UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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FORM 10-Q

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

For the quarterly period ended September 30, 2003

OR

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

For the transition period from ________to _________

Commission file number    000-27743



Pac-West Telecomm, Inc.



|California                                                     | 68-0383568                             
|-------------------------------------------------------------- | ---------------------------------------
|(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification Number)

1776 W. March Lane, Suite 250
Stockton, California     95207

(209) 926-3300







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 reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [   ]

Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).  YES [  ]  NO [X]

As of October 22, 2003, the Company had an aggregate of 36,514,802 shares of common stock issued and outstanding.









Pac-West Telecomm, Inc.

            Report on  Form 10-Q for the Quarterly Period Ended September 30, 2003
                                   Table Of Contents



|PART I.   FINANCIAL INFORMATION                                                                                                                                           
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                          
|Item 1.   Financial Statements (Unaudited)                                                                                                                                
|                                                                                                                                                                          
|Consolidated Balance Sheets as of September 30, 2003
         and December 31, 2002                                                                                       
|                                                                                                                                                                          
|Consolidated Statements of Operations and Comprehensive
          
         Income (Loss) - Three and  month periods
          
         ended September 30, 2003 and 2002
|                                                                                                                                                                          
|Condensed Consolidated Statements of Cash Flows
          
         for the nine-month periods ended September 30, 2003 and 2002                                          
|                                                                                                                                                                          
|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 Risk                                                                                                      
|                                                                                                                                                                          
|Item 4.   Controls and Procedures                                                                                                                                         
|                                                                                                                                                                          
|PART II.  OTHER INFORMATION                                                                                                                                               
|                                                                                                                                                                          
|Item 1.   Legal Proceedings                                                                                                                                               
|                                                                                                                                                                          
|Item 4.  Submission of Matters to a Vote of Security Holders                                                                                                              
|                                                                                                                                                                          
|Item 6.   Exhibits and Reports on Form 8-K                                                                                                                                
|                                                                                                                                                                          
|Signatures                                                                                                                                                                

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PAC-WEST TELECOMM, INC.

                     Condensed Consolidated Balance Sheets

                                (Unaudited)

`September 30,
                                                               2003        December 31,
                                                           (Unaudited)        2002
                                                           -------------  -------------

                           ASSETS
Current Assets:
   Cash and cash equivalents............................. $  61,312,000  $  28,050,000
   Short-term investments                                            --     29,209,000
   Trade accounts receivable, net of allowances of
      $1,497,000 and $1,660,000, respectively ...........     8,567,000     12,624,000
   Prepaid expenses and other current assets.............     3,850,000      5,433,000
   Deferred tax assets...................................     4,569,000      4,569,000
                                                           -------------  -------------
       Total current assets..............................    78,298,000     79,885,000
Property and equipment, net..............................   130,230,000    159,355,000
Other assets, net........................................     3,843,000      3,776,000
                                                           -------------  -------------
       Total assets...................................... $ 212,371,000  $ 243,016,000
                                                           =============  =============

            LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
   Accounts payable...................................... $   4,796,000  $  10,058,000
   Current obligations under capital leases..............     4,641,000      7,881,000
   Fiber IRU liability...................................            --      4,200,000
   Accrued interest on Senior Notes......................     2,136,000      5,522,000
   Other accrued liabilities ............................    15,341,000     19,649,000
   Deferred revenues.....................................       682,000        755,000
                                                           -------------  -------------
       Total current liabilities.........................    27,596,000     48,065,000
                                                           -------------  -------------
Senior Notes.............................................    95,102,000     95,102,000
Notes payable............................................        60,000         30,000
Capital leases, less current portion.....................       210,000      2,311,000
Deferred revenues, less current portion..................       465,000        527,000
Deferred income taxes....................................     6,998,000      9,745,000
                                                           -------------  -------------
       Total liabilities.................................   130,431,000    155,780,000
                                                           -------------  -------------
Commitments and Contingencies (Note 11)
Stockholders' Equity:
   Common stock, $.001 par value; 100,000,000 shares
       authorized 36,508,677 and 36,444,094 shares issued
       and outstanding, respectively.....................        37,000         36,000
   Additional paid-in capital............................   183,612,000    183,668,000
   Note receivable from stockholder......................            --       (200,000)
   Accumulated deficit...................................  (101,494,000)   (96,026,000)
   Accumulated other comprehensive loss..................      (215,000)      (156,000)
   Deferred stock compensation...........................            --        (86,000)
                                                           -------------  -------------
       Total stockholders' equity........................    81,940,000     87,236,000
                                                           -------------  -------------
       Total liabilities and stockholders' equity........ $ 212,371,000  $ 243,016,000
                                                           =============  =============`

See accompanying notes to unaudited condensed consolidated financial statements.



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PAC-WEST TELECOMM, INC.

               Condensed Consolidated Statements of Operations

                      and Comprehensive Gain (Loss)

                               (Unaudited)

`Three-Month Periods Ended     Nine-Month Periods Ended
                                                            September 30,               September 30,
                                                    --------------------------  --------------------------
                                                        2003          2002          2003          2002
                                                    ------------  ------------  ------------  ------------
Revenues.......................................... $ 30,312,000  $ 34,201,000  $106,550,000  $115,792,000

Costs and Expenses:
    Cost of sales.................................    8,829,000    12,478,000    26,532,000    40,245,000
    Selling, general and administrative...........   15,155,000    14,874,000    44,609,000    45,936,000
    Depreciation and amortization.................    9,862,000     9,815,000    33,913,000    29,392,000
    Restructuring charge..........................           --        21,000       125,000     9,325,000
    Impairment of assets..........................           --            --            --     7,153,000
                                                    ------------  ------------  ------------  ------------
      Total operating expenses....................   33,846,000    37,188,000   105,179,000   132,051,000
                                                    ------------  ------------  ------------  ------------
        Income (loss) from operations.............   (3,534,000)   (2,987,000)    1,371,000   (16,259,000)
                                                    ------------  ------------  ------------  ------------
Other (Income) Expense:
    Interest expense, net.........................    3,149,000     3,708,000     9,541,000    12,383,000
    Gain on repurchase of bonds...................           --   (14,854,000)           --   (26,796,000)
    Other expense.................................       13,000        12,000        30,000        13,000
                                                    ------------  ------------  ------------  ------------
      Total other (income) expense, net...........    3,162,000   (11,134,000)    9,571,000   (14,400,000)
                                                    ------------  ------------  ------------  ------------
      Income (loss) before provision
      (benefit) from income taxes ................   (6,696,000)    8,147,000    (8,200,000)   (1,859,000)
Income tax expense (benefit)......................   (2,382,000)    3,258,000    (2,733,000)     (744,000)
                                                    ------------  ------------  ------------  ------------
      Net income (loss) .......................... $ (4,314,000) $  4,889,000  $ (5,467,000) $ (1,115,000)
                                                    ============  ============  ============  ============

Basic and diluted income (loss) per share......... $      (0.12) $       0.13  $      (0.15) $      (0.03)

Basic weighted average shares outstanding.........   36,491,889    36,398,351    36,464,152    36,276,316

Diluted weighted average shares
    outstanding...................................   36,491,889    36,401,078    36,464,152    36,276,316

Comprehensive income (loss):
    Net income (loss)............................. $ (4,314,000) $  4,889,000  $ (5,467,000) $ (1,115,000)
      Other comprehensive loss....................      (15,000)      (19,000)      (59,000)      (30,000)
                                                    ------------  ------------  ------------  ------------
      Comprehensive income (loss)................. $ (4,329,000) $  4,870,000  $ (5,526,000) $ (1,145,000)
                                                    ============  ============  ============  ============`

See accompanying notes to unaudited condensed consolidated financial statements.



