               |                                              |                                                             | 15,000                                              |           |                          |             | 3,000          |          
|                           | Purchase of investments, net                                                                                   |                                              |                                                             | (5,207,000                                          | )         |                          |             | (6,113,000     | )        
|                           | Costs of acquisitions, net of cash received                                                                    |                                              |                                                             |                                                    |           |                          |             | (8,000         | )        
|                           |                                                                                                                |                                              |                                                             |                                                     |           |                          |             |               
|                           |                                                                                                                |                                              |                                                             | Net cash used in investing activities               |           |                          | (12,680,000 | )              |           |            | (24,305,000 | )
|                           |                                                                                                                |                                              |                                                             |                                                     |           |                          |             |               
|Financing activities:      |                                                                                                                |                                              |                                                             |                                                     |           |                          |             |               
|                           | Proceeds from stock option exercises                                                                           |                                              |                                                             |                                                    |           |                          |             | 188,000        |          
|                           | Principal payments on capital leases                                                                           |                                              |                                                             | (1,972,000                                          | )         |                          |             |               |          
|                           | Principal payments on notes payable                                                                            |                                              |                                                             |                                                    |           |                          |             | (11,000        | )        
|                           | Payments for deferred financing costs                                                                          |                                              |                                                             | (200,000                                            | )         |                          |             |               |          
|                           | Redemption of Senior Notes payable                                                                             |                                              |                                                             | (8,288,000                                          | )         |                          |             |               |          
|                           |                                                                                                                |                                              |                                                             |                                                     |           |                          |             |               
|                           |                                                                                                                |                                              |                                                             | Net cash provided by (used in) financing activities |           |                          | (10,460,000 | )              |           |            | 177,000     |  
|                           |                                                                                                                |                                              |                                                             |                                                     |           |                          |             |               
|                           |                                                                                                                |                                              |                                                             | Net decrease in cash and cash equivalents           |           |                          | (22,684,000 | )              |           |            | (27,003,000 | )
|Cash and cash equivalents: |                                                                                                                |                                              |                                                             |                                                     |           |                          |             |               
|                           | Beginning of period                                                                                            |                                              |                                                             | 64,029,000                                          |           |                          |             | 56,675,000     |          
|                           |                                                                                                                |                                              |                                                             |                                                     |           |                          |             |               
|                           | End of period                                                                                                  |                                              | $                                                           | 41,345,000                                          |           |                          | $           | 29,672,000     |          
|                           |                                                                                                                |                                              |                                                             |                                                     |           |                          |             |               

See notes to these condensed consolidated financial statements.

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PAC-WEST TELECOMM, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002

1. Organization and Basis of Presentation:

Pac-West Telecomm, Inc. (the Company) is a provider of integrated
communications services in the western United States. The Companys customers
include Internet service providers (ISPs), small and medium-sized businesses
and enhanced communications service providers, many of which are communications
intensive users.

These accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information. Accordingly, they do not include all of the
information and notes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments,
consisting only of normal recurring adjustments, considered necessary for a
fair presentation for the periods indicated, have been included. Operating
results for the three month period ended March 31, 2002 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2002. The condensed consolidated balance sheet at December 31, 2001 has been
derived from the audited consolidated balance sheet at that date, but does not
include all of the information and notes required by generally accepted
accounting principles for complete financial statements. These unaudited
interim condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and the notes
thereto of Pac-West Telecomm, Inc. (the Company) as of and for the year ended
December 31, 2001 included in the Companys Annual Report on Form 10-K.

These unaudited condensed consolidated financial statements include the
results of operations of Napa Valley Telecom (Napa Telecom), Installnet, Inc.
and two other related companies (collectively referred to as Installnet), BTC
Corp. (Baron Telecommunications) and Communication Specialists, Inc. (CSI)
since their acquisitions in January, February, September and November 2000,
respectively.

2. Extraordinary Item:

During the first quarter of 2002, the Company purchased from holders of
its Senior Notes an aggregate of approximately $21 million principal amount of
Senior Notes at a substantial discount to face value. The difference between
the amount the Company paid to the holders of the Senior Notes and the face
value of the amount retired, net of income taxes of $4.8 million and costs paid
to outside parties to complete the transaction, was recorded as an
extraordinary item  gain on early retirement of debt of $7.2 million.

3. Restructuring Charges:

In August 2001, the Company announced and approved a restructuring plan
which contained certain business initiatives in response to current market
conditions including suspension of its expansion plans in certain states,
exiting of certain lower margin services, including residential resale and
customer owned and maintained equipment (COAM), and undertaking certain cost
reduction initiatives. In addition to restructuring certain product offerings,
this restructuring plan included closing our switch facility in Utah,
consolidation of 6 sales offices, and a workforce reduction of approximately
200 employees. As a result of these restructuring activities, the Company
recorded an $8.8 million restructuring charge in the third quarter of 2001.
Included in the $8.8 million charge was $5.2 million related to the write-off
of leasehold improvements and equipment, primarily in Utah, which could not be
redeployed to other locations; $2.4 million related to future rent payments due
(net of estimated sublease payments) for abandoned premises, primarily in Utah
and San Diego, which will be paid over the respective lease terms through
various dates ending in fiscal year 2010; $0.9 million related to the work
force reduction all of which was paid as of December 31, 2001; and other
charges of $0.3 million primarily related to legal and other professional
services. In order to estimate rent expense related to abandoned premises, the
Company made certain assumptions including; (1) the time period over which the
premises would remain vacant, (2) sublease terms, and (3) estimated sublease
rents. In the case of
6Table of Contents

the Utah switching facility, no sublease income was estimated due to the
specialized nature of this facility. As of March 31, 2002 and December 31,
2001, a remaining restructuring liability of $2.3 million and $2.5 million,
respectively, is included in other accrued liabilities in the accompanying
unaudited condensed consolidated balance sheets.

A summary of the Companys restructuring activities during the first
quarter of 2002 is outlined as follows:

|                                                  |  |                 |           |               |  |               |         |                 |  |   |           | 
|------------------------------------------------- |  | --------------- | --------- | ------------- |  | ------------- | ------- | --------------- |  | - | --------- | 
|                                                  |  | Remaining       |           |               |  |               |         | Remaining      
|                                                  |  | Restructuring   |           |               |  |               |         | Restructuring  
|                                                  |  | Liability as of |           |               |  |               |         | Liability as of
|                                                  |  | Dec. 31, 2001   |           | Cash Payments |  | Mar. 31, 2002
|                                                  |  |                 |           |               |  |              
|Write-off of leasehold
improvements and equipment |  | $               | 171,000   |               |  | $             |        |                 |  | $ | 171,000   | 
|Rent expense for vacated premises                 |  |                 | 2,147,000 |               |  |               | 175,000 |                 |  |   | 1,972,000 | 
|Other charges                                     |  |                 | 142,000   |               |  |               |        |                 |  |   | 142,000   | 
|                                                  |  |                 |           |               |  |               |         |                 |  |   |           | 
|                                                  |  | $               | 2,460,000 |               |  | $             | 175,000 |                 |  | $ | 2,285,000 | 
|                                                  |  |                 |           |               |  |               |         |                 |  |   |           | 

4. Impairment of Long-Lived Assets:

Property and Equipment

In accordance with Statement of Financial Accounting Standards (SFAS) No.
144 (SFAS 144), Accounting for the Impairment or Disposal of Long-Lived
Assets, the Company periodically evaluates the carrying amount of its property
and equipment when events or changes in business circumstances have occurred
which indicate the carrying amount of such assets may not be fully recoverable.
Determination of impairment is based on an estimate of undiscounted future
cash flows resulting from the use of the assets and their eventual disposition.
If the Company determines an asset has been impaired, the impairment charge is
recorded based on a comparison of the net book value of the fixed assets and
the discounted future cash flows resulting from the use of the assets over
their average remaining useful lives.

Goodwill

In accordance with Accounting Principles Board Opinion No. 17 (APB 17),
Intangible Assets, during the third quarter of 2001 the Company evaluated the
carrying amount of its enterprise-level costs in excess of net assets of
acquired businesses (goodwill) as a result of the Companys modified business
plan which was approved and announced during this time. The Companys
evaluation of goodwill was based on an estimate of its fair value using
estimated discounted future cash flows. This evaluation indicated that the
carrying amount of the goodwill was impaired, and as a result, the Company
recorded an impairment charge of $16.8 million in the third quarter of 2001. As
of August 1, 2001, when the Company determined the goodwill was impaired, the
Company discontinued amortizing the related goodwill and wrote-off the
remaining unamortized amount. The Company recorded $0.8 million of goodwill
amortization for the three month period ended March 31, 2001.

5. Revenue Recognition:

In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin No. 101 (SAB 101) Revenue Recognition in Financial
Statements. SAB 101 provides guidance on applying generally accepted
accounting principles to revenue recognition in financial statements, and
became effective for the Company during the fourth quarter of 2000, retroactive
to January 1, 2000. In accordance with SAB 101, the Company recognizes revenue
when there is persuasive evidence of an arrangement, delivery of the product or
performance of the service has occurred, the selling price is fixed or
determinable and collectibility is reasonably assured. The Companys adoption
of SAB 101 changed the timing of when revenue is recognized for non-refundable
up-front payments received for installation services. Historically, these
amounts had been recognized in the period received. Under the revised revenue
recognition policy, these payments, and related costs up to the amount of
revenues, are recognized as revenue and expense ratably over
7Table of Contents

the term of the service contracts, generally 24 to 36 months. Any costs
in excess of recognized revenues are expensed in the current period.

