##### Table of Contents



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

FORM 10-Q

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

For the Quarterly Period Ended June 30, 2002

OR

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

Commission File Number: 000-27743

PAC-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 BOX)    No (BOX)

As of July 31, 2002, the Company had an aggregate of 36,398,531 shares of
common stock issued and outstanding.



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TABLE OF CONTENTS



|                          |                                                                                              |                                                                        |  |  |  |  |  | 
|------------------------- | -------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------- |  |  |  |  |  | 
|PART I                   
|                          | ITEM 1. FINANCIAL STATEMENTS                                                                
|                          |                                                                                              | Condensed Consolidated Balance Sheets                                 
|                          |                                                                                              | Condensed Consolidated Statements of Operations and Comprehensive Loss
|                          |                                                                                              | Condensed Consolidated Statements of Cash Flows                       
|                          |                                                                                              | NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS        
|                          | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS
|                          | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS                         
|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               
|Exhibit 10.43(c)         
|Exhibit 10.66            



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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)  As of June 30, 2002
and December 31, 2001                                                 |    |  | 3    | 
|          
|          
|          
|          
|           |  |                                                                                       |                       | Condensed Consolidated Statements of Operations and Comprehensive
Loss (Unaudited)  Three and six month periods ended
June 30, 2002 and 2001 |    |  | 4    | 
|          
|          
|          
|          
|           |  |                                                                                       |                       | Condensed Consolidated Statements of Cash Flows (Unaudited)  Six
month periods ended June 30, 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 |                       |                                                                                                                                               | 16 | 
|          
|          
|          
|          
|Item 3.    |  | Quantitative and Qualitative Disclosures About Market Risks                           |                       |                                                                                                                                               | 26 | 
|          
|          
|          
|          
|PART II    |  |                                                                                       | OTHER INFORMATION     |                                                                                                                                               |    |  |     
|          
|          
|          
|          
|Item 1.    |  | Legal Proceedings                                                                     |                       |                                                                                                                                               | 27 | 
|          
|          
|          
|          
|Item 4.    |  | Submission of a Vote of Security Holders                                              |                       |                                                                                                                                               | 27 | 
|          
|          
|          
|          
|Item 6.    |  | Exhibits and Reports on Form 8-K                                                      |                       |                                                                                                                                               | 27 | 
|          
|          
|          
|          
|SIGNATURES |  |                                                                                       |                       |                                                                                                                                               | 28 | 

2



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##### Table of Contents






PART I




ITEM 1.     FINANCIAL STATEMENTS




PAC-WEST TELECOMM, INC.
Condensed Consolidated Balance Sheets

ASSETS

|                                                |                                                                                                                                                                           |  |                                            |              |               |             |                    |             |   |             | 
|----------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------ | ------------ | ------------- | ----------- | ------------------ | ----------- | - | ----------- | 
|                                                |                                                                                                                                                                           |  |                                            |              | As of         |             | As of             
|                                                |                                                                                                                                                                           |  |                                            |              | June 30, 2002 |             | December 31, 2001*
|                                                |                                                                                                                                                                           |  |                                            |              |               |             |                   
|                                                |                                                                                                                                                                           |  |                                            |              | (unaudited)  
|                                                |                                                                                                                                                                           |  |                                            |              |              
|Current Assets:                                 |                                                                                                                                                                           |  |                                            |              |               |             |                    |            
|                                               
|                                               
|                                               
|                                               
|                                                | Cash and cash equivalents                                                                                                                                                 |  | $                                          | 36,585,000   |               |             | $                  | 64,029,000  |  
|                                               
|                                               
|                                               
|                                               
|                                                | Short-term investments                                                                                                                                                    |  |                                            | 27,839,000   |               |             |                    | 18,471,000  |  
|                                               
|                                               
|                                               
|                                               
|                                                | Trade accounts receivable, net of allowances of $3,396,000 at
June 30, 2002 and $2,630,000 at December 31, 2001                                                           |  |                                            | 10,860,000   |               |             |                    | 13,621,000  |  
|                                               
|                                               
|                                               
|                                               
|                                                | Accounts receivable from related parties                                                                                                                                  |  |                                            | 97,000       |               |             |                    | 80,000      |  
|                                               
|                                               
|                                               
|                                               
|                                                | Income taxes receivable                                                                                                                                                   |  |                                            | 297,000      |               |             |                    | 291,000     |  
|                                               
|                                               
|                                               
|                                               
|                                                | Inventories                                                                                                                                                               |  |                                            | 1,441,000    |               |             |                    | 2,939,000   |  
|                                               
|                                               
|                                               
|                                               
|                                                | Prepaid expenses and other current assets                                                                                                                                 |  |                                            | 2,780,000    |               |             |                    | 3,134,000   |  
|                                               
|                                               
|                                               
|                                               
|                                                | Deferred financing costs, net                                                                                                                                             |  |                                            | 573,000      |               |             |                    | 785,000     |  
|                                               
|                                               
|                                               
|                                               
|                                                | Deferred tax assets                                                                                                                                                       |  |                                            |             |               |             |                    | 4,491,000   |  
|                                                |                                                                                                                                                                           |  |                                            |              |               |             |                    |            
|                                                |                                                                                                                                                                           |  | Total current assets                       |              |               | 80,472,000  |                    |             |   | 107,841,000 | 
|                                               
|                                               
|                                               
|                                               
|Property and equipment, net                     |                                                                                                                                                                           |  | 184,422,000                                |              |               |             | 201,036,000        |            
|                                               
|                                               
|                                               
|                                               
|Other assets, net                               |                                                                                                                                                                           |  | 4,841,000                                  |              |               |             | 5,860,000          |            
|                                                |                                                                                                                                                                           |  |                                            |              |               |             |                    |            
|                                                |                                                                                                                                                                           |  | Total assets                               |              | $             | 269,735,000 |                    |             | $ | 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  |  
|                                               
|                                               
|                                               
|                                               
|                                                | Accounts payable                                                                                                                                                          |  |                                            | 10,803,000   |               |             |                    | 11,536,000  |  
|                                               
|                                               
|                                               
|                                               
|                                                | Accrued payroll and related expenses                                                                                                                                      |  |                                            | 3,065,000    |               |             |                    | 2,884,000   |  
|                                               
|                                               
|                                               
|                                               
|                                                | Accrued interest                                                                                                                                                          |  |                                            | 7,307,000    |               |             |                    | 8,438,000   |  
|                                               
|                                               
|                                               
|                                               
|                                                | Other accrued liabilities                                                                                                                                                 |  |                                            | 14,800,000   |               |             |                    | 7,568,000   |  
|                                               
|                                               
|                                               
|                                               
|                                                | Fiber IRU liability                                                                                                                                                       |  |                                            | 8,620,000    |               |             |                    | 17,240,000  |  
|                                                |                                                                                                                                                                           |  |                                            |              |               |             |                    |            
|                                                |                                                                                                                                                                           |  | Total current liabilities                  |              |               | 52,476,000  |                    |             |   | 65,547,000  | 
|                                               
|                                               
|                                               
|                                               
|Senior Notes                                    |                                                                                                                                                                           |  | 129,274,000                                |              |               |             | 150,000,000        |            
|                                               
|                                               
|                                               
|                                               
|Capital leases, less current portion            |                                                                                                                                                                           |  | 6,244,000                                  |              |               |             | 10,192,000         |            
|                                               
|                                               
|                                               
|                                               
|Deferred revenues, less current portion         |                                                                                                                                                                           |  | 625,000                                    |              |               |             | 644,000            |            
|                                               
|                                               
|                                               
|                                               
|Deferred income taxes                           |                                                                                                                                                                           |  | 1,892,000                                  |              |               |             | 3,283,000          |            
|                                                |                                                                                                                                                                           |  |                                            |              |               |             |                    |            
|                                                |                                                                                                                                                                           |  | Total liabilities                          |              |               | 190,511,000 |                    |             |   | 229,666,000 | 
|                                               
|                                               
|                                               
|                                               
|Commitments
and Contingencies (Notes 12 and 13) |                                                                                                                                                                           |  |                                            |              |               |             |                    |            
|                                               
|                                               
|                                               
|                                               
|Stockholders Equity:                           |                                                                                                                                                                           |  |                                            |              |               |             |                    |            
|                                               
|                                               
|                                               
|                                               
|                                                | Common stock, $.001 par value; 100,000,000 shares authorized
36,398,531 and 36,148,487 shares issued and outstanding at
June 30, 2002 and December 31, 2001, respectively |  |                                            | 36,000       |               |             |                    | 36,000      |  
|                                               
|                                               
|                                               
|                                               
|                                                | Additional paid-in capital                                                                                                                                                |  |                                            | 183,666,000  |               |             |                    | 183,550,000 |  
|                                               
|                                               
|                                               
|                                               
|                                                | Note receivable from stockholder                                                                                                                                          |  |                                            | (200,000     | )             |             |                    | (200,000    | )
|                                               
|                                               
|                                               
|                                               
|                                                | Retained deficit                                                                                                                                                          |  |                                            | (104,076,000 | )             |             |                    | (98,072,000 | )
|                                               
|                                               
|                                               
|                                               
|                                                | Accumulated other comprehensive loss                                                                                                                                      |  |                                            | (64,000      | )             |             |                    | (53,000     | )
|                                               
|                                               
|                                               
|                                               
|                                                | Deferred stock compensation                                                                                                                                               |  |                                            | (138,000     | )             |             |                    | (190,000    | )
|                                                |                                                                                                                                                                           |  |                                            |              |               |             |                    |            
|                                                |                                                                                                                                                                           |  | Total stockholders equity                 |              |               | 79,224,000  |                    |             |   | 85,071,000  | 
|                                                |                                                                                                                                                                           |  |                                            |              |               |             |                    |            
|                                                |                                                                                                                                                                           |  | Total liabilities and stockholders equity |              | $             | 269,735,000 |                    |             | $ | 314,737,000 | 
|                                                |                                                                                                                                                                           |  |                                            |              |               |             |                    |            

* The condensed consolidated balance sheet at December 31, 2001 has been
derived from the Companys audited financial statements at
that date. See notes to these condensed consolidated financial statements.