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PAC-WEST TELECOMM, INC.

          Condensed Consolidated Statements of Cash Flows

                         (Unaudited)

`Nine Month Period Ended
                                                                        September 30,
                                                                ----------------------------
                                                                   2003           2002
                                                                -------------  -------------
Operating activities:
    Net loss.................................................. $  (5,467,000) $  (1,115,000)
    Adjustments to reconcile net loss to net cash
      provided by operating activities:
        Depreciation and amortization.........................    33,913,000     29,392,000
        Amortization of deferred financing costs..............       315,000        575,000
        Amortization of deferred stock compensation...........            --         78,000
        Impairment of assets..................................            --      7,153,000
        Non-cash restructuring charges........................            --      3,408,000
        Gain on repurchase of bonds...........................            --    (26,796,000)
        Allowance for doubtful accounts receivable............        50,000      1,596,000
        Deferred income taxes ................................    (2,817,000)      (744,000)
        Loss on disposal of property and equipment............        30,000         14,000
        Other...................................................          --      1,148,000
        Changes in operating assets and liabilities:
            Trade accounts receivable.........................     4,007,000        726,000
            Income taxes receivable.............................          --      7,386,000
            Prepaid expenses and other current assets.........     1,584,000      1,089,000
            Other assets......................................       245,000        835,000
            Accounts payable and other accrued liabilities....   (10,490,000)     4,507,000
            Accrued interest .................................    (3,386,000)    (5,285,000)
                                                                -------------  -------------
        Net cash provided by operating activities.............    17,984,000     23,967,000
                                                                -------------  -------------
Investing activities:
    Purchases of property and equipment.......................    (4,699,000)   (16,518,000)
    Proceeds from disposal of property and equipment..........        43,000        151,000
    Sales (purchases) of short-term investments, net..........    29,150,000     (7,614,000)
                                                                -------------  -------------
        Net cash provided by (used in) investing activities...    24,494,000    (23,981,000)
                                                                -------------  -------------
Financing activities:
    Proceeds (payments) from borrowings under Senior Credit Fa            --    (10,000,000)
    Principal payments on Fiber IRU...........................    (4,200,000)    (8,620,000)
    Net proceeds from notes receivable .......................       237,000             --
    Proceeds from stock option exercises......................        31,000        116,000
    Net principal payments on capital leases..................    (4,494,000)    (5,067,000)
    Payments for deferred financing costs.....................      (790,000)            --
    Repurchase of Senior Notes................................            --    (15,998,000)
                                                                -------------  -------------
        Net cash used in financing activities.................    (9,216,000)   (39,569,000)
                                                                -------------  -------------
        Net increase (decrease) in cash and cash equivalents..    33,262,000    (39,583,000)
Cash and cash equivalents:
    Beginning of period.......................................    28,050,000     64,029,000
                                                                -------------  -------------
    End of period............................................. $  61,312,000  $  24,446,000
                                                                =============  =============
Supplemental Disclosure of Cash Flow Information:
    Cash paid for interest.................................... $  13,228,000  $  19,948,000`

See accompanying notes to unaudited condensed consolidated financial statements.



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PAC-WEST TELECOMM, INC.

        NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

       AS OF AND FOR THE THREE AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2003






PAC-WEST TELECOMM,
INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
AS OF AND FOR THE THREE AND NINE-MONTH PERIODS ENDED SEPTEMBER
30, 2003

The terms "the Company," "Pac-West," "we," "our," "us," and similar terms
used in this Form 10-Q, refer to Pac-West Telecomm, Inc.

1. Organization and Basis of Presentation
2. Description and Summary of Significant Accounting Policies
3. Concentration of Customers and Suppliers
4. Restructuring Charges
5. Long Lived Assets
6. Gain on Repurchase of Bonds
7. Income Taxes
8. Comprehensive Income (Loss)
9. Property and Equipment
10. Long-Term Debt and Capital Lease Obligations:
11. Commitments and Contingencies:
12. Other Recent Pronouncements:
13. Related Party Transactions:
14. Subsequent Events:



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. In this Quarterly Report on Form 10-Q, our use of the words "outlook,"
"expect," "anticipate," "estimate," "forecast," "project," "likely,"
"objective," "plan," "designed," "goal," "target," and similar expressions is
intended to identify forward-looking statements. While these statements
represent our current judgment on what the future may hold, and we believe these
judgments are reasonable, actual results may differ materially due to numerous
important risk factors that are described in our Annual Report on Form 10-K for
the period ended December 31, 2002, as filed with the SEC on March 31, 2003,
which may be revised or supplemented in subsequent reports filed by us with the
SEC.  Such risk factors include, but are not limited to: our substantial
indebtedness; an inability to generate sufficient cash to service our
indebtedness; the declining rate at which reciprocal compensation payments are
determined; regulatory and legal uncertainty with respect to reciprocal
compensation payments received by us; the inability to expand our business as a
result of the unavailability of funds to do so; failure to successfully
implement our restructuring plan; adverse affects on our operations as a result
of the covenants in our senior notes indenture; competition from the ILECs and
other competitors and potential competitors, including those competitors with
lower cost structures.



Overview

Pac-West is a provider of integrated communications
services in the western United States. Our customers include Internet service
providers (ISPs) and enhanced communications service providers, collectively
referred to as service providers (SPs), and small and medium-sized enterprise
(SME) businesses, many of which are communications intensive users.

We built our facilities-based network to capitalize on the
significant growth in Internet usage and in the related demand for local
telephone service by SPs, as well as the increasing demand of SME businesses for
customized and integrated voice and data communications services. We believe the
statewide footprint of our network, which encompasses all of the major
metropolitan areas of California, provides us with a significant competitive
advantage over incumbent local exchange carriers (ILECs) and other competitive
local exchange carriers (CLECs), particularly with regard to SP customers. Our
ubiquitous network within the State of California enables SPs to provide their
business and residential customers with access to Internet, paging and other
data and voice services from almost any point in the state through a local call.
We believe the breadth of our product offerings and the structure of our network
enable us to generate high network utilization and strong gross profit margins.
In addition, by providing a level of customer service that we believe is higher
than that of our competitors, we believe that we differentiate ourselves in the
marketplace.  We also believe that this focus on superior customer service on a
company-wide basis, which we have internally referred to as "Five
Star," will provide us with the ability to sustain high levels of customer
loyalty and allow us to achieve benchmark industry levels of turnover in
customers, or  "churn".

For the three-month periods ended September 30, 2003 and
2002, we had net revenues of approximately $30.3million and $34.2
million, respectively. Operating expenses for the three-month periods ended
September 30, 2003 and 2002 were $33.8 million and $37.2 million. Net income
(loss) for the three-month periods ended September 30, 2003 and 2002 was $(4.3)
million and $4.9 million. Net income for the three-month period ended September
30, 2002 included a gain on repurchase of bonds of $14.9 million.