Revenues from the sale of telecommunications products are recognized upon
installation, or if no installation is required, upon shipment. Revenues from
service access agreements are recognized as the service is provided, except for
reciprocal compensation generated by calls placed to ISPs connected through the
Companys network. The right of competitive local exchange carriers (CLECs),
such as the Company, to receive this type of compensation is the subject of
numerous regulatory and legal challenges (see Note 17). Until this issue is
ultimately resolved, the Company will continue to recognize reciprocal
compensation as revenue when received in cash or when collectibility is
reasonably assured.

6. Short-Term Investments:

All investments with an original maturity of greater than three months
from the date of acquisition are accounted for in accordance with Financial
Accounting Standards Board (FASB) Statement No. 115, Accounting for Certain
Investments in Debt and Equity Securities. The Company determines the
appropriate classification at the time of purchase. All investments as of March
31, 2002 and December 31, 2001 were classified as available-for-sale and
appropriately carried at fair value. Realized gains and losses are included in
interest income in the accompanying statements of operations. Differences
between cost and fair value are recorded as accumulated other comprehensive
income (loss) as a separate component of stockholders equity. At March 31,
2002 and December 31, 2001, unrealized losses on investments of $194,000 and
$53,000, respectively, were recorded as accumulated other comprehensive loss in
the accompanying unaudited condensed consolidated balance sheets.

7. Property and Equipment:

Property and equipment includes network and other communications
equipment, equipment under capital leases, office furniture, business software
and computer equipment, vehicles, leasehold improvements and
projects-in-progress. These assets are stated at cost, which includes direct
costs and capitalized interest, and are depreciated once placed in service
using the straight-line method. Capitalized interest of $96,000 and $570,000
was recorded during the three month periods ended March 31, 2002 and 2001,
respectively. Depreciation expense of $9,906,000 and $6,371,000 was recorded
during the three month periods ended March 31, 2002 and 2001, respectively.
Repair and maintenance costs are expensed as incurred.

Property and equipment as of March 31, 2002 and December 31, 2001 consist
of the following:

|                                                |  |           |             |              |  |   |             | 
|----------------------------------------------- |  | --------- | ----------- | ------------ |  | - | ----------- | 
|                                                |  | March 31, |             | December 31,
|                                                |  | 2002      |             | 2001        
|                                                |  |           |             |             
|Network and other communications
equipment      |  | $         | 149,403,000 |              |  | $ | 146,703,000 | 
|Equipment under capital leases                  |  |           | 23,273,000  |              |  |   | 23,273,000  | 
|Office furniture                                |  |           | 2,627,000   |              |  |   | 2,624,000   | 
|Business software and computer equipment        |  |           | 26,279,000  |              |  |   | 25,346,000  | 
|Vehicles                                        |  |           | 1,984,000   |              |  |   | 2,004,000   | 
|Leasehold improvements                          |  |           | 30,720,000  |              |  |   | 30,149,000  | 
|Projects-in-progress                            |  |           | 36,051,000  |              |  |   | 32,775,000  | 
|                                                |  |           |             |              |  |   |             | 
|                                                |  |           | 270,337,000 |              |  |   | 262,874,000 | 
|Less: accumulated depreciation and amortization |  |           | 71,734,000  |              |  |   | 61,838,000  | 
|                                                |  |           |             |              |  |   |             | 
|Property and equipment, net                     |  | $         | 198,603,000 |              |  | $ | 201,036,000 | 
|                                                |  |           |             |              |  |   |             | 

8



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##### Table of Contents



8. Other Assets:

As of March 31, 2002 and December 31, 2001, other assets, net consist of
the following:

|                                                   |  |           |           |              |  |   |           | 
|-------------------------------------------------- |  | --------- | --------- | ------------ |  | - | --------- | 
|                                                   |  | March 31, |           | December 31,
|                                                   |  | 2002      |           | 2001        
|                                                   |  |           |           |             
|Deferred
financing costs                           |  | $         | 3,542,000 |              |  | $ | 4,148,000 | 
|Acquisition
of lease rights                        |  |           | 972,000   |              |  |   | 1,026,000 | 
|Long-term
portion of deferred installation costs   |  |           | 393,000   |              |  |   | 448,000   | 
|Long-term
portion of prepaid expenses and deposits |  |           | 133,000   |              |  |   | 133,000   | 
|Employee
receivable                                |  |           | 105,000   |              |  |   | 105,000   | 
|                                                   |  |           |           |              |  |   |           | 
|                                                   |  | $         | 5,145,000 |              |  | $ | 5,860,000 | 
|                                                   |  |           |           |              |  |   |           | 

Deferred financing costs primarily consist of capitalized amounts for
underwriter fees, professional fees and other expenses related to the issuance
and subsequent registration of the $150,000,000 Senior Notes. Deferred
financing costs are amortized on a straight-line basis (which approximates the
effective interest method) over the estimated 10-year term of the notes, which
term began January 29, 1999. Amortization of deferred financing costs for the
three month periods ended March 31, 2002 and 2001 was $226,000 and $213,000,
respectively, and is included within interest expense in the accompanying
unaudited condensed consolidated statements of operations. During the first
quarter of 2002, the Company purchased from holders of its Senior Notes an
aggregate of approximately $21 million principal amount of Senior Notes at a
substantial discount to face value (see Note 13). In connection with this
transaction, the Company wrote-off a portion of deferred financing costs
associated with the Notes redeemed.

During 1999, the Company purchased lease rights for additional space in
its Los Angeles facility. This amount is included as acquisition of lease
rights in other assets in the accompanying unaudited condensed consolidated
balance sheets and is being amortized on a straight-line basis over the life of
the lease, which is 81 months. Amortization expense for this facility was
$54,000 and $66,000 for the three month periods ended March 31, 2002 and 2001,
respectively, and is included within amortization expense in the accompanying
unaudited condensed consolidated statements of operations.

9. Other Accrued and Other Liabilities:

At March 31, 2002 and December 31, 2001, other accrued liabilities consist
of the following:

|                                        |  |           |           |              |  |   |           | 
|--------------------------------------- |  | --------- | --------- | ------------ |  | - | --------- | 
|                                        |  | March 31, |           | December 31,
|                                        |  | 2002      |           | 2001        
|                                        |  |           |           |             
|Taxes payable, collected from customers |  | $         | 584,000   |              |  | $ | 361,000   | 
|Acquisition holdbacks                   |  |           | 533,000   |              |  |   | 608,000   | 
|Deferred revenue                        |  |           | 1,425,000 |              |  |   | 964,000   | 
|Accrued restructuring charges (Note 3)  |  |           | 2,285,000 |              |  |   | 2,460,000 | 
|Other                                   |  |           | 2,801,000 |              |  |   | 3,175,000 | 
|                                        |  |           |           |              |  |   |           | 
|                                        |  | $         | 7,628,000 |              |  | $ | 7,568,000 | 
|                                        |  |           |           |              |  |   |           | 