3



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##### Table of Contents






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

|                                                     |                                     |                                       |            |                          |             |                        |            |               |            |               |            |             |             |   |            |            |            |  
|---------------------------------------------------- | ----------------------------------- | ------------------------------------- | ---------- | ------------------------ | ----------- | ---------------------- | ---------- | ------------- | ---------- | ------------- | ---------- | ----------- | ----------- | - | ---------- | ---------- | ---------- | -
|                                                     |                                     |                                       |            | Three Month Period Ended |             | Six Month Period Ended
|                                                     |                                     |                                       |            |                          |             |                       
|                                                     |                                     |                                       |            | June 30, 2002            |             | June 30, 2001          |            | June 30, 2002 |            | June 30, 2001
|                                                     |                                     |                                       |            |                          |             |                        |            |               |            |              
|Revenues                                             |                                     | $                                     | 38,499,000 |                          |             | $                      | 38,162,000 |               |            | $             | 81,591,000 |             |             | $ | 78,223,000 |           
|                                                     |                                     |                                       |            |                          |             |                        |            |               |            |               |            |             |             |   |            |           
|Costs and Expenses:                                  |                                     |                                       |            |                          |             |                        |            |               |            |               |            |             |             |   |            |           
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Cost of sales and operating         |                                       |            | 14,007,000               |             |                        |            | 14,218,000    |            |               |            | 27,767,000  |             |   |            | 26,834,000 |           
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Selling, general and administrative |                                       |            | 16,164,000               |             |                        |            | 17,824,000    |            |               |            | 30,497,000  |             |   |            | 35,043,000 |           
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Depreciation and amortization       |                                       |            | 10,182,000               |             |                        |            | 8,695,000     |            |               |            | 20,142,000  |             |   |            | 15,971,000 |           
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Restructuring charge                |                                       |            | 9,304.000                |             |                        |            |              |            |               |            | 9,304.000   |             |   |            |           |           
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Impairment of assets                |                                       |            | 7,153,000                |             |                        |            |              |            |               |            | 7,153,000   |             |   |            |           |           
|                                                     |                                     |                                       |            |                          |             |                        |            |               |            |               |            |             |             |   |            |           
|                                                     |                                     | Income (loss) from operations         |            |                          | (18,311,000 | )                      |            |               | (2,575,000 | )             |            |             | (13,272,000 | ) |            |            | 375,000    |  
|                                                    
|                                                    
|                                                    
|                                                    
|Other Expense (Income):                              |                                     |                                       |            |                          |             |                        |            |               |            |               |            |             |             |   |            |           
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Interest expense                    |                                       |            | 4,403,000                |             |                        |            | 4,676,000     |            |               |            | 9,543,000   |             |   |            | 9,387,000  |           
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Interest income                     |                                       |            | (402,000                 | )           |                        |            | (1,564,000    | )          |               |            | (868,000    | )           |   |            | (2,880,000 | )         
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Gain on redemption of bonds         |                                       |            |                         |             |                        |            |              |            |               |            | (11,942,000 | )           |   |            |           |           
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Other expense                       |                                       |            | 1,000                    |             |                        |            |              |            |               |            | 1,000       |             |   |            | 11,000     |           
|                                                     |                                     |                                       |            |                          |             |                        |            |               |            |               |            |             |             |   |            |           
|                                                     |                                     | Total other expense (income), net     |            |                          | 4,002,000   |                        |            |               | 3,112,000  |               |            |             | (3,266,000  | ) |            |            | 6,518,000  |  
|                                                     |                                     |                                       |            |                          |             |                        |            |               |            |               |            |             |             |   |            |           
|                                                     |                                     | Loss before benefit from income taxes |            |                          | (22,313,000 | )                      |            |               | (5,687,000 | )             |            |             | (10,006,000 | ) |            |            | (6,143,000 | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                     | Benefit from income taxes             |            |                          | (8,925,000  | )                      |            |               | (2,063,000 | )             |            |             | (4,002,000  | ) |            |            | (2,034,000 | )
|                                                     |                                     |                                       |            |                          |             |                        |            |               |            |               |            |             |             |   |            |           
|                                                     |                                     | Net loss                              |            | $                        | (13,388,000 | )                      |            | $             | (3,624,000 | )             |            | $           | (6,004,000  | ) |            | $          | (4,109,000 | )
|                                                     |                                     |                                       |            |                          |             |                        |            |               |            |               |            |             |             |   |            |           
|Basic and diluted loss per share                     |                                     | $                                     | (0.37      | )                        |             | $                      | (0.10      | )             |            | $             | (0.17      | )           |             | $ | (0.11      | )         
|                                                    
|                                                    
|                                                    
|                                                    
|Basic and diluted weighted
averageshares outstanding |                                     |                                       | 36,279,184 |                          |             |                        | 36,020,844 |               |            |               | 36,208,866 |             |             |   | 36,010,986 |           
|                                                     |                                     |                                       |            |                          |             |                        |            |               |            |               |            |             |             |   |            |           
|                                                    
|                                                    
|                                                    
|                                                    
|Comprehensive loss:                                  |                                     |                                       |            |                          |             |                        |            |               |            |               |            |             |             |   |            |           
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Net loss                            |                                       | $          | (13,388,000              | )           |                        | $          | (3,624,000    | )          |               | $          | (6,004,000  | )           |   | $          | (4,109,000 | )         
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Other comprehensive income (loss)   |                                       |            | 130,000                  |             |                        |            | (684,000      | )          |               |            | (11,000     | )           |   |            | (261,000   | )         
|                                                     |                                     |                                       |            |                          |             |                        |            |               |            |               |            |             |             |   |            |           
|                                                     |                                     | Comprehensive loss                    |            | $                        | (13,258,000 | )                      |            | $             | (4,308,000 | )             |            | $           | (6,015,000  | ) |            | $          | (4,370,000 | )
|                                                     |                                     |                                       |            |                          |             |                        |            |               |            |               |            |             |             |   |            |           

See notes to these condensed consolidated financial statements.

4



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##### Table of Contents






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

|                                                  |                                                                                 |                                              |                                                   |                                                      |             |                        |             |               |            |            |            |  
|------------------------------------------------- | ------------------------------------------------------------------------------- | -------------------------------------------- | ------------------------------------------------- | ---------------------------------------------------- | ----------- | ---------------------- | ----------- | ------------- | ---------- | ---------- | ---------- | -
|                                                  |                                                                                 |                                              |                                                   |                                                      |             | Six Month Period Ended
|                                                  |                                                                                 |                                              |                                                   |                                                      |             |                       
|                                                  |                                                                                 |                                              |                                                   |                                                      |             | June 30, 2002          |             | June 30, 2001
|                                                  |                                                                                 |                                              |                                                   |                                                      |             |                        |             |              
|Operating Activities:                             |                                                                                 |                                              |                                                   |                                                      |             |                        |             |              
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Net loss                                                                        |                                              | $                                                 | (6,004,000                                           | )           |                        | $           | (4,109,000    | )         
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Adjustments to reconcile net loss to net cash provided by operating activities: |                                              |                                                   |                                                      |             |                        |             |               |           
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                                 | Depreciation and amortization                |                                                   |                                                      | 20,142,000  |                        |             |               | 15,971,000 |           
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                                 | Amortization of deferred financing costs     |                                                   |                                                      | 432,000     |                        |             |               | 426,000    |           
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                                 | Amortization of deferred stock compensation  |                                                   |                                                      | 52,000      |                        |             |               | 32,000     |           
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                                 | Gain on redemption of bonds                  |                                                   |                                                      | (11,942,000 | )                      |             |               |           |           
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                                 | Non-cash restructuring charge                |                                                   |                                                      | 3,216,000   |                        |             |               |           |           
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                                 | Impairment of assets                         |                                                   |                                                      | 7,153,000   |                        |             |               |           |           
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                                 | Provision for doubtful accounts receivable   |                                                   |                                                      | 1,511,000   |                        |             |               | 1,351,000  |           
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                                 | Provision for inventory obsolescence         |                                                   |                                                      | 1,148,000   |                        |             |               |           |           
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                                 | Deferred income tax benefit                  |                                                   |                                                      | (4,002,000  | )                      |             |               | (2,041,000 | )         
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                                 | Loss on disposal of property and equipment   |                                                   |                                                      | 1,000       |                        |             |               | 11,000     |           
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                                 | Changes in operating assets and liabilities: |                                                   |                                                      |             |                        |             |               |            |           
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                                 |                                              | Accounts receivable                               |                                                      |             | 1,233,000              |             |               |            | (1,865,000 | )         
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                                 |                                              | Income taxes receivable and deferred income taxes |                                                      |             | 7,096,000              |             |               |            | 1,961,000  |           
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                                 |                                              | Inventories                                       |                                                      |             | 350,000                |             |               |            | 670,000    |           
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                                 |                                              | Prepaid expenses and other current assets         |                                                      |             | 354,000                |             |               |            | (204,000   | )         
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                                 |                                              | Other assets                                      |                                                      |             | 59,000                 |             |               |            | 66,000     |           
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                                 |                                              | Accounts payable and other accrued liabilities    |                                                      |             | 6,739,000              |             |               |            | (2,781,000 | )         
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                                 |                                              | Accrued interest                                  |                                                      |             | (894,000               | )           |               |            | 1,000      |           
|                                                  |                                                                                 |                                              |                                                   |                                                      |             |                        |             |              
|                                                  |                                                                                 |                                              |                                                   | Net cash provided by operating activities            |             |                        | 26,644,000  |               |            |            | 9,489,000  |  
|                                                  |                                                                                 |                                              |                                                   |                                                      |             |                        |             |              
|Investing activities:                             |                                                                                 |                                              |                                                   |                                                      |             |                        |             |              
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Purchase of property and equipment                                              |                                              |                                                   | (13,949,000                                          | )           |                        |             | (27,690,000   | )         
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Proceeds from disposal of property and equipment                                |                                              |                                                   | 80,000                                               |             |                        |             | 3,000         |           
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Purchase of investments, net                                                    |                                              |                                                   | (9,379,000                                           | )           |                        |             | 23,786,000    |           
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Costs of acquisitions                                                           |                                              |                                                   |                                                     |             |                        |             | (35,000       | )         
|                                                  |                                                                                 |                                              |                                                   |                                                      |             |                        |             |              
|                                                  |                                                                                 |                                              |                                                   | Net cash used in investing activities                |             |                        | (23,248,000 | )             |            |            | (3,936,000 | )
|                                                  |                                                                                 |                                              |                                                   |                                                      |             |                        |             |              
|Financing activities:                             |                                                                                 |                                              |                                                   |                                                      |             |                        |             |              
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Borrowing (payment) under Senior Credit Facility                                |                                              |                                                   | (10,000,000                                          | )           |                        |             | 10,000,000    |           
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Principal payments on Fiber IRU                                                 |                                              |                                                   | (8,620,000                                           | )           |                        |             |              |           
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Proceeds from stock option exercises                                            |                                              |                                                   | 116,000                                              |             |                        |             | 188,000       |           
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Principal payments on capital leases                                            |                                              |                                                   | (3,948,000                                           | )           |                        |             | (1,592,000    | )         
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Principal payments on notes payable                                             |                                              |                                                   |                                                     |             |                        |             | (15,000       | )         
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Payments for deferred financing costs                                           |                                              |                                                   | (100,000                                             | )           |                        |             |              |           
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Redemption of Senior Notes payable                                              |                                              |                                                   | (8,288,000                                           | )           |                        |             |              |           
|                                                  |                                                                                 |                                              |                                                   |                                                      |             |                        |             |              
|                                                  |                                                                                 |                                              |                                                   | Net cash provided by (used in) financing activities  |             |                        | (30,840,000 | )             |            |            | 8,581,000  |  
|                                                  |                                                                                 |                                              |                                                   |                                                      |             |                        |             |              
|                                                  |                                                                                 |                                              |                                                   | Net increase (decrease) in cash and cash equivalents |             |                        | (27,444,000 | )             |            |            | 14,134,000 |  
|                                                 
|                                                 
|                                                 
|                                                 
|Cash and cash equivalents:                        |                                                                                 |                                              |                                                   |                                                      |             |                        |             |              
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Beginning of period                                                             |                                              |                                                   | 64,029,000                                           |             |                        |             | 56,675,000    |           
|                                                  |                                                                                 |                                              |                                                   |                                                      |             |                        |             |              
|                                                  | End of period                                                                   |                                              | $                                                 | 36,585,000                                           |             |                        | $           | 70,809,000    |           
|                                                  |                                                                                 |                                              |                                                   |                                                      |             |                        |             |              
|Supplemental Disclosure of Cash Flow Information: |                                                                                 |                                              |                                                   |                                                      |             |                        |             |              
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Cash paid for interest                                                          |                                              | $                                                 | 10,248,000                                           |             |                        | $           | 10,234,000    |           
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Equipment purchased under capital lease obligations                             |                                              | $                                                 |                                                     |             |                        | $           | 1,962,000     |           