For the nine-month periods ended September 30, 2003 and 2002,
we had net revenues of approximately $106.6million and $115.8 million.
Included in net revenues for the nine-month period ended September 30, 2003 and
2002 were $5.7 million and $4.8 million of amounts earned by the Company for
services rendered in prior periods but withheld by certain ILECs.  The amounts
collected represented 5.3% and 4.1% of our total revenues for the nine-month
periods ended September 30, 2003 and 2002, respectively. Operating expenses for
the nine-month periods ended September 30, 2003 and 2002 were $105.2 million and
$132.1 million, respectively. Operating expenses for the nine-month period ended
September 30, 2002 include $9.3 million of restructuring charges and $7.2
million of asset impairment charges. Operating expenses for the nine-month
period ended September 30, 2003 were net of $6.1 million of negotiated supplier
credits.  Net loss for the nine-month periods ended September 30, 2003 and 2002
was $5.5 million and $1.1 million, respectively.  Net loss for the nine-month
period ended September 30, 2002 included a gain on repurchase of bonds of $26.8
million.



EBITDA represents earnings before
interest expense, net; income taxes; depreciation and amortization. EBITDA for
the three-month periods ended September 30, 2003 and 2002 was $6.3 million and
$21.7 million.  EBITDA for the nine-month periods ended September 30, 2003 and
2002 was $35.3 million and $39.9 million.  We believe EBITDA is a common measure
used by analysts and investors as well as a means to evaluate our capacity to
meet our service obligations. We use EBITDA as an internal measurement tool and
have also included EBITDA performance goals in its 2003 compensation plans.
Accordingly, we are including EBITDA in our discussion of financial performance
as we believe that its presentation provides useful and relevant information.
The table below reconciles EBITDA to the Company's net cash provided by
operating activities.

`Three-Month Periods Ended     Nine-Month Periods Ended
                                                            September 30,               September 30,
                                                    --------------------------  --------------------------
                                                        2003          2002          2003          2002
                                                    ------------  ------------  ------------  ------------
                                                    (unaudited)   (unaudited)   (unaudited)   (unaudited)
EBITDA............................................ $  6,315,000  $ 21,670,000  $ 35,254,000  $ 39,917,000
Less:
    Net gain on bond repurchase...................           --    14,854,000            --    26,796,000
    Non-cash restructuring charges................           --      (192,000)           --    (3,408,000)
    Impairment of assets..........................           --            --            --    (7,153,000)
    Change in operating assets and liabilities....   (6,839,000)    5,614,000     7,960,000    (3,033,000)
    Interest expense, net.........................    3,149,000     3,708,000     9,541,000    12,383,000
    Current income tax benefit ...................           --      (290,000)       84,000    (7,386,000)
    Allowance for doubtful accounts receivable....           --       (85,000)           --    (1,596,000)
    Amortization of deferred financing costs......     (105,000)     (143,000)     (315,000)     (575,000)
    Amortization of deferred stock compensation...           --       (26,000)           --       (78,000)
                                                    ------------  ------------  ------------  ------------
         Net cash provided by operating activities $ 10,110,000  $ (1,770,000) $ 17,984,000  $ 23,967,000
                                                    ============  ============  ============  ============`





We are California's second largest local business market
competitor based on access lines as of data, as reported by the CPUC during the
second quarter of 2003.  As of September 30, 2003, we had 425,070 total DS-0
(digital signal level of 64,000 bits per second) equivalent lines in service,
referred to as "lines" going forward, an increase of 100,970 or 31.2%
from September 30, 2002.  Total lines include wholesale and on-network retail
line equivalents. We have also segregated small to medium-size business 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 three-month periods
ended September 30, 2003 and 2002 our minutes of use were 11.2 billion and 8.2
billion, respectively, an increase of 3.0 billion, or 36.6%. For the nine-month
periods ended September 30, 2003 and 2002 our minutes of use were 30.6 billion
and 23.6 billion, respectively, an increase of 7.0 billion, or 29.7%.



In 2001 and 2002, in response to a weak economy and increased
competitive pressure resulting from lower than expected demand for
telecommunications services and overcapacity in our industry, we restructured
certain aspects of our operations.  In particular, among other things, we
suspended expansion plans in certain states, exited certain lower margin product
and service markets, closed certain switch facilities and implemented certain
other cost-savings initiatives.   In addition during the second quarter of 2003,
the Company recorded additional restructuring charges of $206,000 resulting from
our vacating lease office space in San Diego, California. We currently occupy
approximately 25% of the lease space, but due to the specialized nature of these
facilities and current economic conditions we no longer anticipate finding a
tenant for the available remaining leased space. The amount of the reserve
recorded is equal to the monthly lease payment on the unoccupied space
multiplied by the remaining months on the lease. In addition, during the three-
month period ended June 30, 2003, the Company reversed $81,000 of previously
recorded restructuring charges relating to professional fees that were
anticipated but never charged to us. As of September 30, 2003, we had a
remaining liability of $501,000 for facilities relating to this restructuring.



On May 28, 2002, our common stock ceased being quoted on the
Nasdaq National Market and began being quoted on the Nasdaq SmallCap Market as a
result of our failure to comply with the Nasdaq's minimum bid price requirement.
To regain compliance with this requirement, the minimum closing bid price of our
stock was required to close at $1.00 or above per share for a period of 10
consecutive business days.  On March 19, 2003, we were notified by Nasdaq that
we had until May 12, 2003, to regain compliance with the minimum bid price
requirement.  On May 19, 2003, we received notification from the Nasdaq Listing
Qualifications Panel that our securities were subject to delisting from the
Nasdaq SmallCap Market. We appealed the decision and requested a hearing with
Listing Qualifications Panel to present our plan to regain compliance with the
minimum bid price requirement.

On or about April 29, 2003, we mailed to our shareholders a
proxy statement, which, among other things, solicited their proxies with respect
to a proposal to amend our articles of incorporation to provide for a reverse
share split. As described in our proxy statement, the reverse share split was
designed to increase the market price of our common shares above $2.00 per
share, which is above the Nasdaq minimum bid requirement of $1.00, in order to
maintain our listing on the Nasdaq Small Cap Market. On June 9, 2003, at the
annual shareholders meeting, the reverse split plan was approved by our
shareholders giving our board of directors the authority to subsequently approve
the amendment and implement the reverse share split at its discretion based upon
its evaluation as to if and when such action would be most advantageous to us
and our shareholders. On August 11, 2003, we received notification from the
Nasdaq Listing Qualifications Panel that we regained compliance with all
requirements for continued listing on the Nasdaq SmallCap Market. Consequently,
we currently have no plans to implement the reverse split approved by our
shareholders on June 9, 2003.



On October 20, 2003 we announced that we
had entered into a note and warrant purchase agreement with Deutsche Bank AG -
London, acting through DB Advisors, LLC, as investment advisor, which provides,
among other things, that, subject to certain conditions, we will receive cash in
the amount of $40 million less certain expenses in exchange for the issuance of
a senior secured note in the principal amount of $40 million and warrants to
purchase up to 26,666,667 shares of our common stock at an exercise price of
$1.50 per share.  In addition, on October 30, 2003, we announced that we had
commenced a cash tender offer and consent solicitation, using the proceeds from
the financing transactions, together with a majority of our existing cash
balance, to fund a tender offer for at least a majority of our Senior Notes.
Closing of the financing transactions is contingent upon, among other things,
the receipt by us of shareholder approval of the issuance of the warrants and
the common stock issuable upon exercise of the warrants and the consent of the
holders of at least a majority of the outstanding principal amount of our Senior
Notes to an amendment or waiver of certain provisions of the indenture governing
such Senior Notes.