10. Income Taxes:

The Companys effective income tax rates for the three month periods ended
March 31, 2002 and 2001 reflect the applicable federal and state statutory
income tax rates. The effective income tax rate for the three month period
ended March 31, 2001 also includes the tax impact of non-deductible
amortization related to our acquisitions. For the three month period ended
March 31, 2002, the Companys effective income tax rate was
9Table of Contents40%. For the three month period ended March 31, 2001, the Companys
effective income tax rate is not meaningful as the Company had a pretax loss
for the period.11. Other Comprehensive Income (Loss):In September 1997, the FASB issued SFAS No. 130 (SFAS 130), Reporting
Comprehensive Income. SFAS 130 establishes the disclosure requirements for
comprehensive income (loss) and its components within the financial statements.
For the three month periods ended March 31, 2002 and 2001, there was
$(141,000) and $423,000, respectively, of other comprehensive income (loss)
pertaining to the net unrealized investment gains (losses).12. Other Recent Pronouncements:In June 2001, the FASB issued SFAS No. 141 (SFAS 141), Business
Combinations and SFAS No. 142 (SFAS 142), Goodwill and Intangible Assets.
Major provisions of these statements are as follows: all business combinations
initiated after June 30, 2001 must use the purchase method of accounting; the
pooling of interest method of accounting is prohibited except for transactions
initiated before July 1, 2001; intangible assets acquired in a business
combination must be recorded separately from goodwill if they arise from
contractual or other legal rights or are separable from the acquired entity and
can be sold, transferred, licensed, rented or exchanged, either individually or
as part of a related contract, asset or liability; goodwill and intangible
assets with indefinite lives are not amortized but are tested for impairment at
least annually using a fair value approach, except in certain circumstances,
and whenever there is an impairment indicator; other intangible assets will
continue to be valued and amortized over their estimated lives; in-process
research and development will continue to be written off immediately; all
acquired goodwill must be assigned to reporting units for purposes of
impairment testing and segment reporting; effective January 1, 2002, existing
goodwill will no longer be subject to amortization; goodwill arising between
June 29, 2001 and December 31, 2001 will not be subject to amortization. As
discussed in Note 4, the Company wrote-off its unamortized goodwill in the
third quarter of 2001. Therefore, SFAS 142 has no effect on the Company at this
time.In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (SFAS No. 144). SFAS No. 144
supercedes SFAS No. 121 and requires that one accounting model be used for
long-lived assets to be disposed of by sale, whether previously held and used
or newly acquired and by broadening the presentation of discontinued operations
to include more disposal transactions. SFAS 144 is effective for fiscal
years beginning after December 15, 2001. The adoption of SFAS 144 did not have
a material impact on the Companys financial position or results of operations.13. Long-Term Debt and Capital Lease Obligations:On January 29, 1999, the Company issued $150,000,000 of Senior Notes at
par. The Senior Notes bear interest at 13.5 percent per annum payable in
semiannual installments, with all principal due in full on February 1, 2009.
During the first quarter of 2002, the Company purchased from holders of its
Senior Notes an aggregate of approximately $21 million principal amount of
Senior Notes at a substantial discount to face value. As of March 31, 2002,
the principal amount due on the Senior Notes is $129,274,000.The Company has a three-year senior credit facility expiring June 15, 2002
that provides for maximum borrowings of $40.0 million to finance working
capital, the cost of capital purchases and other corporate transactions. This
facility is secured by substantially all of the Companys assets. Borrowings
under this senior credit facility bear interest, at the Companys option, at
(1) the Base Rate (as defined in our senior credit facility) or (2) the LIBOR
Rate (as defined) plus between 2.25% and 3.5%. In June 2001, the Company
borrowed $10.0 million under the senior credit facility. This amount is
classified in current liabilities in the accompanying unaudited condensed
consolidated balance sheets. As of March 31, 2002, the Companys effective
borrowing rate was 4.28%. Prior to June 2001, there were not any amounts
outstanding under this facility.The Companys senior credit facility and the senior notes indenture
contain financial and other covenants that restrict, among other things, the
ability to incur additional indebtedness, incur liens, pay dividends or make10Table of Contentscertain other restricted payments, consummate certain asset sales, enter
into certain transactions with affiliates, merge or consolidate with any other
person or sell, assign, transfer, lease, convey or otherwise dispose of
substantially all of its assets. As of March 31, 2002, the Company is in
compliance with its financial covenants.In 2001 and 2000, the Company had a lease facility used exclusively for
the acquisition of networking products and services manufactured by Cisco
Systems, Inc. Equipment financed under this facility is leased for a term of
36 months at which time the Company may purchase the equipment at fair market
value. Purchases of networking products under this facility of $23.3 million
have been accounted for as a capital lease. Upon acceptance of the networking
products the Company makes recurring monthly lease payments and begins
depreciating the equipment over a period of three years. Lease payments and
depreciation commenced during the second quarter of 2001. During the three
month period ended March 31, 2002, the Company made principal payments and
recorded depreciation expense of approximately $2.0 million. As of March 31,
2002, the Company has future obligations, excluding interest, of $16.1 million
that will be paid over the remaining term of this lease facility.14. Purchase Commitments:In 1999, the Company began implementing a new enterprise and financial
software system. Total estimated costs for this system were $5 million, of
which approximately $4.8 million has been incurred through March 31, 2002.
Except for expenses related to upgrades and improvements the Company may make
in the future, this system is substantially complete. The majority of the $4.8
million incurred through March 31, 2002 is recorded in business software and
computer equipment.On June 30, 2000, the Company entered into an Indefeasible Right of Use
(IRU) agreement with Qwest Communications to acquire rights of use of dedicated
fiber optics circuits of OC-48 capacity connecting major metropolitan areas in
California. The IRU agreement is for a term of 20 years and includes one
dollar purchase options at the end of the term. The total cost of the IRU is
approximately $23.0 million of which $5.8 million was paid on July 28, 2000.
Effective June 2001, the Company amended the IRU Agreement with Qwest
Communications and extended the payment due date for the balance from June 30,
2001 to May 15, 2002. The purchase price of approximately $23.0 million is
included in projects-in-progress and the balance of $17.2 million is classified
as Fiber IRU liability in current liabilities in the accompanying unaudited
condensed consolidated balance sheets as of March 31, 2002 and December 31,
2001. The Company is currently negotiating a further amendment to the payment
term. The circuits are expected to be placed in use by the middle of fiscal
year 2002.15. Stockholders Equity:Stock OptionsAn aggregate of 5,375,500 shares of common stock have been reserved for
option grants under the Companys 1999 Stock Incentive Plan, the 1998 Griffin
and Bryson Non-Qualified Stock Incentive Plan and the 2000 Napa Valley
Non-Qualified Stock Incentive Plan. During the three month period ended March
31, 2002, options to purchase 79,250 shares of common stock were granted and
options to purchase 136,213 shares of common stock were canceled.11Table of ContentsThe following table summarizes information about the Companys stock
options outstanding as of March 31, 2002:

|                    |  |                     |           |                  |  |          |     |                |  |          |      |          |  |  |           |  |  |   |      | 
|------------------- |  | ------------------- | --------- | ---------------- |  | -------- | --- | -------------- |  | -------- | ---- | -------- |  |  | --------- |  |  | - | ---- | 
|Options Outstanding |  | Options Exercisable
|                    |  |                    
|                    |  |                     |           |                  |  | Weighted |     |                |  |          |      |          |  |  |           |  |  |  
|                    |  |                     |           |                  |  | Average  |     | Weighted       |  | Number   |      | Weighted
|                    |  | Number              |           | Contractual Life |  | Average  |     | Exercisable at |  | Average 
|Range of            |  | Outstanding at      |           | Remaining        |  | Exercise |     | March 31,      |  | Exercise
|Exercise Price      |  | March 31, 2002      |           | (Years)          |  | Price    |     | 2002           |  | Price   
|                    |  |                     |           |                  |  |          |     |                |  |         
|$0.45  0.48        |  |                     | 582,750   |                  |  |          | 4.2 |                |  | $        | 0.48 |          |  |  | 568,750   |  |  | $ | 0.48 | 
|$0.55  35.00       |  |                     | 3,239,632 |                  |  |          | 8.3 |                |  | $        | 3.32 |          |  |  | 932,509   |  |  | $ | 5.43 | 
|                    |  |                     |           |                  |  |          |     |                |  |          |      |          |  |  |           |  |  |   |      | 
|$0.45  35.00       |  |                     | 3,822,382 |                  |  |          | 7.7 |                |  | $        | 2.89 |          |  |  | 1,501,259 |  |  | $ | 3.56 | 
|                    |  |                     |           |                  |  |          |     |                |  |          |      |          |  |  |           |  |  |   |      | 

16. Income (Loss) Per Share:

Income (loss) per share has been calculated under SFAS No. 128 (SFAS 128),
Earnings per Share. SFAS 128 requires companies to compute income (loss) per
share under two methods, basic and diluted. Basic net income (loss) per share
is calculated by dividing net income (loss) by the weighted average shares of
common stock outstanding during the period. Diluted net income (loss) per
share information considers the effect of dilutive securities such as stock
options and other securities convertible into common stock on an if-converted
basis. For the three month period ended March 31, 2001, dilutive securities
were antidilutive, as they decreased the loss for this period. Accordingly,
options to purchase 1,287,515 shares were excluded from the diluted net income
(loss) per share calculation for the three month period ended March 31, 2001.

12



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##### Table of Contents



Basic and diluted net income (loss) per share for the three month periods
ended March 31, 2002 and 2001 has been determined as follows:

|                                                                                             |               |   |                                  |  |               |        |            |  |  |   |      |  | 
|-------------------------------------------------------------------------------------------- | ------------- | - | -------------------------------- |  | ------------- | ------ | ---------- |  |  | - | ---- |  | 
|                                                                                             |               |   | For the Three Month Period Ended
|                                                                                             |               |   | March 31, 2002                  
|                                                                                             |               |   |                                 
|                                                                                             |               |   | Income                           |  | Shares        |        | Per-share 
|                                                                                             |               |   | (Numerator)                      |  | (Denominator) |        | Amount    
|                                                                                             |               |   |                                  |  |               |        |           
|Basic net income per share:                                                                  |               |   |                                  |  |               |        |            |  |  |   |      | 
|Income available to common
stockholders before extraordinary item                            |               | $ | 219,000                          |  |               |        | 36,148,487 |  |  | $ | 0.01 | 
|Extraordinary item  gain on early
retirement of debt, net of tax                            |               |   | 7,165,000                        |  |               |        | 36,148,487 |  |  |   | 0.19 | 
|                                                                                             |               |   |                                  |  |               |        |            |  |  |   |      | 
|Net income available to common
stockholders                                                  |               | $ | 7,384,000                        |  |               |        | 36,148,487 |  |  | $ | 0.20 | 
|                                                                                             |               |   |                                  |  |               |        |            |  |  |   |      | 
|Effect of Dilutive Securities:                                                               |               |   |                                  |  |               |        |            |  |  |   |      | 
|                                                                                             | Stock options |   |                                  |  |               | 56,821 |            |  | 
|                                                                                             |               |   |                                  |  |               |        |            |  |  |   |      | 
|Diluted net income per share:                                                                |               |   |                                  |  |               |        |            |  |  |   |      | 
|Income available to common
stockholders and dilutive stock options
before extraordinary item |               | $ | 219,000                          |  |               |        | 36,205,308 |  |  | $ | 0.01 | 
|Extraordinary item  gain on early
retirement of debt, net of tax                            |               |   | 7,165,000                        |  |               |        | 36,205,308 |  |  |   | 0.19 | 
|                                                                                             |               |   |                                  |  |               |        |            |  |  |   |      | 
|Net income available to common
stockholders and dilutive stock options                       |               | $ | 7,384,000                        |  |               |        | 36,205,308 |  |  | $ | 0.20 | 
|                                                                                             |               |   |                                  |  |               |        |            |  |  |   |      | 

|                                          |  |                                  |          |               |  |           |            |  |  |   |       |  
|----------------------------------------- |  | -------------------------------- | -------- | ------------- |  | --------- | ---------- |  |  | - | ----- | -
|                                          |  | For the Three Month Period Ended
|                                          |  | March 31, 2001                  
|                                          |  |                                 
|                                          |  | Income                           |          | Shares        |  | Per-share
|                                          |  | (Numerator)                      |          | (Denominator) |  | Amount   
|                                          |  |                                  |          |               |  |          
|Basic and dilutive net loss per share:    |  |                                  |          |               |  |           |            |  |  |   |       |  
|Net loss available to common stockholders |  | $                                | (485,000 | )             |  |           | 36,001,304 |  |  | $ | (0.01 | )
|                                          |  |                                  |          |               |  |           |            |  |  |   |       |  