See notes to these condensed consolidated financial statements.

5



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##### Table of Contents






PAC-WEST TELECOMM, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 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 and six month periods ended June 30, 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 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 Installnet, Inc. and two other related companies
(collectively referred to as Installnet) since its acquisition in February
2000.

2.     Restructuring Charges:

In June 2002, the Company approved a restructuring plan that contained
additional business initiatives to those approved and announced in August 2001.
These initiatives, which were intended to respond to continued unfavorable
market conditions, included the closing of the Companys switch facility in
Colorado. In connection with such closing, the Company recorded a $9.3 million
restructuring charge in the second quarter of 2002. Of this amount, $3.2
million related to the write-off of leasehold improvements and
equipment, which
could not be redeployed to other locations and, in managements
best estimate,
had a fair market value of zero; $2.8 million related to circuit commitment
obligations; and $3.2 million related to future rent payments due (assuming
sublease income of zero) for the abandoned premise in Colorado which will be
paid over the lease term, which ends in fiscal year 2010. In order to estimate
rent expense related to this premise, and those premises discussed in the
following paragraph, 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 the Colorado switching
facility, and the Utah switching facility described in the following paragraph,
no sublease income was estimated due to the specialized nature of these
facilities and current economic conditions. As of June 30, 2002, a remaining
restructuring liability of $6.1 million, net of non-cash charges, related to
this restructuring initiative is included in other accrued liabilities in the
accompanying unaudited condensed consolidated balance sheet.

6



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##### Table of Contents



A summary of the restructuring charge recorded in the second quarter of
June 30, 2002 is outlined as follows (unaudited):

|                                                  |  |               |           |                  |  |                     |           |  |  |                         |           | 
|------------------------------------------------- |  | ------------- | --------- | ---------------- |  | ------------------- | --------- |  |  | ----------------------- | --------- | 
|                                                  |  |               |           |                  |  |                     |           |  |  | Restructuring Liability
|                                                  |  | Total Expense |           | Non-Cash Charges |  | as of June 30, 2002
|                                                  |  |               |           |                  |  |                    
|Write-off of leasehold improvements
and equipment |  | $             | 3,216,000 |                  |  | $                   | 3,216,000 |  |  | $                       |          | 
|                                                 
|                                                 
|                                                 
|                                                 
|Rent expense for vacated premises                 |  |               | 3,169,000 |                  |  |                     |          |  |  |                         | 3,169,000 | 
|                                                 
|                                                 
|                                                 
|                                                 
|Circuit obligations                               |  |               | 2,800,000 |                  |  |                     |           |  |  |                         | 2,800,000 | 
|                                                 
|                                                 
|                                                 
|                                                 
|Other charges                                     |  |               | 119,000   |                  |  |                     |          |  |  |                         | 119,000   | 
|                                                  |  |               |           |                  |  |                     |           |  |  |                         |           | 
|                                                  |  | $             | 9,304,000 |                  |  | $                   | 3,216,000 |  |  | $                       | 6,088,000 | 
|                                                  |  |               |           |                  |  |                     |           |  |  |                         |           | 

In August 2001, the Company approved and announced a restructuring plan
which included suspension of its expansion plans in certain states, exiting of
certain lower margin products and services, including residential resale and
customer owned and maintained (COAM) equipment, and undertaking certain cost
reduction initiatives. In addition to restructuring certain product offerings,
the Company closed its switch facility in Utah, consolidated six sales offices,
and completed a workforce reduction of approximately 200 employees as part of
the restructuring initiative. As of June 30, 2002 and December 31, 2001, a
remaining restructuring liability of $2.0 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 activities during the first six months of 2002
related to the restructuring charge recorded in 2001 is outlined as follows:

|                                  |  |                 |           |               |  |               |         |                 |  |   |           | 
|--------------------------------- |  | --------------- | --------- | ------------- |  | ------------- | ------- | --------------- |  | - | --------- | 
|                                  |  | Restructuring   |           |               |  |               |         | Restructuring  
|                                  |  | Liability as of |           |               |  |               |         | Liability as of
|                                  |  | Dec. 31, 2001   |           | Cash Payments |  | June 30, 2002
|                                  |  |                 |           |               |  |              
|Rent expense for vacated premises |  |                 | 2,147,000 |               |  |               | 457,000 |                 |  |   | 1,690,000 | 
|                                 
|                                 
|                                 
|                                 
|Other charges                     |  |                 | 313,000   |               |  |               | 13,000  |                 |  |   | 300,000   | 
|                                  |  |                 |           |               |  |               |         |                 |  |   |           | 
|                                  |  | $               | 2,460,000 |               |  | $             | 470,000 |                 |  | $ | 1,990,000 | 
|                                  |  |                 |           |               |  |               |         |                 |  |   |           | 

3.     Impairment of Long-Lived Assets:

In accordance with Statement of Financial Accounting Standards (SFAS) No.
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.
During the second quarter of fiscal year 2002, as a result of continued
significant negative industry and economic trends in certain of our markets
outside of California, the Company determined that certain of its leasehold
improvements, which could not be redeployed to other locations,
had been impaired. During the second quarter of 2002, in
accordance with SFAS No. 144, the Company recorded an impairment charge for the
specific assets of $7.2 million.

4.     Gain on Redemption of Bonds:

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 and costs paid to outside parties to complete the
transaction, was recorded as an extraordinary gain on early retirement of debt
of $7.2 million, net of tax provision of $4.8 million in the first quarter of
2002. In May 2002, the FASB issued SFAS No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. This Statement rescinds FASB Statement No. 4, Reporting Gains
and Losses from Extinguishment of Debt, and an amendment of that Statement,
FASB Statement No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements. This

7



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##### Table of Contents



Statement amends FASB Statement No. 13, Accounting for Leases, to
eliminate an inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. This
Statement also amends other existing authoritative pronouncements to make
various technical corrections, clarify meanings, or describe their
applicability under changed conditions. The provisions of SFAS No. 145 are
effective in fiscal years beginning after May 15, 2002, with early adoption
permitted and, in general, are to be applied prospectively. Accordingly, the
Company has reclassified the extraordinary gain on early retirement
of debt to gain on redemption of bonds for
the six month period ended June 30, 2002.

5.    Revenue Recognition:

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. Revenues from the sale of telecommunications products are
recognized upon installation, or if no installation is required, upon shipment.
Revenues for non-refundable up-front payments received for installation
services are recognized as revenue ratably over the term of the service
contracts, generally 36 months. 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. Until this issue is ultimately resolved, the Company will
continue to recognize reciprocal compensation as revenue when payment is
received 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 SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities. The Company
classified these investments as available-for-sale and appropriately carried
them at fair value. At June 30, 2002 and December 31, 2001, the Company had
net unrealized losses on investments of $64,000 (unaudited) and $53,000,
respectively, which are recorded as accumulated other comprehensive loss in the
accompanying unaudited condensed consolidated balance sheets. Realized gains
and losses are included in interest income in the accompanying condensed
consolidated statements of operations.