Factors Affecting Operations:

Revenues.   We derive our revenues from monthly
recurring charges, usage charges and amortization of initial non-recurring
charges. We provide services to both retail and wholesale customers. 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
ILECs as reciprocal compensation for completion of their customers' calls
through our network, and access charges paid by carriers for long distance
traffic terminated on our network. Initial non-recurring charges consist of fees
paid by end users for the installation of our service. 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, which is generally 24 to 36
months. In accordance with Staff Accounting Bulletin No. 101 "Revenue
Recognition in Financial Statements," we recognize 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.



A substantial portion of our revenue is
derived from reciprocal compensation paid by ILECs with which we have
interconnection agreements (ICAs). The revenues from these carriers are the
result of ICAs we have entered into with them that provide for the transport and
termination of local telecommunication traffic.  Reciprocal compensation
payments are currently an important source of revenue for the Company, and as a
result, the failure, for any reason, of one or more ILECs from which we receive
reciprocal compensation payments to make all or a significant portion of such
payments in the future could adversely affect our financial condition. Key
drivers of reciprocal compensation revenue include the number of calls we
terminate, the minutes of use associated with such calls and the rates we are
compensated at by the ILECs. During 2002, we experienced a decrease of
approximately 57.6% in the average rate at which we are compensated by the
ILECs.   From the nine-month period ended September 30, 2002 to the nine-month
period ended  September 30, 2003, the reciprocal compensation rate at which we
are compensated by the ILECs (excluding $5.7 million and $4.8 million of
previously withheld reciprocal compensation billings earned by the Company in
prior periods, but withheld by certain ILECs, that were recorded in the nine-
month periods ended September 30, 2003 and 2002) decreased by approximately
41.6%.  However to date, we have been successful in partially offsetting the
impact of the rate reductions on our revenues as a result of increases in both
the number of calls we terminate and in the total minutes of use associated with
such calls. The right of CLECs, such as us, to receive reciprocal compensation
is the subject of numerous regulatory and legal challenges, further described
below. For instances when the reciprocal compensation payments we receive are
not in dispute, we will continue to recognize reciprocal compensation as revenue
when received in cash or when collectibility is reasonably assured. As
previously announced, both Verizon and SBC have attempted to adopt the Federal
Communications Commission's (FCC) Intercarrier ISP Compensation Order.  In
particular, the FCC ISP Order introduced a series of declining reciprocal
compensation pricing tiers for minutes of use, at rates starting below the rates
previously negotiated in our interconnection agreements with both carriers.  The
lowest pricing tier specified by the FCC ISP order was reached on June 15, 2003,
which will remain in effect until such time that a replacement FCC ISP Order may
be introduced.  Additionally, the FCC ISP Order introduced artificial annual
growth limits on compensable minutes of use subject to reciprocal compensation
based on the composition and balance of traffic between carriers.  Based on
Verizon's interpretation of the growth cap formula, Verizon commenced
withholding reciprocal compensation payments to us during July 2003, and has
indicated its intention to withhold any further reciprocal compensation payments
for the duration of 2003.  If other significant carriers that we exchange
traffic with, such as SBC, were to adopt a similar interpretation of the growth
cap formula, we could experience further significant reductions in reciprocal
compensation revenue as a result of payment withholdings for the balance of
2003.  Furthermore, ILECs that withhold reciprocal compensation payments for
2003 based on their interpretation of the FCC ISP Order may also withhold
reciprocal compensation payments in 2004 and beyond once we have exceeded the
growth cap.



We are disputing these withheld reciprocal compensation
revenues and have challenged the legality of the growth caps as well as
Verizon's and SBC's implementation of the FCC ISP Order.  There are no
assurances that we will ever receive any disputed past or future reciprocal
compensation payments. We expect that reciprocal compensation will continue to
represent a significant portion of our revenues in the future.



Pac-West's revenue base is characterized by a concentration
of customers. Reciprocal compensation revenue streams are generated primarily by
three customers for the three and nine-month periods ended September 30, 2003
and 2002. Revenues generated by direct billings to SP and SME customers is
primarily derived from approximately 20 of our largest customers for the three
and nine-month periods ended September 30, 2003 and 2002. Though these
relationships are governed by contract, there is no guarantee we will receive
the full benefit of these contracts, or that we will be able to maintain these
customers over the long term.



On May 16, 2002, the CPUC implemented an Unbundled Network
Element (UNE) pricing structure for local traffic exchanged with SBC in
California. The impact of this pricing structure has reduced our reciprocal
compensation revenues by approximately $2.0 million per month since its
implementation.  During the quarter ended June 30, 2003, we finalized new ICAs
with both SBC and Verizon. These new three-year agreements establish the rules
under which we and SBC or Verizon can interconnect networks to allow for the
exchange of traffic, and the recovery of costs associated with exchanging such
traffic. The ICA with Verizon provides that the FCC Plan reciprocal compensation
rates would become effective on the effective date of the new ICA.  Verizon has
appealed this result, arguing that the FCC Plan rates should be retroactive to
an earlier date.  The Company has opposed Verizon's position and has also
asserted that the new transport charges contained in the ICA are unlawful.  This
matter is currently pending in Federal District Court.  The ICA with SBC also
recognizes that SBC, if legally entitled to do so, may implement the FCC
Intercarrier ISP order. SBC has notified us of its election to implement the FCC
order beginning August 1, 2003.



The terms of these ICAs require us to modify our existing
network in material respects in order to avoid certain new transport charges
imposed under the ICAs. However, in recognition of the complexity of this
determination and the time required to enact such a modification, the CPUC has
deferred the effectiveness of these new transport charges until February of 2004
(SBC) and January of 2004 (Verizon) to provide us time to modify our network in
order to avoid the charges. If we elect to make such modifications to our
network we estimate one time expenses associated with the implementation of such
modifications to be approximately $1.2 million and a corresponding increase in
on-going expense of $4.0 million per year (at current level of interconnection
facilities which may be subject to change).  The ICAs also authorize us to
charge tandem switching and transport where appropriate.





Cost of Sales.  Costs of sales are comprised primarily of
leased transport charges, usage charges for long distance and intrastate calls
and, to a lesser extent, reciprocal compensation we pay to other companies
related to calls that originate with one of our customers and terminate on the
network of an ILEC or other CLEC. Our leased transport charges include the lease
payments we incur for the transmission facilities, or circuits, used to connect
our customers to our switches and to connect to the ILEC and other CLEC
networks.  Due to our strategy of leasing rather than building our own transport
facilities our operating costs provide for gross margins in excess of 50%. Our
lease commitments often have initial lease terms in excess of one-year from the
commitment date. When the lease commitment is fulfilled, the lease often
converts to a month-to-month agreement and thus reduces our future lease
commitments.



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.



Economic Conditions in the State of California. The
current economic conditions in California may impact our financial results. The
state's economy continues to recover, but at a slower rate than the national
average. There has been modest employment growth, but limited growth in wages
and salaries. While we do not believe that current economic conditions in
California will materially impact near-term financial results, we cannot
guarantee that it will not have an impact in the future.



Telecommunication Industry Trends. Competition in the
communication services market has resulted in the consolidation of CLECs, a
trend we expect to continue. In order to grow our business and better serve our
customers, we continue to consider new business models and strategies, including
potential acquisitions or new business lines.  We believe that the statewide
footprint of our network, which encompasses all of the major metropolitan areas
of California, provides us with a significant competitive advantage that will
enable us to successfully compete in the future, but we cannot guarantee that we
will be able to sustain continued growth.