17. Reciprocal Compensation, Call Origination Charges by ILECs, and Legal Proceedings:

The Company has established interconnection agreements with certain
Incumbent Local Exchange Carriers (ILECs). The Telecommunications Act of 1996
requires ILECs to enter into interconnection agreements with CLECs, such as the
Company and other competitors, and requires state Public Utilities Commissions
(PUCs) to arbitrate such agreements if the parties cannot reach agreement.

The interconnection agreements outline, among other items, compensation
arrangements for calls terminating in the other partys switching equipment,
payment terms, and level of services.

13



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##### Table of Contents



Various ILECs have alleged, and are continuing to allege, that calls made
to an ISP are not local calls, and, as a result, compensation for terminating
such calls is not be covered by the interconnection agreements.

The Company is a party to various legal proceedings, including those with
Pacific Bell and Verizon before the California Public Utilities Commission
(CPUC) and those with Nevada Bell before the Public Utilities Commission of
Nevada, relating to reciprocal compensation payment and other interconnection
agreement issues.

In February 1999, the Federal Communications Commission (FCC) issued a
Declaratory Ruling on the issue of reciprocal compensation for calls bound to
ISPs. The FCC ruled that the calls are jurisdictionally interstate calls. The
FCC, however, determined that this issue did not resolve the question of
whether reciprocal compensation is owed. The FCC noted a number of factors that
would allow the state PUCs to leave their decisions requiring the payment of
compensation undisturbed. In March 2000, the Declaratory Ruling was appealed
and, on appeal, was remanded to the FCC.

In February 2000, the CPUC commenced a separate generic proceeding to
develop its policy regarding intercarrier compensation. Similarly, in the
latter part of 2000, the Colorado and Utah Commissions commenced investigations
into intercarrier compensation issues.

On April 27, 2001, the FCC released its Order on Remand regarding
intercarrier compensation for ISP-bound traffic. The FCC asserted exclusive
jurisdiction over ISP-bound traffic and established a new interim intercarrier
compensation regime for ISP-bound traffic with capped rates above a fixed
traffic exchange ratio. Traffic in excess of a ratio of 3:1 (terminating
minutes to originating minutes) is presumed to be ISP-bound traffic, and is to
be compensated at rates that decrease from $.0015 to $.0007, or the applicable
state-approved rate if lower, over three years. Traffic below the 3:1
threshold is to be compensated at the rates in existing and future
interconnection agreements. Traffic above the 3:1 ratio is also subject to a
growth ceiling, such that traffic in excess of the growth ceiling is subject to
bill and keep, an arrangement in which the originating carrier pays no
compensation to the terminating carrier to complete calls. In addition, when a
competitive carrier begins to provide service in a state it has not previously
served, all traffic in excess of the 3:1 ratio is subject to bill-and-keep
arrangements. In order to qualify for this reduction in reciprocal
compensation obligations to CLECs, the ILECs must offer to exchange all traffic
in a given state subject to Section 251 (b) (5) of the Telecommunications Act
of 1996, as well as ISP-bound traffic, at the federal capped rates. It is not
possible to estimate the full impact of the FCC Order at this time because the
federal regime does not alter existing contracts except to the extent that they
incorporate changes of federal law, and because adoption of the federal regime
is within the discretion of the ILEC exchanging traffic with CLECs on a
state-by-state basis. In the event an ILEC determines not to adopt the federal
regime, the ILEC must pay the same rate for ISP bound traffic as for calls
subject to reciprocal compensation. On May 3, 2002, the Federal
District Court for the District of Columbia remanded the FCCs
Order on Remand on the basis that the FCCs legal basis was
incorrect. The Court did not vacate the rules promulgated by the
FCCs Order on Remand.

In the later half of 2001, Verizon, formerly known as GTE, took the
position that it had properly implemented the FCCs Order on Remand, and that
this unilateral action modified the current interconnection agreement between
the Company and Verizon. Accordingly, Verizon withheld payment of portions of
invoices submitted by the Company for calls after June 13, 2001. The Company
disputed this assertion. In August 2001, Pac-West filed a motion with the CPUC
pursuant to the dispute resolution provisions of its interconnection agreement
with Verizon requesting a ruling that Verizons actions violated the agreement.
On September 27, 2001, the administrative law judge issued a ruling in favor
of Pac-West, ordering Verizon to cease such withholding and make all payments
called for under the agreement. Verizon appealed this ruling to the full CPUC.
On January 23, 2002, the full Commission upheld the Ruling of the
Administrative Law Judge in its entirety, and ordered Verizon to pay all
disputed amounts, plus interest, within three business days. On January 28,
2002, Verizon made payment of withheld amounts to the Company of $4.8 million.
Pacific Bell has not implemented the FCC Order on Remand in California, but has
informed the Company that it reserves the right to do so.

The Company cannot predict the effect of the FCCs ruling on existing
state decisions or the outcome of pending appeals of the decision or on
additional cases involving reciprocal compensation. Given the uncertainty
concerning the final outcome of the PUC proceedings, the possibility of future
extended appeals or additional litigation, and the effect of any appeal of the
FCC decision, the Company continues to record the revenue associated with
reciprocal compensation billings to ILECs only when received in cash or when
collection is reasonably assured.

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The initial term of the Companys 1999 interconnection agreement with
Pacific Bell has expired, and it now remains in effect until the replacement
agreement becomes effective as a result of negotiation by the parties or
arbitration of its terms by the CPUC. After lengthy negotiations, on March 29,
2002, Pacific Bell filed with the CPUC an application for arbitration of
unresolved issues concerning the replacement agreement. One of these issues is
the Pacific Bell proposal to assess charges on certain calls originated by its
customers and delivered to the Company for termination to a customer of the
Company. These charges would offset or exceed in many instances the reciprocal
compensation received by the Company for terminating such calls. On April 23,
2002, the Company filed its response to Pacific Bells application, contested
the implementation of such charges, and proposed that the Company be permitted
to impose additional charges on Pacific Bell. The arbitration process has
recently commenced, and it is not possible at this time to determine the
outcome of this proceeding. The CPUC may lower the reciprocal
compensation rates for all carriers exchanging traffic with Pacific
Bell, if the CPUC modifies rates for unbundled network elements
(UNEs).

Similar negotiations with Verizon California concerning its
interconnection agreement with the Company are ongoing, and the Company expects
that a similar CPUC arbitration process will ensue. Verizon has also proposed
the imposition of new handling charges similar to those proposed by Pacific
Bell. The eventual outcome of this expected proceeding also cannot be
determined at this time.

Other Legal Proceedings

On December 6, 2001, a complaint captioned Krim v Pac-West Telecomm, Inc.,
et. al., Civil Action No. 01-CV-11217, was filed in United States District
Court for the Southern District of New York against the Company, and certain
executive officers, and various underwriters in connection with our initial
public offering. The plaintiffs allege undisclosed improper underwriting
practices concerning the allocation of shares of the Companys common stock in
exchange for excessive brokerage commissions or agreements to purchase shares
at higher prices in the aftermarket, in violation of Section 11 of the
Securities Act of 1933. The complaint also includes a claim for securities
fraud under Section 10(b) of the Securities Exchange Act of 1934 against
underwriters only. Substantially similar actions have been filed concerning
the initial public offerings for more than 300 different issuers, and the cases
have been coordinated as In re Initial Public Offering Securities Litigation,
21 MC 92. The complaint against the Company seeks unspecified damages on
behalf of a purported class of purchasers of its common stock. The Company
believes that the plaintiffs claims are without merit and will defend this
lawsuit vigorously. An amended complaint was filed on April 19,
2002.

From time to time, Pac-West Telecomm, Inc. is a party to litigation that
arises in the ordinary course of business. The Company believes that the
resolution of this litigation will not materially harm its business, financial
condition or results of operations.