7.     Property and Equipment:

Property and equipment is stated at cost, which includes direct costs and
capitalized interest, and is depreciated once placed in service using the
straight-line method. Capitalized interest of $369,000 and $703,000 was
recorded during the three month periods ended June 30, 2002 and 2001,
respectively, and $465,000 and $1,273,000 was recorded during the six month
periods ended June 30, 2002 and 2001, respectively. Depreciation expense of
$10,128,000 and $7,801,000 was recorded during the three month periods ended
June 30, 2002 and 2001, respectively, and $20,034,000 and $14,172,000 was
recorded during the six month periods ended June 30, 2002 and 2001,
respectively.

8



---



##### Table of Contents



Property and equipment as of June 30, 2002 and December 31, 2001 consist
of the following:

|                                                |  |             |             |              |  |   |             | 
|----------------------------------------------- |  | ----------- | ----------- | ------------ |  | - | ----------- | 
|                                                |  | June 30,    |             | December 31,
|                                                |  | 2002        |             | 2001        
|                                                |  |             |             |             
|                                                |  | (Unaudited) |             |              |  |  
|                                                |  |             |             |              |  |   |             | 
|Network and other communications equipment      |  | $           | 173,637,000 |              |  | $ | 146,703,000 | 
|                                               
|                                               
|                                               
|                                               
|Equipment under capital leases                  |  |             | 23,273,000  |              |  |   | 23,273,000  | 
|                                               
|                                               
|                                               
|                                               
|Office furniture                                |  |             | 2,628,000   |              |  |   | 2,624,000   | 
|                                               
|                                               
|                                               
|                                               
|Business software and computer equipment        |  |             | 27,062,000  |              |  |   | 25,346,000  | 
|                                               
|                                               
|                                               
|                                               
|Vehicles                                        |  |             | 1,817,000   |              |  |   | 2,004,000   | 
|                                               
|                                               
|                                               
|                                               
|Leasehold improvements                          |  |             | 19,032,000  |              |  |   | 30,149,000  | 
|                                               
|                                               
|                                               
|                                               
|Projects-in-progress                            |  |             | 17,551,000  |              |  |   | 32,775,000  | 
|                                                |  |             |             |              |  |   |             | 
|                                                |  |             | 265,000,000 |              |  |   | 262,874,000 | 
|                                               
|                                               
|                                               
|                                               
|Less: accumulated depreciation and amortization |  |             | 80,578,000  |              |  |   | 61,838,000  | 
|                                                |  |             |             |              |  |   |             | 
|Property and equipment, net                     |  | $           | 184,422,000 |              |  | $ | 201,036,000 | 
|                                                |  |             |             |              |  |   |             | 

8.     Other Assets:

As
of June 30, 2002 and December 31, 2001, other assets, net, consist of
the following:

|                                                   |  |             |           |              |  |   |           | 
|-------------------------------------------------- |  | ----------- | --------- | ------------ |  | - | --------- | 
|                                                   |  | June 30,    |           | December 31,
|                                                   |  | 2002        |           | 2001        
|                                                   |  |             |           |             
|                                                   |  | (Unaudited) |           |              |  |  
|                                                   |  |             |           |              |  |   |           | 
|Deferred financing costs                           |  | $           | 3,300,000 |              |  | $ | 4,148,000 | 
|                                                  
|                                                  
|                                                  
|                                                  
|Acquisition of lease rights                        |  |             | 918,000   |              |  |   | 1,026,000 | 
|                                                  
|                                                  
|                                                  
|                                                  
|Long-term portion of deferred
installation costs   |  |             | 384,000   |              |  |   | 448,000   | 
|                                                  
|                                                  
|                                                  
|                                                  
|Long-term portion of prepaid
expenses and deposits |  |             | 134,000   |              |  |   | 133,000   | 
|                                                  
|                                                  
|                                                  
|                                                  
|Employee receivable                                |  |             | 105,000   |              |  |   | 105,000   | 
|                                                   |  |             |           |              |  |   |           | 
|                                                   |  | $           | 4,841,000 |              |  | $ | 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 Senior Notes. Amortization of deferred
financing costs for the three month periods ended June 30, 2002 and 2001 was
$206,000 and $213,000, respectively, and was $432,000 and $426,000 for the six
month periods ended June 30, 2002 and 2001, respectively. Amortization expense
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. 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 facility located in Los Angeles, CA. Amortization expense for this
facility was $54,000 for each of the three month periods ended June 30, 2002
and 2001, and was $108,000 and $120,000 for the six month periods ended June
30, 2002 and 2001, respectively. These amounts are included within
depreciation and amortization expense in the accompanying unaudited condensed
consolidated statements of operations.

9



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##### Table of Contents



9.     Other Accrued Liabilities:

At June 30, 2002 and December 31, 2001, other accrued liabilities consist of
the following:

|                                        |  |             |            |              |  |   |           | 
|--------------------------------------- |  | ----------- | ---------- | ------------ |  | - | --------- | 
|                                        |  | June 30,    |            | December 31,
|                                        |  | 2002        |            | 2001        
|                                        |  |             |            |             
|                                        |  | (Unaudited) |            |              |  |  
|                                        |  |             |            |             
|Taxes payable, collected from customers |  | $           | 497,000    |              |  | $ | 361,000   | 
|                                       
|                                       
|                                       
|                                       
|Acquisition holdbacks                   |  |             | 533,000    |              |  |   | 608,000   | 
|                                       
|                                       
|                                       
|                                       
|Deferred revenue                        |  |             | 1,876,000  |              |  |   | 964,000   | 
|                                       
|                                       
|                                       
|                                       
|Accrued restructuring charges           |  |             | 8,078,000  |              |  |   | 2,460,000 | 
|                                       
|                                       
|                                       
|                                       
|Other                                   |  |             | 3,816,000  |              |  |   | 3,175,000 | 
|                                        |  |             |            |              |  |   |           | 
|                                        |  | $           | 14,800,000 |              |  | $ | 7,568,000 | 
|                                        |  |             |            |              |  |   |           | 

10.     Income Taxes:

The Companys effective income tax rates for the three and six month
periods ended June 30, 2002 and 2001 reflect the applicable federal and state
statutory income tax rates. The effective income tax rates for the three and
six month periods ended June 30, 2001 also include the tax impact of
non-deductible amortization related to our acquisitions. For the three month
periods ended June 30, 2002 and 2001, the Companys effective income tax rate
was 40% and 36%, respectively. For the six month periods ended June 30, 2002
and 2001, the Companys effective income tax rate was 40% and 33%,
respectively.

11.     Other Comprehensive Income (Loss):

For the three month periods ended June 30, 2002 and 2001, there was
$130,000 and $(684,000), respectively, of other comprehensive income (loss)
pertaining to the net unrealized investment gains (losses). For the six month
periods ended June 30, 2002 and 2001, there was $(11,000) and $(261,000),
respectively, of other comprehensive loss pertaining to the net unrealized
investment losses.

12.     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 due February 1st and August 1st, 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 June 30, 2002, the principal amount due on the Senior Notes is
$129,274,000.

The Company had a three-year senior credit facility which expired June 15,
2002, which provided for maximum borrowings of $40.0 million to finance working
capital, the cost of capital purchases and other corporate transactions. In
June 2001, the Company borrowed $10.0 million under the senior credit facility
and classified the entire balance in current liabilities in the accompanying
unaudited condensed consolidated balance sheet. On June 15, 2002, this amount
was paid in full.

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. During the three month periods
ended June 30, 2002 and 2001, the Company made principal payments and recorded
depreciation expense of approximately $2.0 million and $1.6 million,
respectively under this lease facility. During the six month period ended June
30, 2002 and 2001, the Company made principal payments and recorded
depreciation expense of approximately $3.9 million and $1.6 million,
respectively, under this lease facility. As of June 30, 2002, the Company has
future obligations, excluding interest, of $14.1 million that will be paid over
the remaining term of this lease facility.

10



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##### Table of Contents



13.     Commitments and Contingencies:

Purchase Commitments:

The
Company purchases its switching equipment and products from several
suppliers. During the normal course of business, the Company may
enter into agreements with certain of its suppliers, which allow
these suppliers to procure equipment or inventory based upon criteria
as defined by the Company. As of June 30, 2002, the Company did
not enter into any material future commitments to purchase equipment
or inventory from any of its vendors.

On June 30, 2000, the Company entered into an Indefeasible Right of Use
(IRU) agreement with Qwest Communications (Qwest) 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
bargain 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.
During the second quarter of 2002, the Company amended the IRU Agreement with
Qwest and in accordance with the new agreement, paid Qwest $8.6 million on May
15, 2002. The balance of $8.6 million consists of two principal payments of
$4.4 million and $4.2 million each, which are due and payable on December 15,
2002 and May 15, 2003, respectively. The payment due May 15, 2003 accrues
interest at a variable rate equal to the Prime Rate plus 2% per annum. The IRU
is included in network and other communications equipment as of June 30, 2002
and included in projects-in-progress as of December 31, 2001. The balance of
$8.6 million and $17.2 million payable to Qwest as of June 30, 2002 and
December 31, 2001, respectively, is classified as Fiber IRU liability in the
accompanying unaudited condensed consolidated balance sheets.

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.

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 covered by the interconnection agreements.

The Company is a party to various legal proceedings, including those with
SBC Communications, Inc. (SBC), formerly known as Pacific Bell, and Verizon,
formerly known as GTE, 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. Any of these proceedings may change the rate the Company may charge an
interconnecting carrier for the use of the Companys network.

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

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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 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. SBC 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.

The initial term of the Companys 1999 interconnection agreement with SBC
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, SBC
filed with the CPUC an application for arbitration of unresolved issues
concerning the replacement agreement. One of these issues is the SBC 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 SBCs application, contested the implementation of such charges,
and proposed that the Company be permitted to impose additional charges on SBC.
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 SBC, if
the CPUC modifies rates for unbundled network elements (UNEs).

On May 16, 2002, the California Public Utilities Commission implemented a
UNE pricing structure for local traffic exchanged with SBC in California. A regulatory hearing is
underway to determine the appropriate rate elements and costs for
interconnecting local traffic between carriers in the state of California.
This resulted in approximately $3.1 million of reduced revenue recorded by the
Company during the second quarter of 2002 pending regulatory clarity and a
finalized interconnection agreement.