As technology continues to evolve with the corresponding
development of new products and services, there is no guarantee we will retain
our customers with our existing product and service offerings or with any new
products or services we may develop in the future. The introduction of Broadband
and Voice over Internet Protocol (VoIP) could someday effect the growth of our
existing dial-up access to the Internet and our switched local and long-distance
voice products.



Proposed Deutsche Bank financing transactions and related
tender offer. On October 20, 2003, we announced that we had entered into a
note and warrant purchase agreement with Deutsche Bank which provides, among
other things, that, subject to certain conditions, we will receive cash in the
amount of $40 million less certain expenses in exchange for  the issuance of a
senior secured note in the principal amount of $40 million and warrants to
purchase up to 26,666,667 shares of our common stock at an exercise price of
$1.50 per share.  In addition, on October 30, 2003, we announced that we had
commenced a cash tender offer and consent solicitation, using the proceeds from
the financing transactions, together with a majority of our existing cash
balance, to fund a tender offer for at least a majority of our Senior Notes.
Closing of the financing transactions is contingent upon, among other things,
the receipt by us of shareholder approval of the issuance of the warrants and
the common stock issuable upon exercise of the warrants and the consent of the
holders of at least a majority of the outstanding principal amount of our Senior
Notes to an amendment or waiver of certain provisions of the indenture governing
such Senior Notes.





Quarterly Operating and Statistical Data:

The following tables summarize the unaudited results of
operations as a percentage of revenues for the three and nine-month periods
ended September 30, 2003 and 2002. Revenues for the nine-month period  ended
September 30, 2003 include $5.7 million in reciprocal compensation revenues
previously earned by us, but withheld by certain ILECs. Revenues for the nine-
month period ended September 30, 2002 include $4.8 million in reciprocal
compensation revenues previously earned by us, but withheld by certain ILECs.
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 Periods Ended     Nine-Month Periods Ended
                                                            September 30,               September 30,
                                                    --------------------------  --------------------------
                                                        2003          2002          2003          2002
                                                    ------------  ------------  ------------  ------------

Consolidated Statements of Operations Data:         (unaudited)   (unaudited)   (unaudited)   (unaudited)

Revenues..........................................        100.0 %       100.0 %       100.0 %       100.0 %
Cost of sales.....................................         29.1 %        36.5 %        24.9 %        34.8 %
Selling, general and administrative expenses......         50.0 %        43.5 %        41.9 %        39.7 %
Depreciation and amortization expenses............         32.5 %        28.7 %        31.8 %        25.4 %
Restructuring charge..............................           -- %         0.1 %         0.1 %         8.1 %
Impairment of assets..............................           -- %          -- %          -- %         6.2 %
Income (loss) from operations.....................        (11.7)%        (8.7)%         1.3 %       (14.0)%
Gain on repurchase of bonds.......................           -- %        43.4 %          -- %        23.1 %
Net income (loss) ................................        (14.2)%        14.3 %        (5.1)%        (1.0)%`

The following table sets forth unaudited statistical
data for each of the specified three-month periods  of 2003 and 2002. The operating and statistical
data for any quarter are not necessarily indicative of results for any future period.



`Three-Month Periods Ended
                                     ------------------------------------------------------------------------------
                                                2003                                       2002
                                     ------------------------------------------------------------------------------
                                     Sept. 30,   June 30,   March 31,   Dec 31,   Sept. 30,  Jun. 30,   Mar. 31,
                                     ----------  ---------  ---------  ---------  ---------  ---------  -----------
                                     (unaudited) (unaudited)(unaudited)(unaudited)(unaudited)(unaudited)(unaudited)
Ports equipped.....................    998,400    998,400    940,800    940,800    944,644    944,644      768,000
Lines sold to date.................    425,246    407,774    341,494    335,851    328,649    323,249      322,939
Lines in service to date...........    425,070    403,751    337,294    327,021    324,100    320,042      257,606
Quarterly minutes of use
 switched (in millions)............     11,189     10,030      9,394      8,532      8,211      7,656        7,714
Capital expenditures
 (in thousands).................... $    1,504  $   1,713  $   1,482  $   3,046 $    2,919 $    5,963  $     7,636
Employees..........................        371        402        402        414        402        406          402`

Three-Month Period Ended September 30, 2003 Compared to the Three-Month
Period Ended September 30, 2002

Our significant revenue components and operational
metrics for the three-month periods ended September 30, 2003 and 2002 are as
follows:

`Three-Month Periods Ended September 30
Revenues:                                               2003          2002        % Change
                                                    ------------  ------------  ------------
                                                    (unaudited)   (unaudited)

Reciprocal compensation........................... $  7,773,000  $ 12,073,000         (35.6)%
Direct billings to SP customers...................   12,004,000    10,666,000          12.5 %
Direct billings to SME customers..................    4,618,000     3,279,000          40.8 %
Outbound local and long distance..................    3,287,000     3,476,000          (5.4)%
Dedicated transport...............................    1,223,000     2,258,000         (45.8)%
Switched access...................................    1,248,000     2,600,000         (52.0)%
COAM..............................................       61,000        13,000         369.2 %
Other.............................................       98,000      (164,000)       (159.8)%
                                                    ------------  ------------
Total revenues.................................... $ 30,312,000  $ 34,201,000         (11.4)%
                                                    ============  ============

Operational metrics:
DS-0 equivalent lines in service .................      425,070       324,100          31.2 %
Minutes of use (in billions) .....................         11.2           8.2          36.6 %`





Consolidated revenues for the three-month period
ended September 30, 2003 decreased by $3.9 million, or 11.4%, to $30.3 million
from $34.2 million for the three-month period ended September 30, 2002. This
decrease is primarily due to a $4.3 million decline in reciprocal compensation
from lower per minute reciprocal compensation rates paid by ILECs and the
withholding of reciprocal compensation payments by Verizon for approximately two
months of the third quarter of 2003. These declines were partially offset by
increased DS-0 lines in service and total minutes of use on a year over year
basis.



As previously announced, both Verizon and SBC have
attempted to adopt the FCC's ISP Order. In particular, the FCC ISP Order
introduced a series of declining reciprocal compensation pricing tiers for
minutes of use, at rates starting below the rates previously negotiated in our
interconnection agreements with both carriers. The lowest pricing tier specified
by the order was reached on June 15, 2003, which will remain in effect until
such time that a replacement FCC Order may be introduced.



Additionally, the FCC ISP Order introduced artificial
annual growth limits on compensable minutes of use subject to reciprocal
compensation based on the composition and balance of traffic between carriers.
Based on Verizon's interpretation of the growth cap formula, Verizon commenced
withholding reciprocal compensation payments to us during July 2003, and has
indicated its intention to withhold any further reciprocal compensation payments
for the duration of 2003. If other significant carriers that we exchange traffic
with, such as SBC, were to adopt a similar interpretation of the growth cap
formula, we could experience further significant reductions in reciprocal
compensation revenue as a result of payment withholdings for the balance of
2003. Furthermore, ILECs that withhold reciprocal compensation payments for 2003
based on their interpretation of the FCC order may also withhold reciprocal
compensation payments in 2004 and beyond, once we have exceeded the growth cap.



We are disputing these withheld reciprocal compensation
revenues and have challenged the legality of the growth caps and as well as
Verizon's and SBC's implementation of the FCC ISP Order. There are no assurances
that disputed past or future reciprocal compensation payments will ever be paid
to us.