18. Segment Reporting

The Company has adopted SFAS No. 131 (SFAS 131), Disclosures about
Segments of an Enterprise and Related Information. SFAS 131 establishes
standards in which public companies disclose certain information about
operating segments in the companys financial reports. As an integrated
telecommunications provider, the Company has one reportable operating segment.
While the Companys chief decision-maker monitors the revenue streams of
various services, operations are managed and financial performance is evaluated
based upon the delivery of multiple services over common networks and
facilities. This allows the Company to leverage its costs in an effort to
maximize return. As a result, there are many shared expenses generated by the
various revenue streams. Because management believes that any allocation of
the expenses to multiple revenue streams would be impractical and arbitrary,
management does not currently make such allocations. The chief decision-maker
does, however, monitor revenue streams at a more detailed level than those
depicted in the Companys consolidated financial statements.

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The following tables present consolidated revenues by service type:

|                             |  |                          |            |                |  |   |            | 
|---------------------------- |  | ------------------------ | ---------- | -------------- |  | - | ---------- | 
|                             |  | Three Month Period Ended
|                             |  |                         
|                             |  | March 31, 2002           |            | March 31, 2001
|                             |  |                          |            |               
|Local services               |  | $                        | 36,784,000 |                |  | $ | 30,547,000 | 
|Long distance service        |  |                          | 3,376,000  |                |  |   | 3,636,000  | 
|Dedicated transport services |  |                          | 2,310,000  |                |  |   | 2,347,000  | 
|Product and services         |  |                          | 239,000    |                |  |   | 3,003,000  | 
|Other                        |  |                          | 383,000    |                |  |   | 528,000    | 
|                             |  |                          |            |                |  |   |            | 
|                             |  | $                        | 43,092,000 |                |  | $ | 40,061,000 | 
|                             |  |                          |            |                |  |   |            | 

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

Except for the historical information contained herein, this report
contains forward-looking statements, subject to uncertainties and risks, and as
a result, our actual results may differ materially from those discussed here.
These uncertainties and risks include among others, that our restructuring
plan, which was approved in the third quarter of 2001, is adequate to provide
positive cash flows; our ability to raise sufficient additional capital, if
required, on acceptable terms and on a timely basis; receipt of full and timely
payments from our customers; the successful execution of our expansion
activities into new geographic markets on a timely and cost-effective basis;
the pace at which new competitors enter our existing and planned markets;
competitive responses of the Incumbent Local Exchange Carriers; execution of
interconnection agreements with Incumbent Local Exchange Carriers on terms
satisfactory to us; maintenance of our supply agreements for transmission
facilities; continued acceptance of our services by new and existing customers;
the outcome of legal and regulatory proceedings regarding reciprocal
compensation for Internet-related calls and certain of our product offerings;
the ability to attract and retain talented employees; the effective management
of our working capital including investments, accounts receivables and
inventory; replacements or upgrades of our technology and equipment that
becomes obsolete; prevention of interruption of services from system failures
or power outages; and our ability to successfully access markets, install
switching electronics, and obtain the use of leased fiber transport facilities
and any required governmental authorizations, franchises and permits, all in a
timely manner, at reasonable costs and on satisfactory term and conditions, as
well as regulatory, legislative and judicial developments that could cause
actual results to differ materially from the future results indicated,
expressed, or implied, in such forward-looking statements. These and other
factors are discussed in our Prospectus dated November 3, 1999, and in our
Annual Report on Form 10-K for the year ended December 31, 2001 as filed with
the Securities and Exchange Commission (SEC).

Overview

Pac-West Telecomm, Inc. is a provider of integrated communications
services in the western United States. Our customers include Internet service
providers (ISPs), small and medium-sized businesses and enhanced communications
service providers, many of which are communications intensive users. Our
predecessor, also known as Pac-West Telecomm, Inc., began selling office phone
systems in 1980 and reselling long distance service to small and medium-sized
businesses and residential customers in 1982. Effective September 30, 1996,
our predecessor transferred its telephone division to us. Prior to September
30, 1996, we did not conduct any operations and, since that time, we have
focused our business strategy on operating as a provider of integrated
communications services.

In January 2000, the Company acquired the customer base and certain other
assets of Napa Valley Telecom (Napa Telecom), a switch based, long distance
telecommunications company, which was headquartered in Napa Valley, California.
In February 2000, the Company acquired all of the outstanding stock of
Installnet, Inc. and two related companies (collectively, Installnet), which
was headquartered in Southern California. Installnet was primarily engaged in
the business of selling, installing and maintaining telecommunications
equipment. In September 2000, the Company acquired the customer base and
certain other assets of BTC Corp (Baron Telecommunications), which was
headquartered in Seattle, Washington. Baron Telecommunications provided
telecommunications equipment to small and medium-sized businesses in Seattle
and surrounding areas. Effective November 1, 2000, the Company acquired the
customer base and assets of Communication Specialists, Inc. (CSI), a
telecommunications company located near Salt Lake City, Utah, which also was
primarily in the business of selling and installing telecommunications
equipment.

For the three month periods ended March 31, 2002 and 2001, recognizing
compensation from other communications companies for completing their
customers calls only to the extent such compensation was actually received in
cash or when collectibility was reasonably assured, we had net revenues of
approximately $43.1 million and $40.1 million, respectively, EBITDA (earnings
before interest, net, income taxes, depreciation and amortization, income or
loss on asset dispositions and extraordinary item) of approximately

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$15.0 million and $10.2 million, respectively, and net income (loss) of
$7.4 million (including a $7.2 million extraordinary item  gain on early
retirement of debt) and $(0.5) million, respectively.

As of March 31, 2002, we had 257,606 total DS0 equivalent lines in
service, a 10% increase from lines in service as of March 31, 2001. Total DS0
equivalent lines in service include wholesale and on-network retail DS0 line
equivalents. In response to technology and network design evolution toward
increased data and VoIP standards, in the fourth quarter of 2001 the Company
retroactively adjusted its line counting methodology to adopt industry standard
bandwidth based measurement of lines in DS0 equivalents. The Company has also
segregated small to medium-size lines into on-network and off-network
components as related to the Companys decision to exit a number of off-network
lines of business. For the quarter ended March 31, 2002, our minutes of use
were 7.7 billion, an increase of 17% over the first quarter of 2001.

During the first quarter of 2002, we purchased from holders of our Senior
Notes an aggregate of approximately $21 million principal amount of Senior
Notes at a substantial discount to face value. The difference between the
amount we paid to the holders of our Senior Notes and the face value of the
amount retired, net of income taxes of $4.8 million and costs paid to outside
parties to complete the transaction, was recorded as an extraordinary item -
gain on early retirement of debt of $7.2 million. Although we are currently no
longer in the market seeking to purchase additional Senior Notes, we are
reviewing all of our debt obligations and are considering various alternatives
to continue to reduce such obligations, including, among other things, the
purchase of additional Senior Notes. The manner, volume and timing of any such
purchases, if any, would depend on then current market conditions for our
Senior Notes.

In August 2001, the Company approved and announced a restructuring plan
that contained certain business initiatives designed to respond to unfavorable
market conditions, including the suspension of our expansion plans into Idaho
and New Mexico and the closure of our switch facility in Utah, which was
completed in December 2001. The restructuring plan also provided for a
reduction in workforce and the exit from certain lower margin services,
including residential resale and customer owned and maintained equipment
(COAM).

As a result of implementing this restructuring plan, the Company recorded
an $8.8 million restructuring charge in the third quarter of 2001, of which
$5.2 million was related to the write-off of leasehold improvements and other
equipment, primarily in Utah, which could not be redeployed to other locations.
In connection with the restructuring charge, the Company expensed a total of
$2.4 million related to future rent payments due (net of estimated sublease
payments) for abandoned premises, primarily in Utah and San Diego, which will
be paid over the respective lease terms through various dates ending in fiscal
year 2010. In order to estimate rent expense, the Company made certain
assumptions related to these abandoned premises including: (1) the time period
over which the premises would remain vacant, (2) sublease terms, and (3)
estimated sublease rents. In the case of the Utah switch facility, no sublease
income was estimated due to the specialized nature of this facility. As of
December 31, 2001, the workforce reduction contemplated by the restructuring
plan was complete and all severance payments arising as a result of such
workforce reduction were paid. The cost savings realized in the quarter ended
December 31, 2001 as a result of implementing the restructuring plan exceeded
the Companys target cost savings of $2.0 to $3.0 million per quarter. During
the quarter ended December 31, 2001, the Companys operating and selling,
general and administrative expenses improved $4.4 million from the third
quarter of 2001 and these cost savings were maintained in the first quarter of
2002. We expect to continue to maintain these cost savings, however, no
assurance can be made that implementation of the restructuring plan will
continue to benefit our financial results in the future.

In accordance with Accounting Principles Board Opinion No. 17 (APB 17),
Intangible Assets, during the third quarter of 2001 the Company evaluated the
carrying amount of its enterprise-level costs in excess of net assets of
acquired businesses (goodwill) as a result of the Companys modified business
plan which was approved and announced during this time. The Companys
evaluation of goodwill was based on an estimate of its fair value using
estimated discounted future cash flows. This evaluation indicated that the
carrying amount of the goodwill was impaired, and as a result, the Company
recorded an impairment charge of $16.8 million in the third quarter of 2001. As
of August 1, 2001, when the Company determined the goodwill was impaired, the
Company discontinued amortizing the related goodwill and wrote-off the
remaining unamortized amount. The Company recorded $0.8 million of goodwill
amortization during the three month period ended March 31, 2001.