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 SBC.
Verizon has proposed that when a replacing agreement is approved by the CPUC,
the FCCs rates for ISP bound traffic should apply

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retroactive to April 13, 2002. The eventual outcome of this expected
proceeding 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. An amended complaint was filed on April 19, 2002. 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. Management believes that the plaintiffs
claims against the Company are without merit and is defending the case vigorously utilizing
experienced counsel retained by a number of issuers and individual defendants
in the cases in order to syndicate cost of defense as to common issues. The
cost of defense is bourn by insurance. Motions to dismiss have been filed,
briefed and are pending on behalf of Issuers, including the Company. Insurance
coverage exists for most of the claims against the Company asserted to date against the Company and
the Company may have indemnification rights against its underwriters depending
on the outcome of the case as against those underwriters.

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 and any other litigation the Company
may be involved with in the ordinary course of business, will not materially harm its business, financial
condition or results of operations.

14.     Loss Per Share:

For the three and six month periods ended June 30, 2002 and 2001, dilutive
securities were antidilutive, as they decreased the loss for this period.
Accordingly, options to purchase 40,777 and 793,808 shares were excluded from
the diluted net loss per share calculation for the three month periods ended
June 30, 2002 and 2001, respectively, and options to purchase 48,614 and
1,046,011 shares were excluded from the calculation for the six month periods
ended June 30, 2002 and 2001, respectively.

Basic and diluted net loss per share for the three and six month periods
ended June 30, 2002 and 2001 has been determined as follows:

|                                                      |  |                    |             |                    |  |   |            |  
|----------------------------------------------------- |  | ------------------ | ----------- | ------------------ |  | - | ---------- | -
|                                                      |  | Three Months Ended |             | Three Months Ended
|                                                      |  | June 30, 2002      |             | June 30, 2001     
|                                                      |  |                    |             |                   
|                                                      |  | (Unaudited)        |             | (Unaudited)       
|                                                      |  |                    |             |                   
|Net loss available to common shareholders             |  | $                  | (13,388,000 | )                  |  | $ | (3,624,000 | )
|                                                     
|Basic and diluted weighted average shares
outstanding |  |                    | 36,279,184  |                    |  |   | 36,020,844 |  
|                                                     
|Net loss available to common shareholders             |  | $                  | (0.37       | )                  |  | $ | (0.10      | )
|                                                      |  |                    |             |                    |  |   |            |  

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|                                                      |  |                  |            |                  |  |   |            |  
|----------------------------------------------------- |  | ---------------- | ---------- | ---------------- |  | - | ---------- | -
|                                                      |  | Six Months Ended |            | Six Months Ended
|                                                      |  | June 30, 2002    |            | June 30, 2001   
|                                                      |  |                  |            |                 
|                                                      |  | (Unaudited)      |            | (Unaudited)     
|                                                      |  |                  |            |                 
|Net loss available to common shareholders             |  | $                | (6,004,000 | )                |  | $ | (4,109,000 | )
|                                                     
|Basic and diluted weighted average shares
outstanding |  |                  | 36,208,866 |                  |  |   | 36,010,986 |  
|                                                     
|Net loss available to common shareholders             |  | $                | (0.17      | )                |  | $ | (0.11      | )
|                                                      |  |                  |            |                  |  |   |            |  

15.     Other Recent Pronouncements:

In May 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. This Statement rescinds FASB Statement No. 4, Reporting Gains
and Losses from Extinguishment of Debt, and an amendment of that Statement,
FASB Statement No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements. This Statement amends FASB Statement No. 13, Accounting for
Leases, to eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. This Statement also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions. The provisions of SFAS
No. 145 are effective in fiscal years beginning after May 15, 2002, with early
adoption permitted and, in general, are to be applied prospectively. As
discussed in Note 4, the Company adopted SFAS No. 145 with effect from April
2002 and has reclassified its extraordinary gain on early retirement
of debt recognized in the first quarter of 2002 to gain on redemption
of bonds for the six month period ended June 30,
2002.

In July 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit and Disposal Activities. This statement revises the
accounting for exit and disposal activities under EITF Issue 94-3, Liability
Recognition for Certain Employee Termination Benefits and other Costs to Exit
an Activity, by spreading out the reporting of expenses related to
restructuring activities. Commitment to a plan to exit an activity or dispose
of long-lived assets will no longer be sufficient to record a one-time charge
for most anticipated costs. Instead, companies will record exit or disposal
costs when they are incurred and can be measured at fair value. The
provisions of SFAS No. 146 are effective for exit or disposal activities
initiated after December 31, 2002, however earlier adoption is encouraged.
Companies may not restate previously issued financial statements for the effect
of the provisions of SFAS No. 146. The Company does not anticipate the
adoption of this statement to significantly impact its financial position,
results of operations and cash flows.

16.     Segment Reporting

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 Periods Ended
|                             |  |                          
|                             |  | June 30, 2002             |            | June 30, 2001
|                             |  |                           |            |              
|                             |  | (Unaudited)              
|                             |  |                          
|Local
services               |  | $                         | 32,225,000 |               |  | $ | 29,224,000 | 
|                            
|                            
|                            
|                            
|Long distance service        |  |                           | 3,310,000  |               |  |   | 3,490,000  | 
|                            
|                            
|                            
|                            
|Dedicated transport services |  |                           | 2,445,000  |               |  |   | 2,432,000  | 
|                            
|                            
|                            
|                            
|Product and services         |  |                           | 131,000    |               |  |   | 2,468,000  | 
|                            
|                            
|                            
|                            
|Other                        |  |                           | 388,000    |               |  |   | 548,000    | 
|                             |  |                           |            |               |  |   |            | 
|                             |  | $                         | 38,499,000 |               |  | $ | 38,162,000 | 
|                             |  |                           |            |               |  |   |            | 

|                             |  |                         |            |               |  |   |            | 
|---------------------------- |  | ----------------------- | ---------- | ------------- |  | - | ---------- | 
|                             |  | Six Month Periods Ended
|                             |  |                        
|                             |  | June 30, 2002           |            | June 30, 2001
|                             |  |                         |            |              
|                             |  | (Unaudited)            
|                             |  |                        
|Local services               |  | $                       | 69,010,000 |               |  | $ | 59,771,000 | 
|                            
|                            
|                            
|                            
|Long distance service        |  |                         | 6,686,000  |               |  |   | 7,126,000  | 
|                            
|                            
|                            
|                            
|Dedicated transport services |  |                         | 4,755,000  |               |  |   | 4,779,000  | 
|                            
|                            
|                            
|                            
|Product and services         |  |                         | 370,000    |               |  |   | 5,471,000  | 
|                            
|                            
|                            
|                            
|Other                        |  |                         | 770,000    |               |  |   | 1,076,000  | 
|                             |  |                         |            |               |  |   |            | 
|                             |  | $                       | 81,591,000 |               |  | $ | 78,223,000 | 
|                             |  |                         |            |               |  |   |            | 

17.    Related Party Transactions:

The Companys investments are maintained by professional asset management
firms. A portion of the Companys short-term investments are maintained by a
professional asset management firm where one of the firms principals is
related to an executive officer of the Company.

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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
plans, which were approved in the third quarter of 2001 and in the second
quarter of 2002, are 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
terms 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. (the Company) 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 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.

For the three month periods ended June 30, 2002 and 2001, recognizing
compensation from other communications companies for completing their
customers calls only to the extent such compensation was actually received or
when collectibility was reasonably assured, we had net revenues of
approximately $38.5 million and $38.2 million, respectively, adjusted EBITDA
(earnings before interest, net, income taxes, depreciation and amortization,
excluding restructuring and impairment charges, gain on redemption of bonds,
and income or loss on asset dispositions) of approximately $8.3 million and
$6.1 million, respectively, and net losses of $13.4 million (including $16.5
million of restructuring and impairment charges) and $3.6 million,
respectively. For the six month periods ended June 30, 2002 and 2001, we had
net revenues of approximately $81.6 million and $78.2 million, respectively,
adjusted EBITDA of approximately $23.3 million and $16.3 million, respectively,
and net losses of $6.0 million (including restructuring and
impairment charges and a gain on redemption of bonds) and $4.1
million, respectively.

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As of June 30, 2002, we had 320,042 total DS0 equivalent lines in service,
a 36% increase from lines in service as of June 30, 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 June 30, 2002, our minutes of use were 7.7
billion, an increase of 22% over the second quarter of 2001. For the six month
period ended June 30, 2002, our minutes of use were 15.4 billion, an increase
of 19% over the six month period ended June 30, 2001.

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 and $1.7 million of goodwill amortization
for the three and six month periods ended June 30, 2001, respectively.

In June 2002, the Company approved a restructuring plan that contained
additional business initiatives to those approved and announced in August 2001.
These initiatives, which were intended to respond to continued unfavorable
market conditions, included the closing of the Companys switch facility in
Colorado. In connection with such closing, the Company recorded a $9.3 million
restructuring charge in the second quarter of 2002. Of this amount, $3.2
million related to the write-off of leasehold improvements and
equipment, which
could not be redeployed to other locations and, in managements
best estimate, had a fair market value of zero; $2.8 million related to circuit commitment
obligations; and $3.2 million related to future rent payments due (assuming
sublease income of zero) for the abandoned premise in Colorado, which will be
paid over the respective lease term which ends in fiscal year 2010. In order
to estimate rent expense, the Company made certain assumptions related to this
abandoned premise including: (1) the time period over which the premise would
remain vacant, (2) sublease terms, and (3) estimated sublease rents. Due to
the specialized nature of the switch facility and current economic conditions,
no sublease income was estimated. As of June 30, 2002, a remaining
restructuring liability of $6.1 million, net of non-cash charges, related to
this restructuring initiative is included in other accrued liabilities in the
accompanying unaudited condensed consolidated balance sheet. The Company
anticipates operating and selling, general and administrative savings of
approximately $0.5 million per quarter from the implementation of this
restructuring plan.