The total lines in service increased by 100,970 or 31.2% to
425,070 as of September 30, 2003 from 324,100 lines as of September 30, 2002.
Billable minutes of use were 11.2 billion for the three-month period ended
September 30, 2003, an increase of approximately 3.0 billion or 36.3% from 8.2
billion billed minutes during the three-month period ended September 30,
2002.



The number of inbound local minutes subject to reciprocal
compensation revenues in accordance with ICAs were 11.0 billion and 8.0 billion
for the quarters ended September 30, 2003 and 2002, respectively. The year over
year increase of 3.0 billion billable minutes of use from September 30, 2002 to
2003 represented a 37.5% increase.   The favorable increase in inbound local
minutes was offset by a decline in the reciprocal compensation rates from
September 30, 2002 to 2003. Reciprocal compensation revenues decreased $4.3
million or 35.6% from $12.1 million in the three-month period ended September
30, 2002 to $7.8 million for the three-month period ended September 30, 2003.



Direct billings to SP customers increased during the three-
month period ended September 30, 2003 from the same period in 2002 by $1.3
million, or 12.5%, to $12.0 million from $10.7 million during the three-month
period ended September 30, 2002. While lines in service to this market increased
from 272,950 lines at September 30, 2002 to 362,154 lines in service at
September 30, 2003, an increase in lines of 89,204, or 32.7%, revenue per line
decreased due to increased competitive pressures.



Direct billings to SME business customers increased in the
three-month period ended September 30, 2003 from the same period in 2002 by $1.3
million, or 40.8%, to $4.6 million from $3.3 million during the quarter ended
September 30, 2002. This change was primarily due to an increase in lines in
service from 51,150 lines at September 30, 2002 to 62,916 lines in service at
September 30, 2003, an increase in lines of 11,766, or 23.0%.



Outbound local and long distance revenues, including 800,
888, and 877 numbers and travel card calls, increased by less than $0.2 million
during the three-month period ended September 30, 2003 from the same period in
2002.



The $1.1 million, or 45.8%, decrease in dedicated transport
revenues to $1.2 million during the quarter ended September 30, 2003 from $2.3
million during the quarter ended September 30, 2002 primarily relates to
decreased service levels in 2003.



Switched access revenues decreased in the three-month period
ended September 30, 2003 from the same period in 2002 by $1.4 million, or 52.0%
to $1.2 million from $2.6 million in the quarter ended September 30, 2002. This
was primarily because of lower billing rates in 2003.

Our significant costs and expenses for the three-month periods ended
September 30, are as follows:

`Three-Month Periods Ended September 30
Costs and expenses:                                     2003          2002        % Change
                                                    ------------  ------------  ------------
                                                    (unaudited)   (unaudited)

Cost of sales..................................... $  8,829,000  $ 12,478,000         (29.2)%
Selling, general and administrative...............   15,155,000    14,874,000           1.9 %
Depreciation and amortization.....................    9,862,000     9,815,000           0.5 %

                                                    ------------  ------------
Total costs and expenses.......................... $ 33,846,000  $ 37,167,000          (8.9)%
                                                    ============  ============`

Our consolidated cost of sales for the quarter ended
September 30, 2003 decreased by $3.6 million, or 29.2%, to $8.8 million from
$12.5 million for the corresponding period in 2002. The decrease in expense for
the quarterly periods is primarily the result of $2.0 million in negotiated
supplier credits recorded in the three-month period ended September 30, 2003.
These supplier credits are as a result of the resolution of disputes with our
suppliers and there can be no assurances that we will continue to receive
supplier credits in the future. We continue to experience an increase in network
operations associated with a higher level of telecommunications activity,
however our operating costs are declining from prior periods as a result of
discontinuing certain low-margin products and services, specifically products
and services related to COAM equipment and DSL, and improving capital
utilization. Although we continue to look for ways to continue to reduce our
operating costs, we cannot guarantee that our cost of sales will continue to
decline in the future.



Our consolidated selling, general and administrative expenses
for the three-month period ended September 30, 2003 increased $0.3 million, or
1.9%, to $15.2 million from $14.9 million for the corresponding period in 2002.
The increase is primarily the result of increased employee compensation costs of
$0.4 million.  Selling, general and administrative expenses were 50.0% and 43.5%
of revenues for the three-month periods ended September 30, 2003 and 2002,
respectively.  The increase in selling, general and administrative expenses as a
percentage of revenues is due to the combination of an decrease in gross
revenues from the three-month period ended September 30, 2002 to the three-month
period ended September 30, 2003 and from the previously discussed increase in
expenses.



Our consolidated depreciation and amortization expense
for the three-month period ended September 30, 2003 increased $0.1 million to
$9.9 million, from $9.8 million for the same period in 2002.  Depreciation and
amortization as a percentage of revenues increased to 32.5% for the three-month
period ended September 30, 2003 from 28.7% from the same period ended 2002. The
increase in depreciation and amortization expense is primarily due to additional
depreciation expense incurred on purchases of equipment placed in service since
September 30, 2002.



Our consolidated interest expense, net for the three-
month period ended September 30, 2003 decreased $0.6 million, or 16.2%, to $3.1
million from $3.7 million for the same period ended 2002. Interest expense is
net of interest income.  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 repurchasing some of our Senior Notes during 2002,
interest expense declined between quarters.



Our effective income tax rates for the quarters ended
September 30, 2003 and 2002 reflect the applicable Federal and state statutory
income tax rates. For the quarters ended September 30, 2003 and 2002, our
effective income tax rate was 35.6% and 40.0%, respectively.





Nine-Month Period Ended September 30, 2003 Compared to the Nine-Month
Period Ended September 30, 2002



Our significant revenue components and operational metrics
for the nine-month periods ended September 30, 2003 and 2002, are as
follows:

`Nine-Month Periods Ended September 30
Revenues:                                               2003          2002        % Change
                                                    ------------  ------------  ------------
                                                    (unaudited)   (unaudited)

Reciprocal compensation........................... $ 41,014,000  $ 51,625,000         (20.6)%
Direct billings to SP customers...................   33,058,000    31,860,000           3.8 %
Direct billings to SME customers..................   12,539,000     9,246,000          35.6 %
Outbound local and long distance..................    9,791,000    10,162,000          (3.7)%
Dedicated transport...............................    4,345,000     7,009,000         (38.0)%
Switched access...................................    4,848,000     5,500,000         (11.9)%
COAM..............................................      328,000       383,000         (14.4)%
Other.............................................      627,000         7,000       8,857.1 %
                                                    ------------  ------------
Total revenues.................................... $106,550,000  $115,792,000          (8.0)%
                                                    ============  ============

Operational metrics:
DS-0 equivalent lines in service .................      425,070       324,100          31.2 %
Minutes of use (in billions) .....................         30.6          23.6          29.7 %`



Consolidated revenues for the nine-month period ended
September 30, 2003 decreased by $9.2 million, or 8.0%, to $106.6 million from
$115.8 million for the nine-month period ended September 30, 2002. The decrease
in revenues is primarily the result of a $10.6 million decrease in reciprocal
compensation, which includes $5.7 million and $4.8 million of previously
withheld reciprocal compensation billings earned by the Company in prior
periods, but withheld by certain ILECs, that were recorded in the nine-month
periods ended September 30, 2003 and 2002, respectively. For the nine-month
periods ended September 30, 2003 and 2002, reciprocal compensation was $41.0
million and $51.6 million, respectively, and accounted for approximately 38.5%
and 44.6%, respectively of our total revenues. The remainder of the variance
from the nine-month periods ended September 30, 2003 and 2002 was comprised of a
decrease in dedicated transport revenues, offset by increases in direct billings
to SME and SP customers.  During 2002, we experienced a decrease of
approximately 57.6% in the reciprocal compensation average rate at which we are
compensated at by the ILECs.  From the nine-month period ended September 30,
2002 to the nine-month period ended  September 30, 2003, the reciprocal
compensation rate at which we are compensated by the ILECs (excluding $5.7
million and $4.8 million of previously withheld reciprocal compensation billings
earned by the Company in prior periods, but withheld by certain ILECs, that were
recorded in the nine-month periods ended September 30, 2003 and 2002) decreased
by approximately 41.6%. However, to date, we have been successful in partially
offsetting the impact of the rate reductions on our revenues due to increases in
both the number of calls we terminate and in the total minutes of use associated
with such calls.