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Our common stock currently trades on Nasdaq National Market System, which
has certain compliance requirements for continued listing of common stock.
Among other requirements, if the minimum closing bid price per share is less
than $1.00 for a period of 30 consecutive business days, our shares may be
delisted following a 90 day notice period during which the minimum closing bid
price must be $1.00 or above per share for a period of 10 consecutive business
days. The bid price for our common stock has not closed above $1.00 per share
since August 6, 2001. On September 27, 2001, the Nasdaq temporarily suspended
the $1.00 minimum closing bid price requirement. The suspension lasted until
January 2, 2002; at which time the original requirements were reinstated.

In February 2002, we received a letter from Nasdaq notifying us that since
January 2, 2002, our stock price has closed below the minimum closing bid price
per share requirement for continued inclusion in the Nasdaq National Market
System and that we would be provided 90 calendar days, or until May 15, 2002,
to regain compliance with this requirement. We expect that we will receive
written notification that our securities may be delisted.

Before May 15, 2002, the Company will apply for listing on the Nasdaq
SmallCap Market and, if accepted, be afforded an additional 180 calendar days
to regain compliance with the Nasdaqs minimum closing bid price requirement
and, provided that the initial listing requirements for the Nasdaq SmallCap
Market are met within this 180 calendar day period, would permit our common
stock to be listed on such market.

If we are delisted from the Nasdaq National Market System or the Nasdaq
SmallCap Market, there may be a reduction in the liquidity of the market for
our common stock, which may cause a material adverse effect on the price of our
common stock. Delisting could reduce the ability of holders of our common
stock to purchase or sell shares as quickly and as inexpensively as they could
have done in the past. This lack of liquidity would make it more difficult for
us to raise capital in the future. Although we are working to comply with all
continued listing requirements of Nasdaq, there can be no assurance that we
will be able to satisfy such requirements.

Factors Affecting Operations:

Revenues. We derive our revenues from monthly recurring charges, usage
charges, amortization of initial non-recurring charges and telephone equipment
sales and service. Monthly recurring charges include the fees paid by customers
for lines in service and additional features on those lines, as well as
equipment collocation services. Usage charges consist of fees paid by end users
for each call made, fees paid by incumbent local exchange carriers as
reciprocal compensation for completion of their customers calls through
Pac-West, and access charges paid by carriers for long distance traffic
terminated by Pac-West. Initial non-recurring charges are paid by end users,
if applicable, for the initiation of our service. Initial non-recurring charges
include payments received for installation services. In December 1999, the
Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No.
101 (SAB 101) Revenue Recognition in Financial Statements. SAB 101 provides
guidance on applying generally accepted accounting principles to revenue
recognition in financial statements, and became effective for the Company
during the fourth quarter of 2000, retroactive to January 1, 2000. The
Companys adoption of SAB 101 changed the timing of when revenue is recognized
for non-refundable up-front payments received for installation services.
Historically, these amounts had been recognized in the period received. Under
the revised revenue recognition policy, these payments, and related costs up to
the amount of revenues, are recognized as revenue and expense ratably over the
term of the service contracts, generally 24 to 36 months.

A substantial portion of our revenues is derived from reciprocal
compensation paid by incumbent local exchange carriers with which we have
interconnection agreements. For the quarters ended March 31, 2002 and 2001,
recorded reciprocal compensation accounted for approximately 55% and 42%,
respectively, of our revenues. Reciprocal compensation revenue recorded in the
quarter ended March 31, 2002 includes a payment of $4.8 million received from
Verizon discussed below.

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From June through December of 2001, Verizon California withheld certain
reciprocal compensation payments on the basis that the amounts invoiced by the
Company exceeded the amounts permissible under an order of the FCC which
permitted incumbent local exchange carriers to adopt a plan, on a statewide
basis, containing such reduced rates. The Company contested Verizons
withholdings before the California Public Utilities Commission, and on January
23, 2002, the California Public Utilities Commission ordered Verizon to pay all
such withheld amounts plus interest of approximately $4.8 million. While,
until the third quarter of 2001, the incumbent local exchange carriers have
otherwise been paying us the full amount of our reciprocal compensation
billings since the latter half of 1999, some of these payments may be subject
to a reservation of rights to appeal, contest or seek subsequent reimbursement
of amounts previously paid by them for reciprocal compensation.

We expect that reciprocal compensation will continue to represent a
significant portion of our revenues in the future, however, recorded reciprocal
compensation as a percentage of revenues is expected to decline. We are
currently negotiating and implementing new interconnection agreements and the
terms including reciprocal compensation. The per minute reciprocal compensation
rate we receive from Pacific Bell under our current agreement is significantly
lower than it was under our previous agreement. Based on current market
conditions, we expect the per minute reciprocal compensation rate could decline
from historic rates under interconnection agreements in the future. Further,
as discussed in Note 17 to the accompanying unaudited condensed consolidated
financial statements, to the extent that the April 27, 2001 federal regime for
intercarrier compensation for ISP-bound traffic applies to the Company and is
adopted by incumbent local exchange carriers exchanging traffic with the
Company, reciprocal compensation or intercarrier compensation rates will
decline. It is not possible to estimate the impact of the April 27, 2001 FCC
regime at this time because the federal regime does not alter existing
contracts except to the extent that they incorporate changes of federal law,
and because adoption of the federal regime is within the discretion of the
incumbent local exchange carrier exchanging traffic with competitive local
exchange carriers on a state-by-state basis. In addition, the rules are the
subject of petitions for reconsideration before the FCC and appeals to the U.S.
Court of Appeals for the District of Columbia Circuit. In the event an
incumbent local exchange carrier determines not to adopt the federal regime,
the incumbent local exchange carrier must pay the same rate for Internet
service provider-bound traffic as for calls subject to reciprocal compensation.
We cannot predict the impact of the FCCs and the Courts ruling on existing
state decisions, the outcome of pending appeals or future litigation on this
issue.

Operating Costs. Operating costs are comprised primarily of leased
transport charges, usage charges for long distance and intrastate calls and, to
a lesser extent, reciprocal compensation related to calls that originate with a
Pac-West customer and terminate on the network of an incumbent local exchange
carrier or other competitive local exchange carrier. Our leased transport
charges include the lease payments we incur for the transmission facilities
used to connect our customers to our switches and to connect to the incumbent
local exchange carrier and other competitive local exchange carrier networks.
Our strategy of leasing rather than building our own transport facilities
results in our operating costs being a significant component of total costs.

Selling, General and Administrative Expenses. Our selling, general and
administrative expenses include network development, administration and
maintenance costs, selling and marketing, customer service, provisions for
doubtful accounts, information technology, billing, corporate administration
and personnel.

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Quarterly Operating and Statistical Data:

The following table summarizes the results of operations as a percentage
of revenues for the three month periods ended March 31, 2002 and 2001. Revenues
for 2002 include a payment received in connection with previously withheld
reciprocal compensation of $4.8 million. The following data should be read in
conjunction with the unaudited condensed consolidated financial statements and
notes thereto included elsewhere in this report:

|                                                           |  |                                    |       |      |  |  |       |   
|---------------------------------------------------------- |  | ---------------------------------- | ----- | ---- |  |  | ----- | --
|                                                           |  | Three Month Period Ended March 31,
|                                                           |  |                                   
|                                                           |  | 2002                               |       | 2001
|                                                           |  |                                    |       |     
|Consolidated Statements of Operations Data:                |  | (unaudited)                       
|Revenue                                                    |  |                                    | 100.0 | %    |  |  | 100.0 | % 
|Operating costs                                            |  |                                    | 31.9  | %    |  |  | 31.5  | % 
|Selling, general and administrative expenses               |  |                                    | 33.3  | %    |  |  | 43.0  | % 
|Depreciation and amortization expenses                     |  |                                    | 23.1  | %    |  |  | 18.1  | % 
|Income from operations                                     |  |                                    | 11.7  | %    |  |  | 7.4   | % 
|Extraordinary item  gain on early retirement of debt, net |  |                                    | 16.6  | %    |  |  |      |   
|Net income (loss)                                          |  |                                    | 17.1  | %    |  |  | (1.2  | )%

The following table sets forth unaudited statistical data for each of the
specified quarters of 2001 and 2002. The operating and statistical data for any
quarter are not necessarily indicative of results for any future period. Lines
sold to date and lines in service to date for all quarters in the table below
have been adjusted as discussed above in Overview.

