##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q

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

For the Quarterly Period Ended September 30, 2002

OR

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

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

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [     ]

As of October 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 Income (Loss) (Unaudited)
|                          |                                                                                               | Condensed Consolidated Statements of Cash Flows                                            
|                          |                                                                                               | NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                             
|                          | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                          | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS                          
|                          | ITEM 4. CONTROLS AND PROCEDURES                                                              
|PART II OTHER INFORMATION
|                          | ITEM 1. Legal Proceedings                                                                    
|                          | ITEM 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES               
|Exhibit 99.1             



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##### Table of Contents



PAC-WEST TELECOMM, INC.
Report on Form 10-Q For the Quarterly Period Ended September 30, 2002

Table of Contents

|           |  |                                                                                       |    |                                                                                                                                                               |    |      |    | 
|---------- |  | ------------------------------------------------------------------------------------- | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|           |  |                                                                                       |    |                                                                                                                                                               |    | PAGE
|           |  |                                                                                       |    |                                                                                                                                                               |    |     
|PART I     |  | FINANCIAL INFORMATION                                                                 |    |                                                                                                                                                               |    |     
|          
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|Item 1.    |  | Financial Statements                                                                  |    |                                                                                                                                                               |    |     
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|           |  |                                                                                       |    | Condensed Consolidated Balance Sheets (Unaudited) 
September 30, 2002 and December 31, 2001                                                                  |    |      | 3  | 
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|           |  |                                                                                       |    | Condensed Consolidated Statements of Operations and Comprehensive
Income (Loss) (Unaudited)  Three and nine month periods ended
September 30, 2002 and 2001  |    |      | 4  | 
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|           |  |                                                                                      
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|           |  |                                                                                       |    | Condensed Consolidated Statements of Cash Flows (Unaudited)  Nine
month periods ended September 30, 2002 and 2001                                            |    |      | 5  | 
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|           |  |                                                                                       |    | Notes to Unaudited Condensed Consolidated Financial Statements                                                                                                |    |      | 6  | 
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|Item 2.    |  | Managements Discussion and Analysis of Financial Condition
and Results of Operations |    |                                                                                                                                                               | 16 |     
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|Item 3.    |  | Quantitative and Qualitative Disclosures About Market Risks                           |    |                                                                                                                                                               | 30 |     
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|Item 4.    |  | Controls and Procedures                                                               |    |                                                                                                                                                               | 30 |     
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|PART II    |  | OTHER INFORMATION                                                                     |    |                                                                                                                                                               |    |     
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|Item 1.    |  | Legal Proceedings                                                                     |    |                                                                                                                                                               | 31 |     
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|Item 6.    |  | Exhibits and Reports on Form 8-K                                                      |    |                                                                                                                                                               | 31 |     
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|SIGNATURES |  |                                                                                       | 32 |                                                                                                                                                              
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|           |  |                                                                                      
|           |  |                                                                                       |    | Certification
Pursuant to Rule 13a-14 and Rule 15d-14 of the Securities
and Exchange Act of 1934 signed by the Companys Chairman and
Chief Executive Officer |    |      | 33 | 
|          
|          
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|          
|           |  |                                                                                      
|           |  |                                                                                       |    | Certification
Pursuant to Rule 13a-14 and Rule 15d-14 of the Securities and
Exchange Act of 1934 signed by the Companys Chief Financial
Officer              |    |      | 34 | 

2



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##### Table of Contents






PART I




ITEM 1. FINANCIAL STATEMENTS




PAC-WEST TELECOMM, INC.