In accordance with Statement of Financial Accounting Standards (SFAS) No.
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.
During the second quarter of fiscal year 2002, as a result of continued
significant negative industry and economic trends in certain of our markets
outside of California, the Company determined that certain of its leasehold
improvements, which could not be redeployed to other locations
had been impaired. During the second quarter of 2002, in
accordance with SFAS No. 144, the Company recorded an impairment charge for the
specific assets of $7.2 million.

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. In April 2002, the Financial
Accounting Standards Board (FASB) issued SFAS No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections.
This Statement rescinds FASB Statement No. 4, Reporting Gains
and Losses from Extinguishment of Debt, and an amendment of that Statement,
FASB Statement No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements. This
Statement amends FASB Statement No. 13, Accounting for Leases, to
eliminate an inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. This
Statement also amends other existing authoritative pronouncements to make
various technical corrections, clarify meanings, or describe their
applicability under changed conditions. The provisions of SFAS No. 145 are
effective in fiscal years beginning after May 15, 2002, with early adoption
permitted and, in general, are to be applied prospectively. Accordingly, the
Company has reclassified the extraordinary gain on early retirement
of debt to gain on redemption of bonds for
the six month period ended June 30, 2002.
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

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Senior Notes. The manner, volume and timing of any such purchases, if
any, would depend on then current market conditions for our Senior Notes.

On May 28, 2002, our common stock ceased being quoted on the Nasdaq
National Market and began being quoted on the Nasdaq SmallCap Market. We applied
for listing on the Nasdaq SmallCap Market in connection with the probable
delisting of our common stock from the Nasdaq National Market system as a
result of our common stock not meeting the Nasdaqs minimum bid price
requirement. To regain compliance with this requirement, the minimum closing
bid price of our stock must have closed at $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. As a result of our
listing on the Nasdaq SmallCap Market, we have been afforded an additional 180
calendar days from May 15, 2002 to regain compliance with the Nasdaqs minimum
closing bid price requirement. At the end of this 180 day calendar period, if
we are still not in compliance with the Nasdaqs minimum bid price
requirements, we may be afforded another 180 calendar days provided that we
meet other listing requirements, before we are delisted from the Nasdaq
SmallCap Market.

If we are delisted from the Nasdaq SmallCap Market, there may be a further
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. 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 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 June 30, 2002 and 2001,
recorded reciprocal compensation accounted for approximately 42% and 41%,
respectively, of our revenues. For the six month periods ended June 30, 2002
and 2001, recorded reciprocal compensation accounted for approximately 48% and
40%, respectively, of our revenues. Reciprocal compensation revenue recorded
in the first six months of 2002 includes a payment of $4.8 million received
from Verizon, formerly known as GTE.

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 Federal
Communications Commission (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 of approximately $4.8
million, plus interest. While, until the third quarter of 2001, the incumbent
local exchange carriers have otherwise been paying 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.

On May 16, 2002, the California Public Utilities Commission implemented a
UNE (Unbundled Network Element) pricing structure for local traffic exchanged with SBC in
California. A regulatory hearing is underway to determine the appropriate rate
elements and costs for interconnecting local traffic between carriers in the
state of California.

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This resulted in approximately $3.1 million of reduced revenues recorded
by the Company during the second quarter of 2002 pending regulatory clarity and
a finalized interconnection agreement.

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 SBC Communications, Inc. (SBC), formerly known as 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 13 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.

Quarterly Operating and Statistical Data:

The following tables summarize the results of operations as a percentage
of revenues for the three and six month periods ended June 30, 2002 and 2001.
Revenues for the six month period ended 2002 include a payment received in the
first quarter 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 Periods Ended June 30,
|                                             |  |                                   
|                                             |  | 2002                               |       | 2001
|                                             |  |                                    |       |     
|Consolidated Statements of Operations Data:  |  | (unaudited)                       
|                                             |  |                                   
|Revenue                                      |  |                                    | 100.0 | %    |  |  | 100.0 | % 
|                                            
|                                            
|                                            
|                                            
|Costs of sales and operating expenses        |  |                                    | 36.4  | %    |  |  | 37.2  | % 
|                                            
|                                            
|                                            
|                                            
|Selling, general and administrative expenses |  |                                    | 42.0  | %    |  |  | 46.7  | % 
|                                            
|                                            
|                                            
|                                            
|Depreciation and amortization expenses       |  |                                    | 26.4  | %    |  |  | 22.8  | % 
|                                            
|                                            
|                                            
|                                            
|Restructuring and impairment charges         |  |                                    | 42.7  | %    |  |  |      |   
|                                            
|                                            
|                                            
|                                            
|Loss from operations                         |  |                                    | (47.6 | )%   |  |  | (6.7  | )%
|                                            
|                                            
|                                            
|                                            
|Net loss                                     |  |                                    | (34.8 | )%   |  |  | (9.5  | )%

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|                                             |  |                                  |       |      |  |  |       |   
|-------------------------------------------- |  | -------------------------------- | ----- | ---- |  |  | ----- | --
|                                             |  | Six Month Periods Ended June 30,
|                                             |  |                                 
|                                             |  | 2002                             |       | 2001
|                                             |  |                                  |       |     
|Consolidated Statements of Operations Data:  |  | (unaudited)                     
|                                             |  |                                 
|Revenue                                      |  |                                  | 100.0 | %    |  |  | 100.0 | % 
|                                            
|                                            
|                                            
|                                            
|Costs of sales and operating expenses        |  |                                  | 34.0  | %    |  |  | 34.3  | % 
|                                            
|                                            
|                                            
|                                            
|Selling, general and administrative expenses |  |                                  | 37.4  | %    |  |  | 44.8  | % 
|                                            
|                                            
|                                            
|                                            
|Depreciation and amortization expenses       |  |                                  | 24.7  | %    |  |  | 20.4  | % 
|                                            
|                                            
|                                            
|                                            
|Restructuring and impairment charges         |  |                                  | 20.2  | %    |  |  |      |   
|                                            
|                                            
|                                            
|                                            
|Income (loss) from operations                |  |                                  | (16.3 | )%   |  |  | 0.5   | % 
|                                            
|                                            
|                                            
|                                            
|Net loss                                     |  |                                  | (7.4  | )%   |  |  | (5.3  | )%

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
|                                                |  |              
|                                                |  | 2001          |         | 2002    
|                                                |  |               |         |         
|                                                |  | Jun. 30       |         | Sept. 30 |  | Dec. 31 |         | Mar. 31 |  | Jun. 30
|                                                |  |               |         |          |  |         |         |         |  |        
|                                                |  | (Unaudited)  
|                                                |  |              
|Ports equipped                                  |  |               | 672,000 |          |  |         | 672,000 |         |  |         | 652,800 |  |  |   | 768,000 |  |  |   | 944,644 | 
|                                               
|                                               
|                                               
|                                               
|Lines sold to date                              |  |               | 249,368 |          |  |         | 253,434 |         |  |         | 240,053 |  |  |   | 322,939 |  |  |   | 323,249 | 
|                                               
|                                               
|                                               
|                                               
|Wholesale DS0 equivalent lines in
service       |  |               | 199,975 |          |  |         | 202,801 |         |  |         | 193,266 |  |  |   | 214,145 |  |  |   | 271,802 | 
|                                               
|                                               
|                                               
|                                               
|Retail DS0 equivalent lines in
service          |  |               | 36,218  |          |  |         | 39,650  |         |  |         | 41,978  |  |  |   | 43,461  |  |  |   | 48,240  | 
|                                               
|                                               
|                                               
|                                               
|Total DS0 equivalent lines in
service           |  |               | 236,193 |          |  |         | 242,451 |         |  |         | 235,244 |  |  |   | 257,606 |  |  |   | 320,042 | 
|                                               
|                                               
|                                               
|                                               
|Quarterly minutes of use switched
(in millions) |  |               | 6,290   |          |  |         | 6,436   |         |  |         | 7,286   |  |  |   | 7,714   |  |  |   | 7,656   | 
|                                               
|                                               
|                                               
|                                               
|Capital expenditures (in
thousands)             |  | $             | 9,504   |          |  | $       | 5,092   |         |  | $       | 2,406   |  |  | $ | 7,488   |  |  | $ | 6,461   | 
|                                               
|                                               
|                                               
|                                               
|Employees                                       |  |               | 645     |          |  |         | 428     |         |  |         | 407     |  |  |   | 402     |  |  |   | 406     | 

Three Month Period Ended June 30, 2002 Compared to the Three Month Period Ended June 30, 2001:

Consolidated revenues for the three month period ended June 30, 2002
increased $0.3 million to $38.5 million from $38.2 million for the same period
ended in 2001. The increase in revenues was primarily attributed to an
increase of $1.0 million and $0.4 million in recurring charges and installation
charges billed directly to wholesale markets and business customers,
respectively, an increase of $1.2 million in switched access charges, and a
decrease of $2.3 million in product and service revenues related to
discontinued sales of COAM (customer owned and maintained) equipment. Revenues
from paid local interconnection charges, or reciprocal compensation, remained
fairly flat between periods. Although the number of minutes billed subject to
reciprocal compensation revenues, in accordance with interconnection agreements
the Company has with various carriers, increased 22% during the three month
period ended June 30, 2002 from the same period ended June 30, 2001, this
increase was offset by amounts withheld by SBC during the second quarter
pending regulatory clarity and a finalized interconnection agreement. These
revenues were not recognized during the second quarter of 2002 due to the
uncertainty of collection. Revenues from dedicated transport services and
local and long distance services also remained fairly constant between periods.

Direct billings to our wholesale customers increased $1.0 million, or 10%,
during the three month period ended June 30, 2002 from the same period ended
June 30, 2001. As of June 30, 2002, lines in service to
this

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market were 271,802 compared to 199,975 lines at June 30, 2001, a net
increase of 36%. A significant portion of this line growth is related to one
customer.

Direct billings to small and medium-sized business customers also
increased from June 30, 2001 generating $0.4 million, or 16%, in additional
revenue during the quarter ended June 30, 2002. As of June 30, 2002 lines in
service to our retail market increased from 36,218 lines at June 30, 2001 to
48,240 lines at June 30, 2002, an increase of 33%.