|                                                                                                 |  |                           |         |         |  |          |         |         |  |         |         |   |  |   |         |   |  |   |         |  
|------------------------------------------------------------------------------------------------ |  | ------------------------- | ------- | ------- |  | -------- | ------- | ------- |  | ------- | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                                                                                 |  | Quarter Ended (unaudited)
|                                                                                                 |  |                          
|                                                                                                 |  | 2001                      |         | 2002   
|                                                                                                 |  |                           |         |        
|                                                                                                 |  | Mar. 31                   |         | Jun. 30 |  | Sept. 30 |         | Dec. 31 |  | Mar. 31
|                                                                                                 |  |                           |         |         |  |          |         |         |  |        
|Ports equipped                                                                                   |  |                           | 672,000 |         |  |          | 672,000 |         |  |         | 672,000 |   |  |   | 652,800 |   |  |   | 768,000 |  
|Lines sold to date                                                                               |  |                           | 245,061 |         |  |          | 249,368 |         |  |         | 253,434 |   |  |   | 240,053 |   |  |   | 322,939 |  
|Lines in service to date                                                                         |  |                           | 233,839 |         |  |          | 236,193 |         |  |         | 242,451 |   |  |   | 235,244 |   |  |   | 257,606 |  
|Estimated data lines (% of installed lines)                                                      |  |                           | 87      | %       |  |          | 86      | %       |  |         | 85      | % |  |   | 84      | % |  |   | 85      | %
|Lines on switch %                                                                                |  |                           | 93      | %       |  |          | 93      | %       |  |         | 93      | % |  |   | 94      | % |  |   | 96      | %
|Internet service provider and enhanced
communications service provider
customer lines collocated |  |                           | 84      | %       |  |          | 84      | %       |  |         | 83      | % |  |   | 82      | % |  |   | 91      | %
|Quarterly minutes of use switched
(in millions)                                                  |  |                           | 6,583   |         |  |          | 6,290   |         |  |         | 6,436   |   |  |   | 7,286   |   |  |   | 7,714   |  
|Capital expenditures (in thousands)                                                              |  | $                         | 20,149  |         |  | $        | 9,504   |         |  | $       | 5,092   |   |  | $ | 2,406   |   |  | $ | 7,488   |  
|Employees (consolidated)                                                                         |  |                           | 689     |         |  |          | 645     |         |  |         | 428     |   |  |   | 407     |   |  |   | 402     |  

Three Month Period Ended March 31, 2002 Compared to the Three Month Period Ended March 31, 2001:

Consolidated revenues for the three month period ended March 31, 2002
increased $3.0 million to $43.1 million from $40.1 million for the same period
ended in 2001. The increase in revenues was primarily attributed to an
increase of $6.6 million in paid local interconnection revenues, a decrease of
$1.3 million in switched access charges, an increase of $0.2 million and $0.6
million in recurring charges and installation charges billed directly to
wholesale markets and business customers, respectively, a decrease of $0.3
million in local and long distance usage revenues and a decrease of $2.8
million in product and service revenues related to exiting the COAM business.

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From June through December of 2001, Verizon California withheld certain
reciprocal compensation payments on the basis that the amounts invoiced by the
Company exceeded the amounts permissible under an order of the FCC which
permitted incumbent local exchange carriers to adopt a plan, on a statewide
basis, containing such reduced rates. The Company contested Verizons
withholdings before the California Public Utilities Commission, and on January
23, 2002, the California Public Utilities Commission ordered Verizon to pay all
such withheld amounts plus interest of approximately $4.8 million. (See Note
17 to the accompanying unaudited condensed consolidated financial statements.)
This amount was included in revenues when received in the first quarter of
2002. Additionally, while the number of inbound local calls remained fairly
flat, the minutes subject to reciprocal compensation revenues in accordance
with interconnection agreements increased 18%, for the three month period ended
March 31, 2002 over the same period ended 2001. The effect of the increases in
inbound local calls and minutes combined with the payment received from
Verizon in the first quarter of 2002, resulted in a $6.6 million, or 39%,
increase in paid interconnection revenues for the three month period ended
March 31, 2002 over the corresponding period in 2001. Revenues recorded from
switched access charges decreased $1.3 million, or 72%, from the same period
ended in 2001 as a result of delayed payments from some of our customers to
whom we provide this service. As the collectibility of these delayed payments
is not reasonably assured, we will not recognize such service as revenue until
we receive payment.

As a result of a weakening economy largely experienced in our wholesale
markets, particularly effecting our Internet service provider customers, direct
billings to this market only slightly increased (as compared to the rapid
growth we have experienced in the past) during the three month period ended
March 31, 2002 from the same period in 2001 by $0.2 million, or 2%. As a
result of successful efforts to generate new business to offset lost business
due to bankruptcies or service restructurings experienced by our existing
customers, lines in service to this market increased from approximately 200,264
lines at March 31, 2001 to approximately 214,145 lines in service at March 31,
2002, an increase of 7%.

Direct billings to small and medium-sized business customers increased
significantly from March 31, 2001 generating $0.6 million, or 23%, in
additional revenue during the quarter ended March 31, 2002. As of March 31,
2002 lines in service to our retail market increased from 33,575 lines at March
31, 2001 to 43,461 lines at March 31, 2002, an increase of 29%.

Outbound local and long distance revenues, including 800, 888, and 877
numbers and travel card calls, decreased $0.3 million during the three month
period ended March 31, 2002 from the same period ended in 2001. Although total
minutes billed to customers increased between periods, the average rate per
minute charged to customers was lower in the first quarter of 2002 than it was
in the same period ended in 2001 as a result of competitive pricing pressures
experienced in the marketplace. Additionally, as a result of the Companys
efforts to sell local service to the small and medium-sized businesses, we have
experienced a shift in the mix of minutes billed to our customers for local and
long distance calls. However, for the three month periods ended March 31, 2002
and 2001, the percentage of local minutes billed to total minutes billed was
fairly constant at approximately 45% and 44%, respectively.

As a result of comprehensive product reviews intended to identify
opportunities to improve profitability, we decided to exit certain low-margin
businesses such as COAM and residential resale and concentrate our efforts in
developing next generation offerings. This decision to exit the COAM business
resulted in decreased revenues from product and service offerings of $2.8
million, or 92%, in the first quarter of 2002 compared to the same period ended
2001.

Our consolidated operating costs for the three month period ended March
31, 2002 increased $1.2 million to $13.8 million from $12.6 million for the
corresponding period in 2001. The increase in operating costs was primarily
due to an increase in network operations associated with a higher level of
telecommunications activity and geographic coverage.

In August 2001, the Company approved and announced a restructuring plan
that contained certain business initiatives designed to respond to unfavorable
market conditions, including the suspension of our expansion plans into Idaho
and New Mexico and the closure of our switch facility in Utah, which was
completed in December 2001. The restructuring plan also provided for a
reduction in workforce and the exit from certain lower margin services,
including residential resale and COAM equipment described above. The workforce
reduction was substantially complete as of September 30, 2001 with all
remaining severance

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payments made during the fourth quarter of 2001. For additional
information regarding our restructuring plan, please refer to Note 3 to our
accompanying unaudited condensed consolidated financial statements.

Our consolidated selling, general and administrative expenses for the
three month period ended March 31, 2002 decreased $2.9 million to $14.3 million
from $17.2 million for the corresponding period in 2001. In 2000 and 2001, we
incurred significant selling and marketing costs in connection with our
anticipated efforts to expand our operations and establish ourselves in markets
before switches became operational and generated revenues. However, as a
result of normal attrition and the workforce reduction described above, our
headcount as of March 31, 2002 was 402 as compared to 689 as of March 31, 2001.
As expected, the workforce reduction resulted in a selling, general and
administrative savings of approximately $1.0 million per month. In addition,
selling, general and administrative expenses for the quarter ended March 31,
2002 include approximately $0.8 million of provision for doubtful accounts
receivable, an increase of $0.4 million from the same quarter ended 2001.
Selling, general and administrative expenses were 33% and 43% of revenues for
the three month periods ended March 31, 2002 and 2001, respectively.

Our consolidated depreciation and amortization expense for the three month
period ended March 31, 2002 increased $2.7 million to $10.0 million from $7.3
million for the same period in 2001. Depreciation and amortization as a
percentage of revenues increased to 23% for the quarter ended March 31, 2002
from 18% from the same period ended 2001. The increase in depreciation and
amortization expense is primarily due to additional depreciation expense
incurred on purchases of equipment placed in use between periods. During the
twelve month period ended March 31, 2002, including purchases financed under
our capital lease facility, the Company acquired an additional $24.5 million of
property and equipment.

Our consolidated interest expense for the three month periods ended March
31, 2002 and 2001 was $5.1 million and $4.7 million, respectively. Interest
expense over these two periods is primarily related to our Senior Notes issued
on January 29, 1999, including amortization of related deferred financing costs
associated with the offering over a period of ten years. As a result of
purchasing from holders of our Senior Notes an aggregate of approximately $21
million principal amount of Senior Notes during the first quarter of 2002,
further described below, the Company will experience future interest expense
savings of approximately $0.7 million per quarter. Interest expense is net of
amounts capitalized of $0.1 million and $0.6 million for the three months ended
March 31, 2002 and 2001, respectively.

The Companys effective income tax rates reflect the applicable federal
and state statutory income tax rates along with the tax impact of the
non-deductibility of certain acquisition related amortization. For the three
month period ended March 31, 2002, the Companys effective income tax rate was
40%. For the three month period ended March 31, 2001 the Companys effective
income tax rate is not meaningful as the Company had a pretax loss for the
period.

During the first quarter of 2002, we purchased from holders of our Senior
Notes an aggregate of approximately $21 million principal amount of Senior
Notes at a substantial discount to face value. The difference between the
amount we paid to the holders of our Senior Notes and the face value of the
amount retired, net of income taxes of $4.8 million and costs paid to outside
parties to complete the transaction, was recorded as an extraordinary
item - gain on
early retirement of debt of $7.2 million. Although we are currently no longer
in the market seeking to purchase additional Senior Notes, we are reviewing all
of our debt obligations and are considering various alternatives to continue to
reduce such obligations, including, among other things, the purchase of
additional Senior Notes. The manner, volume and timing of any such purchases,
if any, would depend on then current market conditions for our Senior Notes.