The total lines in service increased by 100,970 or 31.2% to
425,070 billion as of September 30, 2003 from 324,100 lines as of September 30,
2002. Billable minutes of use were 30.6 billion for the nine-month period ended
September 30, 2003, an increase of approximately 7.0 billion, or 29.7%, from
23.6 billion billed minutes during the nine-month period ended September 30,
2002.



The number of inbound local minutes subject to reciprocal
compensation revenues in accordance with ICAs were 30.0 billion and 23.1 billion
for the nine-month periods ended September 30, 2003 and 2002, while the year
over year increase of 6.9 billion billable minutes of use from September 30,
2002 to 2003 represented a 29.9% increase.  However, the favorable increase in
inbound local minutes was offset by a decline in the reciprocal compensation
rates from September 30, 2002 to 2003. Reciprocal compensation revenues
decreased $10.6 million, or 20.6%, from $51.6 million in the nine-month period
ended September 30, 2002 to $41.0 million for the nine-month period ended
September 30, 2003. Included in reciprocal compensation revenues are $5.7
million and $4.8 million in reciprocal compensation revenues previously earned
by us, but withheld by certain ILECs during the nine-month periods ended
September 30, 2003 and 2002, respectively.



Direct billings to SP customers increased during the nine-
month period ended September 30, 2003 from the same period in 2002 by $1.2
million, or 3.8%, to $33.1 million from $31.9 million during the nine-month
period ended September 30, 2002. While lines in service to this market increased
from 272,950 lines at September 30, 2002 to 362,154 lines in service at
September 30, 2003, an increase in lines of 89,204, or 32.7%, revenue per line
decreased due to competitive pressures.



Direct billings to SME business customers increased in the
nine-month period ended September 30, 2003 from the same period in 2002 by $3.3
million, or 35.6%, to $12.5 million from $9.2 million during the same period in
2002. This change was primarily due to introduction of new services for SME
customers in 2003 combined with an increase in lines in service from 51,150
lines at September 30, 2002 to 62,916 lines in service at September 30, 2003, an
increase in lines of 11,766, or 23.0%.



Outbound local and long distance revenues, including 800,
888, and 877 numbers and travel card calls, decreased by $0.4 million during the
nine-month period ended September 30, 2003 from the same period in 2002. The
decline in revenue from 2002 to 2003 resulted from the combination of lower
total minutes of local and long distance billed for the nine-month in 2003 as
compared to 2002 combined with a decline in the average rate per minute charged
to customers for local and long distance services from 2003 to 2002.



The $2.7 million, or 38.0%, decrease in dedicated transport
revenues to $4.3 million during the nine-month period ended September 30, 2003
from $7.0 million during the nine-month period ended September 30, 2002
primarily relates to reduced service levels.



Switched access revenues decreased in the nine-month period
ended September 30, 2003 from the same period in 2002 by $0.7 million, or 11.9%,
to $4.8 million from $5.5 million in the nine-month period ended September 30,
2002. This decrease was mainly due to payments received in 2002 that were
previously withheld.



Our significant costs and expenses for the nine-month periods
ended September 30, are as follows:

`Nine-Month Periods Ended September 30
Costs and expenses:                                     2003          2002        % Change
                                                    ------------  ------------  ------------
                                                    (unaudited)   (unaudited)

Cost of sales..................................... $ 26,532,000  $ 40,245,000         (34.1)%
Selling, general and administrative...............   44,609,000    45,936,000          (2.9)%
Depreciation and amortization.....................   33,913,000    29,392,000          15.4 %
                                                    ------------  ------------
Total costs and expenses.......................... $105,054,000  $115,573,000          (9.1)%
                                                    ============  ============`





Our consolidated cost of sales for the nine-month period
ended September 30, 2003 decreased by $13.7 million, or 34.1%, to $26.5 million
from $40.2 million for the corresponding period in 2002. The decrease in expense
for the nine-month periods is the result of negotiated supplier credits recorded
in the nine-month period ended September 30, 2003, discontinuing certain low-
margin products and services, specifically products and services related to COAM
equipment and DSL, and improving capital utilization. Although we continue to
look for ways to reduce our operating costs, we cannot guarantee that our cost
of sales will continue to decline in the future as we experience increasing
network operations associated with a higher level of telecommunications
activity.



Our consolidated selling, general and administrative expenses
for the nine-month period ended September 30, 2003 decreased $1.3 million, or
2.9%, to $44.6 million from $45.9 million for the corresponding period in 2002.
The decrease is primarily the result of decreases in bad debt expense of $1.5
million, resulting from the quality of our customers and improved collections
activities.  Selling, general and administrative expenses were 41.9% and 39.7%
of revenues for the nine-month periods ended September 30, 2003 and 2002.
Selling, general and administrative expenses as a percentage of revenues
increased slightly as the decrease in gross revenues from the nine-month periods
ended September 30, 2002 to the similar period ended September 30, 2003 was
partially offset by a similar percentage decrease in expenses for the same two
comparison periods.



Our consolidated depreciation and amortization expense
for the nine-month period ended September 30, 2003 increased $4.5 million to
$33.9 million, from $29.4 million for the same period in 2002.  Depreciation and
amortization as a percentage of revenues increased to 31.8% for the nine-month
period ended September 30, 2003 from 25.4% for the same period ended 2002.  The
increase in depreciation and amortization expense is primarily related to the
fact that during January, 2003, the Company changed the estimated useful lives
of certain assets.



Our consolidated interest expense, net for the nine-month
period ended September 30, 2003 decreased $2.9 million, or 23.4%, to $9.5
million from $12.4 million for the same period ended 2002. Interest expense is
net of interest income.  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 repurchasing some of our Senior Notes during 2002,
interest expense declined between the periods.



Our effective income tax rates for the nine-month periods
ended September 30, 2003 and 2002 reflect the applicable Federal and state
statutory income tax rates. For the nine-month periods ended September 30, 2003
and 2002, our effective income tax rate was 33.3% and 40.0%, respectively.

Liquidity and Capital Resources:

Net cash provided by operating activities was $18.0
million for the nine-month period ended September 30, 2003 as compared to net
cash provided by operating activities of $24.0 million for the same period ended
in 2002. Net cash provided by operating activities for the periods ended
September 30, 2003 and 2002 includes $0.1 million and $5.9 million, respectively
of restructuring charges. Excluding this transaction in both comparison periods,
the net cash provided by operating activities decreased $0.2 million for the
nine-month period ended September 30, 2003 over 2002.