Revenues recorded from switched access charges increased $1.2 million, or
92%, for the three month period ended June 30, 2002, from the same period ended
in 2001 primarily as a result of payments from customers who had previously
delayed making payments to us. The Company did not record these revenues in
prior periods, as collectibility of these delayed payments was not reasonably
assured.

The Company elected to discontinue certain low-margin products and
services such as COAM equipment, residential resale and digital subscriber
lines (DSL) and concentrate efforts in developing next generation offerings.
This decision to discontinue low-margin products and services resulted
in decreased revenues from product and service offerings of $2.3 million, or
95%, in the second quarter of 2002 compared to the same period ended 2001.

Our consolidated operating costs for the three month period ended June 30,
2002 decreased $0.2 million to $14.0 million from $14.2 million for the
corresponding period in 2001. Although the Company continues to expand its
network in response to a higher level of telecommunications activity, the
Companys operating costs for the three month period ended
June 30, 2002 have declined from the same period ended
June 30, 2001 as a result of
implementation of our restructuring plan announced and implemented in the third quarter of
2001. During the second quarter of 2002, these cost savings were partially
offset by a provision for obsolete inventory primarily associated with the
Companys exit from low-margin products and services discussed above.

Our consolidated selling, general and administrative expenses for the
three month period ended June 30, 2002 decreased $1.6 million to $16.2 million
from $17.8 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. As a result of
normal attrition and the workforce reduction implemented in connection with our
restructuring initiatives approved and announced in the third quarter of 2001,
our headcount as of June 30, 2002 was 406 as compared to 645 as of June 30,
2001. The workforce reduction resulted in selling, general and administrative
savings of approximately $1.0 million per month. Partially offsetting these
cost savings, however, were additional legal expenses incurred in connection
with the Companys efforts to defend its position on various reciprocal
compensation proceedings described above in Factors Affecting Operations.
Selling, general and administrative expenses were 42% and 47% of revenues for
the three month periods ended June 30, 2002 and 2001, respectively.

Our consolidated depreciation and amortization expense for the three month
period ended June 30, 2002 increased $1.5 million to $10.2 million, from $8.7
million for the same period in 2001. Depreciation and amortization as a
percentage of revenues increased to 26% for the quarter ended June 30, 2002
from 23% 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 service since June 30, 2001.
During the twelve month period ended June 30, 2002 the Company acquired an
additional $21.4 million of property and equipment.

In June 2002, the Company approved a restructuring plan that contained
additional business initiatives to those approved and announced in August 2001.
These initiatives, which were intended to respond to continued unfavorable
market conditions, included closing of the Companys switch facility in
Colorado. In connection with this closing, the Company recorded a $9.3
million restructuring charge in the second quarter of 2002. Of this amount,
$3.2 million related to the write-off of leasehold improvements and equipment,
which could not be redeployed to other locations and, in managements best
estimate, had a fair market value of zero; $2.8 million related to circuit
commitment obligations; and $3.2 million related to future rent payments due
(assuming sublease income of zero) for the abandoned premise in Colorado which
will be paid over the respective lease term which ends in fiscal year 2010. In
order to estimate rent expense related to this premise the Company made certain
assumptions including; (1) the time period over which the premise would remain
vacant, (2)

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sublease terms, and (3) estimated sublease rents. No sublease income was
estimated for the Colorado switching facility due to its specialized nature and
current economic conditions. As of June 30, 2002, a remaining restructuring
liability of $6.1 million, net of non-cash charges, related to this
restructuring initiative is included in other accrued liabilities in the
accompanying unaudited condensed consolidated balance sheet.

In accordance with Statement of Financial Accounting Standards (SFAS) No.
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.
During the second quarter of fiscal year 2002, as a result of continued
significant negative industry and economic trends in certain of our markets
outside of California, the Company determined that certain of its leasehold
improvements, which could not be redeployed to other locations
had been impaired. During the second quarter of 2002, in
accordance with SFAS No. 144, the Company recorded an impairment charge for the
specific assets of $7.2 million.

Our consolidated interest expense for the three month periods ended June
30, 2002 and 2001 was $4.4 million and $4.7 million, respectively. Interest
expense is net of capitalized interest. 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,
interest expense declined between quarters. During the three month period
ended June 20, 2002 and 2001, the Company capitalized interest of $0.4 million
and $0.7 million, respectively.

The Companys effective income tax rates for the three month periods ended
June 30, 2002 and 2001 reflect the applicable Federal and state statutory
income tax rates. The effective income tax rates for the three month period
ended June 30, 2001 also includes the tax impact of non-deductible amortization
related to our acquisitions. For the three month periods ended June 30, 2002
and 2001, the Companys effective income tax rate was 40% and 36%,
respectively.

Six Month Period Ended June 30, 2002 Compared to the Six Month Period Ended June 30, 2001:

Consolidated revenues for the six month period ended June 30, 2002
increased $3.4 million to $81.6 million from $78.2 million for the same period
ended in 2001. The increase in revenues was primarily attributed to an
increase of $6.8 million in local interconnection revenues, an increase of $1.2
million and $1.0 million in charges billed directly to wholesale markets and
business customers, respectively, a decrease of $0.4 million in local and long
distance usage revenues and a decrease of $5.1 million in product and service
revenues related to discontinued sales of COAM equipment. Revenues recorded
from switched access line charges remained fairly flat between periods.

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, which totaled approximately $4.8 million, plus interest.
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 19% during the six month period ended
June 30, 2002 over the same period ended 2001. The effect of the increase in
minutes combined with the payment received from Verizon in the first quarter of
2002, partially offset by amounts withheld by SBC during the second quarter
pending regulatory clarity and a finalized interconnection agreement, resulted
in a $6.8 million, or 21%, increase in paid interconnection revenues for the
six month period ended June 30, 2002 over the corresponding period in 2001.

Direct billings to our wholesale customers increased $1.2 million, or 6%,
during the six month period ended June 30, 2002 from the same period ended June
30, 2001. As of June 30, 2002, lines in service to this market were 271,802
compared to 199,975 lines at June 30, 2001, an increase of 36%. A significant
portion of this line growth is related to one customer.

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Direct billings to small and medium-sized business customers also
increased from the six month period ended June 30, 2001 generating $1.0
million, or 20%, in additional revenue during the six month period ended June
30, 2002. As of June 30, 2002 lines in service to our retail market increased
from 36,218 lines at June 30, 2001 to 48,240 lines at June 30, 2002, an
increase of 33%.

Outbound local and long distance revenues, including 800, 888, and 877
numbers and travel card calls, decreased $0.4 million during the six month
period ended June 30, 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 during the first six months of 2002 than
it was in the same period ended in 2001 as a result of competitive pricing
pressures experienced in the marketplace.

The Company elected to discontinue certain low-margin products and
services such as COAM equipment, residential resale and DSL and concentrate
efforts in developing next generation offerings. This decision to discontinue
low-margin products and services resulted in decreased revenues from
product and service offerings of $5.1 million, or 93%, in the first six months
of 2002 compared to the same period ended 2001.

Our consolidated operating costs for the six month period ended June 30,
2002 increased $1.0 million to $27.8 million from $26.8 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 combined with a provision for obsolete inventory
primarily associated with the Companys exit from low-margin
products and services discussed above. These increased costs were partially offset by cost savings
recognized as a result of implementation of our restructuring plan announced in
the third quarter of 2001.

Our consolidated selling, general and administrative expenses for the six
month period ended June 30, 2002 decreased $4.5 million to $30.5 million from
$35.0 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 identified in our
restructuring initiatives announced in August 2001, our headcount as of June
30, 2002 was 406 as compared to 645 as of June 30, 2001. The workforce
reduction resulted in selling, general and administrative savings of
approximately $1.0 million per month. Partially offsetting these cost savings,
however, were additional legal expenses incurred in connection with the
Companys efforts to defend its position on various reciprocal compensation
proceedings described above in Factors Affecting Operations. Selling,
general and administrative expenses were 37% and 45% of revenues for the six
month periods ended June 30, 2002 and 2001, respectively.

Our consolidated depreciation and amortization expense for the six month
period ended June 30, 2002 increased $4.1 million to $20.1 million from $16.0
million for the same period in 2001. Depreciation and amortization as a
percentage of revenues increased to 25% for the six month period ended June 30,
2002 from 20% 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 June 30, 2002 the Company acquired an additional
$21.4 million of property and equipment.

In June 2002, the Company approved a restructuring plan that contained
additional business initiatives to those approved and announced in August 2001.
These initiatives, which were intended to respond to continued unfavorable
market conditions, included closing of the Companys switch facility in
Colorado. In connection with this closing, the Company recorded a $9.3
million restructuring charge in the second quarter of 2002. Of this amount,
$3.2 million related to the write-off of leasehold improvements
and equipment,
which could not be redeployed to other locations and, in managements best
estimate, had a fair market value of zero; $2.8 million related to circuit
commitment obligations; and $3.2 million related to future rent payments due
(assuming sublease income zero) for the abandoned premise in Colorado which
will be paid over the respective lease term which ends in fiscal year 2010. In
order to estimate rent expense related to this premise the Company made certain
assumptions including; (1) the time period over which the premise would remain
vacant, (2) sublease terms, and (3) estimated sublease rents. No sublease
income was estimated for the Colorado switching facility due to its specialized
nature and current economic conditions. As of June 30, 2002, a remaining
restructuring

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liability of $6.1 million, net of non-cash charges, related to this
restructuring initiative is included in other accrued liabilities in the
accompanying unaudited condensed consolidated balance sheet.

In accordance with Statement of Financial Accounting Standards (SFAS) No.
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.
During the second quarter of fiscal year 2002, as a result of continued
significant negative industry and economic trends in certain of our markets
outside of California, the Company determined that certain of its leasehold
improvements, which could not be redeployed to other locations
had been impaired. During the second quarter of 2002, in
accordance with SFAS No. 144, the Company recorded an impairment charge for the
specific assets of $7.2 million.

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 and costs paid to outside parties to complete the
transaction, was recorded as a gain on redemption of bonds of $11.9 million.