Liquidity and Capital Resources:

Net cash provided by (used in) operating activities was $0.5 million for
the three month period ended March 31, 2002 as compared to $(2.9) million for
the same period ended in 2001. One of the primary differences between periods
was attributable to an increase in operating income (excluding depreciation and
amortization) of $4.8 million. Favorable operating income between periods is
primarily the result of restructuring initiatives implemented in the third
quarter of 2001, which are more fully described above, and higher revenues.
Partially offsetting our favorable operating income between periods was $2.0
million of income tax refunds received in the first quarter ended 2001.

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Net cash used in investing activities was $12.7 million for the three
month period ended March 31, 2002 as compared to $24.3 million for the same
period ended in 2001. During the three month period ended March 31, 2002, the
Company invested $7.5 million in new switching and related equipment as
compared to $18.2 million, excluding $2.0 million of equipment being financed
under a capital lease, during the same period ended in 2001. In addition to
favorable capital spending between periods, the Company purchased $0.9 million
less of investments between periods in order to cover financing activities.

Net cash provided by (used in) financing activities was $(10.5) million
for the three month period ended March 31, 2002 as compared to $0.2 million for
the same period ended in 2001. During the first quarter of 2002, we purchased
from holders of our Senior Notes an aggregate of approximately $21 million
principal amount of Senior Notes at a substantial discount to face value.
Total amounts paid to our holders of our Senior Notes for principal and
interest was approximately $8.3 million. The difference between the amount we
paid to the holders of our Senior Notes and the face value of the amount
retired, net of income taxes and costs paid to outside parties to complete the
transaction, was recorded as an extraordinary item  gain on early retirement
of debt in our accompanying unaudited condensed consolidated statements of
operations. Additionally, during the quarter ended March 31, 2002, we made
principal payments on our capital leases of $2.0 million.

The local telecommunications services business is capital intensive. Our
operations have required substantial capital investment for the design,
acquisition, construction and implementation of our network. Capital
expenditures, including amounts financed under capital leases, were $7.5
million for the first three months of 2002, and $37.2 million, including
amounts financed under capital leases, for the year ended December 31, 2001.
In response to a weakening economy, we have undertaken various initiatives
intended to not only maximize our performance during this economic downturn,
but to take advantage of emerging opportunities. Our business plan, as
currently contemplated, anticipates additional capital expenditures of
approximately $22.5 million during the balance of 2002. The actual cost of
these additional capital expenditures will depend on a variety of factors.
Accordingly, our actual capital requirements may exceed, or fall below, the
amounts described above.

Our senior credit facility, which expires June 15, 2002, provides for
maximum borrowings of up to $40.0 million for working capital and other general
corporate purposes, and bears interest, at our option, at: (1) the Base Rate,
as defined in our senior credit facility; or (2) the LIBOR rate, as defined in
our senior credit facility plus between 2.25% and 3.5%. As of March 31, 2002,
there was $10 million outstanding under this facility at a borrowing rate of
approximately 4.28%. Borrowings under our senior credit facility are secured by
substantially all of our assets. The Company is currently reviewing its debt
obligations and is considering various alternatives to reduce its borrowing
costs. The Company is also pursuing replacing its existing senior credit
facility, although no replacement arrangement has been entered into at this
time.

In 2000 and 2001, the Company had a lease facility used exclusively for
the acquisition of networking products and related services manufactured by
Cisco Systems, Inc. The Company purchased approximately $23.3 million of
networking products under this facility, which is being accounted for as a
capital lease. Upon acceptance of the networking products the Company makes
recurring monthly lease payments over a period of three years. Lease payments
commenced during the second quarter of 2001. During the three month period
ended March 31, 2002, the Company made principal payments of approximately $2.0
million. As of March 31, 2002, the Company has future obligations, excluding
interest, of $16.1 million that will be paid over the remaining
term of this
lease facility.

Our principal sources of funds for the balance of 2002 are anticipated to
be from current cash and short-term investment balances, cash flows from
operating activities, and if necessary and available, borrowings under the
senior credit facility. We believe that these funds will provide us with
sufficient liquidity and capital resources for us to fund our business plan for
at least the next twelve months. No assurance can be given, however, that this
will be the case. As currently contemplated, during the balance of 2002 we
expect to fund, among other things, our August 1, 2002 semi-annual interest
payment of approximately $8.7 million, anticipated capital expenditures of
$22.5 million, capital lease payments of $5.9 million, repayment of the $10.0
million senior debt borrowing and all or part of our Fiber IRU obligation of
$17.2 million for which we are negotiating extended payment terms. Although
not currently contemplated, the foregoing statements do not take into account
additional acquisitions, which, if made, would most likely be funded through a

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combination of cash and equity. Depending upon our rate of growth and
profitability, among other things, we may require additional equity or debt
financing to meet our working capital requirements or capital equipment needs.
There can be no assurance that additional financing will be available when
required or, if available, will be on terms satisfactory to us.

Our senior credit facility and the senior notes indenture contain
financial and other covenants that restrict, among other things, our ability to
incur additional indebtedness, incur liens, pay dividends or make certain other
restricted payments, consummate certain asset sales, enter into certain
transactions with affiliates, merge or consolidate with any other person or
sell, assign, transfer, lease, convey or otherwise dispose of substantially all
of our assets. Such limitations could limit corporate and operating
activities, including our ability to respond to market conditions, to provide
for unanticipated capital investments or to take advantage of business
opportunities. As of March 31, 2002, the Company is in compliance with its
financial covenants.

Recent Developments

Our independent auditor, Arthur Andersen LLP, has informed us that on
March 14, 2002, it was indicted on federal obstruction of justice charges
arising from the governments investigation of Enron Corp. We have been
carefully monitoring these developments. In a release, dated March 18, 2002,
the SEC has said that it will continue to accept financial statements audited,
and interim financial statements reviewed by, Arthur Andersen so long as it is
able to make certain representations to us. Our ability to raise capital and
make timely filings with the SEC could be impaired if the SEC ceases accepting
financial statements audited by Arthur Andersen, if Arthur Andersen becomes
unable to make the required representations to us or if, for any other reason,
Arthur Andersen is unable to perform required audit-related services for us.
As a result of this uncertainty, we have initiated a review of other
independent auditors. Although Arthur Andersen currently remains the Companys
independent auditor and has performed the independent auditors review of our
condensed consolidated financial statements for the period ended March 31,
2002, it is highly unlikely that Arthur Andersen will continue to serve as the
Companys independent auditor for the remainder of fiscal year 2002.




ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

The SECs rule related to market risk disclosure requires that we describe
and quantify our potential losses from market risk sensitive instruments
attributable to reasonably possible market changes. Market risk sensitive
instruments include all financial or commodity instruments and other financial
instruments that are sensitive to future changes in interest rates, currency
exchange rates, commodity prices or other market factors. We are not exposed to
market risks from changes in foreign currency exchange rates or commodity
prices. We do not hold derivative financial instruments nor do we hold
securities for trading or speculative purposes. At March 31, 2002, we had
$129.3 million of fixed rate notes outstanding, and consequently we currently
have no risk exposure associated with increasing interest rates on our debt.
In addition, we have a line of credit which may, at our option, have a variable
interest rate tied to LIBOR. As of March 31, 2002, we have drawn $10 million
against our line of credit at a rate of 4.28% based upon LIBOR. Additionally,
we are exposed to changes in interest rates on our investments in cash
equivalents and short-term investments. Substantially all of our investments in
cash equivalents and short-term investments are in money market funds that hold
short-term investment grade commercial paper, treasury bills or other U.S.
government obligations. Currently this reduces our exposure to long-term
interest rate changes. We do not use interest rate derivative instruments to
manage our exposure to interest rate changes. A hypothetical 100 basis point
decline in short-term interest rates would reduce the annualized earnings on
our $64.9 million of cash equivalents and short-term investments at March 31,
2002 by approximately $0.6 million.

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PART II
OTHER INFORMATION




ITEM 1. Legal Proceedings

See Note 17 to the Unaudited Condensed Consolidated Financial Statements
included elsewhere in this Form 10-Q and Managements Discussion and Analysis
of Financial Condition and Results of OperationsFactors Affecting
OperationsRevenues for a description of certain legal proceedings involving
the Company.




ITEM 6. Exhibits and Reports on Form 8-K



|(a) |  | Exhibits
|--- |  | --------

None



|(b) |  | Reports on Form 8-K
|--- |  | -------------------

The Company did not file any reports on Form 8-K during the quarter ended
March 31, 2002.

Note: ITEMS 2, 3, 4 and 5 are not applicable and have been omitted.

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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 May 8, 2002.

| |  |     |  |                                                                                         
| |  | --- |  | ----------------------------------------------------------------------------------------
| |  |     |  | PAC-WEST TELECOMM, INC.                                                                 
| |  |     |  |                                                                                         
| |  |     |  |                                                                                         
| |  | /s/ |  | Wallace W. Griffin                                                                      
| |  |     |  |                                                                                         
| |  |     |  | Wallace W. Griffin
Chairman and Chief Executive Officer                                 
| |  |     |  |                                                                                         
| |  |     |  |                                                                                         
| |  | /s/ |  | H. Ravi Brar                                                                            
| |  |     |  |                                                                                         
| |  |     |  | H. Ravi Brar
Acting Chief Financial Officer
(Principal Financial and Accounting Officer)

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