Net cash provided by investing activities was $24.5 million
for the nine-month period ended September 30, 2003 compared to a net cash used
in investing activities of $24.0 million for the same period ended in 2002.
During the nine-month period ended September 30, 2003 we sold $29.2 million
of short-term investments as compared to $7.6 million of purchases of short-term
investments during the nine-month period ended September 30, 2002.
Purchases of property and equipment decreased to $4.7 million during the nine-month period ended September
30, 2003 as compared to $16.5 million during the same period in 2002 as we were
able to re-deploy existing or under-utilized equipment rather than purchase new
equipment to meet our operating needs.



Net cash used in financing activities was $9.2 million
for the nine-month period ended September 30, 2003 compared to $39.6 million for
the same period ended 2002. The main reason for this decrease was a $10.0 million
payment on a Senior Credit facility and a $16.0 million payment to repurchase a
portion of our outstanding Senior Notes in the nine-month period ended September
30, 2002. These payments were not repeated in 2003.



The telecommunications service business is capital intensive.
Our operations have required substantial capital investment for the design,
acquisition, construction and implementation of our network. Capital
expenditures, were $4.7 million and $16.5 million for the nine-month periods
ended September 30, 2003 and 2002.Approximately $1.8 million of capital
expenditures are included in construction projects in progress as of September
30, 2003 and therefore are not being depreciated until they are placed in
service at a  later date. In response to the sluggish economy and the
significant negative industry trends including bankruptcies and depressed
valuations of public telecommunication companies, we have undertaken various
initiatives intended to not only maximize our performance, but to take advantage
of emerging opportunities. Our business plan, as currently contemplated,
anticipates capital expenditures, excluding acquisitions, of approximately $15
million for the next twelve months. The terms of two of our ICAs incent us to
modify our existing network.  If we elect to make the modifications to our
network capital expenditures over the next twelve months may increase by amounts
up to $4.0 million. However, the actual cost of capital expenditures during the
final three months of 2003 and the first nine months of 2004 will depend on a
variety of factors. Accordingly, our actual capital requirements may exceed, or
fall below, the amounts described above.



We continue to review all of our debt obligations and are
considering various alternatives to continue to reduce such obligations, On
October 20, 2003, we announced that we had entered into a note and warrant
purchase agreement with Deutsche Bank which provides, among other things, that,
subject to certain conditions, we will receive cash in the amount of $40 million
less certain expenses in exchange for  the issuance of a senior secured note in
the principal amount of $40 million and warrants to purchase up to 26,666,667
shares of our common stock at an exercise price of $1.50 per share.  In
addition, on October 30, 2003, we announced that we had commenced a cash tender
offer and consent solicitation, using the proceeds from the financing
transactions, together with a majority of our existing cash balance, to fund a
tender offer for at least a majority of our Senior Notes.  Closing of the
financing transactions is contingent upon, among other things, the receipt by us
of shareholder approval of the issuance of the warrants and the common stock
issuable upon exercise of the warrants and the consent of the holders of at
least a majority of the outstanding principal amount of the our Senior Notes to
an amendment or waiver of certain provisions of the indenture governing such
Senior Notes. There can be no guarantee given that the financing transactions
will occur or, if the financing transactions do not occur, that we would be able
to secure an adequate alternative source of financing. In addition, we are
currently considering various alternatives to replace our senior credit facility
which expired in 2002. However, there can be no assurance we will be successful
in obtaining additional capital sources at rates and terms acceptable to us. Our
principal sources of funds for 2003 are anticipated to be current cash and
short-term investment balances and cash flows from operating activities and the
proceeds from the financing transactions described above, if completed. We
believe that these funds will provide us with sufficient liquidity and capital
resources for us to fund our business plan for the next 12 months. No assurance
can be given, however, that this will be the case. As currently contemplated, we
expect to fund, among other things, our semi-annual interest payments of
approximately $6.4 million each, anticipated capital expenditures of
approximately $15 million and capital lease payments (including interest) of
approximately $6.2 million. The foregoing statements do not take into account
(i) any reduction in cash interest payments that would arise if the financing
transactions described above are completed and the cash tender for our Senior
Notes is completed (ii) acquisitions which, if made, are expected to be funded
through a combination of cash and equity or (iii) the repurchase of any of our
remaining outstanding Senior Notes.  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 needs. There can
be no assurance that additional financing will be available when required, or,
if available, will be on terms satisfactory to us. Key factors which could
affect our liquidity include: future demand of our services; financial stability
of our customers; outcomes of regulatory proceedings involving reciprocal
compensation; capital expenditures; and our debt payments.



Our senior notes indenture contains 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. The Company believes
that it is in compliance with its financial covenants. In connection with the
cash tender offer and consent solicitation described above, we have solicited
the consent of the holders of our Senior Notes to amendments of certain
provisions of the indenture governing such Senior Notes.  The amendments would
eliminate substantially all of the restrictive covenants and certain events of
default and related provisions contained in the indenture.  If we receive the
consent of noteholders holding a majority of the outstanding principal amount of
Senior Notes, we expect to enter into a supplemental indenture incorporating the
amendments.   There can be no assurance that we will receive the requisite
consents from the holders of our Senior Notes or that the amendments to the
indenture will be made.



We purchase our switching equipment and products from several
suppliers.  During the normal course of business, we may enter into agreements
with certain of its suppliers, which allow these suppliers to have equipment or
inventory available for purchase based upon criteria as defined by us.   As of
September 30, 2003, we did not have any material future purchase commitments to
purchase equipment from any of our vendors.





ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK



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 September 30, 2003, we had an
outstanding $95.1 million principal amount of fixed rate notes due 2009, and
consequently we currently have no risk exposure associated with increasing
interest rates on our debt.   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 $61.3 million of cash and cash
equivalents and short-term investments at September 30, 2003 by approximately
$0.6 million.





ITEM 4.	CONTROLS AND PROCEDURES

As of the date of this Report, we carried out an evaluation,
under the supervision and with the participation of our management, including
the Chief Executive Officer and Chief Financial Officer, of the effectiveness of
the design and operation of our "disclosure controls and procedures"
(as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"),) in accordance with Rule 13a-15 of the Exchange
Act. Based on that evaluation, the Chief Executive Officer and Chief Financial
Officer, together with the other members of management participating in the
evaluation, concluded that we are  in compliance with the requirements of Rule
13a-15(a) of the Exchange Act and that our disclosure controls and procedures
are effective.



There have been no significant changes during the period
covered by this Report in our internal control over financial reporting that
have materially affected, or are reasonably likely to materially affect our
internal control over financial reporting. It should be recognized that the
design of any system of controls is based upon certain assumptions about the
scope of the tasks to be performed and the environment in which the tasks are to
be performed. As such, our internal controls provide us with a reasonable
assurance of achieving their intended effect.













PART II

OTHER INFORMATION

ITEM 1. Legal Proceedings

See Notes 11 and 15 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

1. Exhibits

10.70     Executive agreement dated as of  July 1, 2003, made by and between
us and Henry R. Carabelli, Chief Executive Officer.

31.1 Certification  by  Henry R. Carabelli, Chief Executive
Officer pursuant to  Section 302 of the  Sarbanes-Oxley Act of 2002.

31.2Certification  by  H. Ravi Brar, Chief Financial Officer
pursuant to  Section 302 of the  Sarbanes-Oxley Act of 2002.

32.1Certification by Henry R. Carabelli, Chief Executive Officer
pursuant to Section  906 of the Sarbanes-Oxley Act of 2002.

32.2Certification by H. Ravi Brar, Chief Financial Officer
pursuant to Section  906 of the Sarbanes-Oxley Act of 2002.

1. Reports on Form 8-K

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