Our consolidated interest expense for the six month periods ended June 30,
2002 and 2001 was $9.5 million and $9.4 million, respectively. Interest
expense is net of capitalized interest. 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 above,
interest expense on our Senior Notes declined between periods. However, these
interest savings were offset by a reduction of capitalized interest between
periods. During the six month periods ended June 30, 2002 and 2001, the
Company capitalized interest of $0.5 million and $1.3 million, respectively.

The Companys effective income tax rates for the six month periods ended
June 30, 2002 and 2001 reflect the applicable federal and state statutory
income tax rates. The effective income tax rate for the six month period ended
June 30, 2001 also includes the tax impact of non-deductible amortization
related to our acquisitions. For the six month periods ended June 30, 2002 and
2001, the Companys effective income tax rate was 40% and 33%, respectively.

Liquidity and Capital Resources:

Net cash provided by operating activities was $26.6 million for the six
month period ended June 30, 2002 and was $9.5 million for the same period ended
in 2001. The principal difference between periods was attributable to an
increase in cash flow from on-going operations (excluding non-cash items
including depreciation and amortization expense, gain on redemption of bonds,
and restructuring and impairment charges) of $7.0 million. Favorable operating
income between periods is primarily the result of reduced selling, general and
administrative expenses and higher revenues. Operating cash flow also
benefited in 2002 due to $7.1 million of income tax refunds received in 2002,
as compared to $2.0 million received in 2001, coupled with reduced accounts
receivable balances and increased liabilities primarily resulting from accrued
restructuring charges which will be paid in the future.

Net cash used in investing activities was $23.2 million for the six month
period ended June 30, 2002 compared to $3.9 million for the same period ended
in 2001. During the six month period ended June 30, 2002, the Company
purchased $9.4 million, net of investments between periods and sold
$23.8 million, net of investments during the same period ended June 30,
2001. Partially offsetting 2002 purchases, was reduced capital spending
between periods. During the six month period ended June 30, 2002, the Company
invested $13.9 million in capital equipment as compared to $27.7 million during
the same period ended in 2001.

Net cash provided by (used by) financing activities was $(30.8) million
for the six month period ended June 30, 2002 as compared to $8.6 million for
the same period ended in 2001. During the first six months of 2002, the
Company paid down its $10 million Senior Credit Facility, which was initially
drawn down during the second quarter of 2001. During the six month period
ended June 30, 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. Total amounts paid to the holders of the
Companys Senior Notes for

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principal and interest was approximately $8.3 million. Additionally, during
the six month period ended June 30, 2002, the Company made principal payments
on its capital leases of $3.9 million compared to $1.6 million during the same
period ended 2001, and made a principal payment related to its Indefeasible
Right of Use (IRU) agreement with Qwest Communications, as described
below.

On June 30, 2000, the Company entered into an 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 bargain 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. During the second quarter of
2002, the Company amended the IRU Agreement with Qwest Communications
and, in
accordance with the new agreement, paid Qwest $8.6 million on May 15, 2002.
The balance of $8.6 million was broken down into two principal
payments of $4.4 million and $4.2 million each, which are due and payable on December 15, 2002
and May 15, 2003, respectively. The payment due May 15, 2003 accrues interest
at a variable rate equal to the Prime Rate plus 2% per annum.

The local telecommunications services business is capital intensive. The
Companys operations have required substantial capital investment for the
design, acquisition, construction and implementation of our network. 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 $16.0 million during the balance of 2002. The actual cost of
these additional capital expenditures will depend on a variety of factors.
Additionally, our actual capital expenditure requirements may exceed, or fall
below, the amounts described above.

The Companys Senior Credit Facility expired June 15, 2002 and was paid in
full on this date. The Company is currently reviewing all of its debt
obligations and is 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 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. During the three month periods
ended June 30, 2002 and 2001, the Company made principal payments and recorded
depreciation expense of approximately $2.0 million and $1.6 million,
respectively under this lease facility. During the six month period ended June
30, 2002, the Company made principal payments and recorded depreciation expense
of approximately $4.0 million under this lease facility. As of June 30, 2002,
the Company has future obligations, excluding interest, of $14.1 million that
will be paid over the remaining term of this lease facility.

The Company purchases its switching equipment and
products from several suppliers. During the normal course of
business, the Company may enter into agreements with certain of its
suppliers, which allow these suppliers to procure equipment or
inventory based upon criteria as defined by the Company. As of
June 30, 2002, the Company did not enter into any material future
commitments to purchase equipment or inventory from any of its
vendors. Additionally, from time to time, the Company has disputes
with some of its third party vendors related to amounts owed for
products purchased by, or services rendered to the Company. These
disputes arise from a variety of factors including, among others,
service issues, contract disputes and/or billing errors. The Company
believes that it will be able to resolve these disputes to its
satisfaction.

On May 16, 2002, the California Public Utilities Commission implemented a
UNE (Unbundled Network Element) pricing structure for local traffic
exchanged with SBC in
California. This resulted in an approximately $3.1 million
reduction in revenue recorded by the Company during the second quarter of 2002 pending
regulatory clarity and a finalized interconnection agreement with
SBC. If a pending regulatory hearing confirms the existing UNE pricing structure as final, or the
Company is unable to renegotiate a more favorable pricing structure within
the interconnection agreement currently being negotiated, the Company estimates
that the net effect of this recently adopted UNE pricing structure will have a
negative impact on revenues of approximately $6.4 million per quarter
for the balance of 2002 and an undetermined but negative impact on
revenues thereafter. However, there can be no assurances that the
negative impact on revenues resulting from the implementation of the UNE
will not be greater or less than the Companys estimates at this time.

The Companys principal sources of funds for the next twelve months are
anticipated to be from current cash and short-term investment balances and cash
flows from operating activities. The Company believes that

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these funds will provide sufficient liquidity and capital resources for the
Company to fund its 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 the Company expects to fund, among
other things, its August 1, 2002 semi-annual interest payment on the Senior
Notes of approximately $8.7 million, its $4.4 million principal payment on the
Fiber IRU due December 15th, anticipated capital expenditures of $16.0 million,
and capital lease payments of $3.9 million. Although not currently
contemplated, the foregoing statements do not take into account additional
acquisitions, which, if made, would most likely be funded through a combination
of cash and equity. Depending upon the Companys rate of growth and
profitability, among other things, the Company may require additional equity or
debt financing to meet 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 satisfactory terms.

Our Senior Notes contain 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 is in compliance with its
covenants.

Recent Developments

During
the second quarter of 2002, the Company retained the services of a
new certifying accountant and a new independent tax advisor. In
connection with the change of the Companys certifying
accountant, the Company filed a Current Report on Form 8-K on
June 11, 2002, and amended on June 21, 2002, announcing a
change in certifying accountants.
Additionally, in order to limit the involvement
of our auditors in other areas of our business, we have retained the services
of an independent tax advisor for all of our tax work matters.




ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

The SECs rule related to market risk disclosure requires that the Company
describe and quantify its 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. The Company
is not exposed to market risks from changes in foreign currency exchange rates
or commodity prices. It does not hold derivative financial instruments nor does
it hold securities for trading or speculative purposes. At June 30, 2002, the
Company had $129.3 million of fixed rate notes outstanding, and consequently
has no risk exposure associated with increasing interest rates on its debt.
However, the Company is exposed to changes in interest rates on its investments
in cash equivalents and short-term investments. Substantially all of its
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 the Companys
exposure to long-term interest rate changes. The Company does not use interest
rate derivative instruments to manage its exposure to interest rate changes. A
hypothetical 100 basis point decline in short-term interest rates would reduce
the annualized earnings on its $64.4 million of cash equivalents and short-term
investments at June 30, 2002 by approximately $0.6 million.

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PART II
OTHER INFORMATION




ITEM 1.     Legal Proceedings

See Note 13 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 4.    Submission of Matters to a Vote of Security Holders

The Companys Annual Meeting of Shareholders was held on June 11, 2002.
The following proposals were adopted by the margins indicated:



| | 1 |  | To elect three members of our Board of Directors to hold office for a term of three years.
| | - |  | ------------------------------------------------------------------------------------------

|                  |  |                  |            |          |  |  |           | 
|----------------- |  | ---------------- | ---------- | -------- |  |  | --------- | 
|                  |  | Number of Shares
|                  |  |                 
|                  |  | For              |            | Withheld
|                  |  |                  |            |         
|A. Gary Ames      |  |                  | 26,542,515 |          |  |  | 7,224,302 | 
|                 
|                 
|                 
|                 
|David G. Chandler |  |                  | 32,348,140 |          |  |  | 1,418,677 | 
|                 
|                 
|                 
|                 
|Samuel A. Plum    |  |                  | 32,342,796 |          |  |  | 1,424,021 | 



| | 2. |  | To approve of the amendment and restatement of our 1999 Stock
Incentive Plan to increase the number of shares of common stock
authorized and reserved for option grants under the Plan by 1,000,000
shares.
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|        |  |  |            | 
|------- |  |  | ---------- | 
|For     |  |  | 31,323,513 | 
|       
|       
|       
|       
|Against |  |  | 2,325,830  | 
|       
|       
|       
|       
|Abstain |  |  | 117,474    | 




ITEM 6.    Exhibits and Reports on Form 8-K





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

|               |  |                                                                                                                                                                 |  |  |  | 
|-------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|Exhibit Number |  | Description                                                                                                                                                     |  |  |  | 
|               |  |                                                                                                                                                                 |  |  |  | 
|10.43 (c)      |  | Amendment No. 2 to IRU Agreement dated June 28, 2002, between
Pac-West Telecomm, Inc. and Qwest Communications Corporation.                                    
|              
|              
|              
|              
|10.66          |  | Secured Promissory Note and Executive Stock Pledge Agreements, dated
November 30, 2000 and December 20, 2000, between Pac-West Telecomm, Inc.
and H. Ravi Brar.



|(b) |  | Reports on Form 8-K                                                                                                                 
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | A Current Report on Form 8-K was filed on June 11,
2002, and amended on June 21, 2002 announcing a Change in Certifying
Accountants.

Note:    ITEMS 2, 3, 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 August 14, 2002.

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

28