Condensed Consolidated Balance Sheets

|                                        |                                                                                                                                    |                                            |             |                    |             |                    |             |             |             | 
|--------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ----------- | ------------------ | ----------- | ------------------ | ----------- | ----------- | ----------- | 
|                                        |                                                                                                                                    |                                            |             | September 30, 2002 |             | December 31, 2001*
|                                        |                                                                                                                                    |                                            |             |                    |             |                   
|                                        |                                                                                                                                    |                                            |             | (unaudited)        |             |                    |             |            
|ASSETS                                  |                                                                                                                                    |                                            |             |                    |             |                    |             |            
|                                       
|                                       
|                                       
|                                       
|Current Assets:                         |                                                                                                                                    |                                            |             |                    |             |                    |             |            
|                                       
|                                       
|                                       
|                                       
|                                        | Cash and cash equivalents                                                                                                          |                                            | $           | 24,446,000         |             |                    | $           | 64,029,000  |            
|                                       
|                                       
|                                       
|                                       
|                                        | Short-term investments                                                                                                             |                                            |             | 26,055,000         |             |                    |             | 18,471,000  |            
|                                       
|                                       
|                                       
|                                       
|                                        | Trade accounts receivable, net of allowances of $3,282,000
and $2,630,000, respectively                                            |                                            |             | 11,357,000         |             |                    |             | 13,621,000  |            
|                                       
|                                       
|                                       
|                                       
|                                        | Inventories                                                                                                                        |                                            |             | 849,000            |             |                    |             | 2,939,000   |            
|                                       
|                                       
|                                       
|                                       
|                                        | Prepaid expenses and other current assets                                                                                          |                                            |             | 2,074,000          |             |                    |             | 3,505,000   |            
|                                       
|                                       
|                                       
|                                       
|                                        | Deferred financing costs, net                                                                                                      |                                            |             | 472,000            |             |                    |             | 785,000     |            
|                                       
|                                       
|                                       
|                                       
|                                        | Deferred tax assets                                                                                                                |                                            |             |                   |             |                    |             | 4,491,000   |            
|                                        |                                                                                                                                    |                                            |             |                    |             |                    |             |            
|                                        |                                                                                                                                    | Total current assets                       |             |                    | 65,253,000  |                    |             |             | 107,841,000 | 
|                                       
|                                       
|                                       
|                                       
|Property and equipment, net             |                                                                                                                                    |                                            | 177,693,000 |                    |             |                    | 201,036,000 |            
|                                       
|                                       
|                                       
|                                       
|Other assets, net                       |                                                                                                                                    |                                            | 4,080,000   |                    |             |                    | 5,860,000   |            
|                                        |                                                                                                                                    |                                            |             |                    |             |                    |             |            
|                                        |                                                                                                                                    | Total assets                               |             | $                  | 247,026,000 |                    |             | $           | 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                                                                                                                   |                                            |             | 8,692,000          |             |                    |             | 11,536,000  |            
|                                       
|                                       
|                                       
|                                       
|                                        | Accrued payroll and related expenses                                                                                               |                                            |             | 3,215,000          |             |                    |             | 2,884,000   |            
|                                       
|                                       
|                                       
|                                       
|                                        | Accrued interest                                                                                                                   |                                            |             | 2,502,000          |             |                    |             | 8,438,000   |            
|                                       
|                                       
|                                       
|                                       
|                                        | Other accrued liabilities                                                                                                          |                                            |             | 15,724,000         |             |                    |             | 7,568,000   |            
|                                       
|                                       
|                                       
|                                       
|                                        | Fiber IRU liability                                                                                                                |                                            |             | 8,620,000          |             |                    |             | 17,240,000  |            
|                                        |                                                                                                                                    |                                            |             |                    |             |                    |             |            
|                                        |                                                                                                                                    | Total current liabilities                  |             |                    | 46,634,000  |                    |             |             | 65,547,000  | 
|                                       
|                                       
|                                       
|                                       
|Senior Notes                            |                                                                                                                                    |                                            | 106,489,000 |                    |             |                    | 150,000,000 |            
|                                       
|                                       
|                                       
|                                       
|Capital leases, less current portion    |                                                                                                                                    |                                            | 4,278,000   |                    |             |                    | 10,192,000  |            
|                                       
|                                       
|                                       
|                                       
|Deferred revenues, less current portion |                                                                                                                                    |                                            | 576,000     |                    |             |                    | 644,000     |            
|                                       
|                                       
|                                       
|                                       
|Deferred income taxes                   |                                                                                                                                    |                                            | 4,929,000   |                    |             |                    | 3,283,000   |            
|                                        |                                                                                                                                    |                                            |             |                    |             |                    |             |            
|                                        |                                                                                                                                    | Total liabilities                          |             |                    | 162,906,000 |                    |             |             | 229,666,000 | 
|                                       
|                                       
|                                       
|                                       
|Commitments and Contingencies (Note 14) |                                                                                                                                    |                                            |             |                    |             |                    |             |            
|                                       
|                                       
|                                       
|                                       
|Stockholders Equity:                   |                                                                                                                                    |                                            |             |                    |             |                    |             |            
|                                       
|                                       
|                                       
|                                       
|                                        | Common stock, $.001 par value; 100,000,000 shares authorized
36,398,531 and 36,148,487 shares issued and outstanding,
respectively |                                            |             | 36,000             |             |                    |             | 36,000      |            
|                                       
|                                       
|                                       
|                                       
|                                        | Additional paid-in capital                                                                                                         |                                            |             | 183,666,000        |             |                    |             | 183,550,000 |            
|                                       
|                                       
|                                       
|                                       
|                                        | Note receivable from stockholder                                                                                                   |                                            |             | (200,000           | )           |                    |             | (200,000    | )          
|                                       
|                                       
|                                       
|                                       
|                                        | Accumulated deficit                                                                                                                |                                            |             | (99,187,000        | )           |                    |             | (98,072,000 | )          
|                                       
|                                       
|                                       
|                                       
|                                        | Accumulated other comprehensive loss                                                                                               |                                            |             | (83,000            | )           |                    |             | (53,000     | )          
|                                       
|                                       
|                                       
|                                       
|                                        | Deferred stock compensation                                                                                                        |                                            |             | (112,000           | )           |                    |             | (190,000    | )          
|                                        |                                                                                                                                    |                                            |             |                    |             |                    |             |            
|                                        |                                                                                                                                    | Total stockholders equity                 |             |                    | 84,120,000  |                    |             |             | 85,071,000  | 
|                                        |                                                                                                                                    |                                            |             |                    |             |                    |             |            
|                                        |                                                                                                                                    | Total liabilities and stockholders equity |             | $                  | 247,026,000 |                    |             | $           | 314,737,000 | 
|                                        |                                                                                                                                    |                                            |             |                    |             |                    |             |            



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

3



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##### Table of Contents






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

|                                            |                                     |                                                            |            |                          |             |                         |            |               |             |               |             |             |             |   |             |             |             |  
|------------------------------------------- | ----------------------------------- | ---------------------------------------------------------- | ---------- | ------------------------ | ----------- | ----------------------- | ---------- | ------------- | ----------- | ------------- | ----------- | ----------- | ----------- | - | ----------- | ----------- | ----------- | -
|                                            |                                     |                                                            |            | Three Month Period Ended |             | Nine Month Period Ended
|                                            |                                     |                                                            |            |                          |             |                        
|                                            |                                     |                                                            |            | September 30,            |             | September 30,           |            | September 30, |             | September 30,
|                                            |                                     |                                                            |            | 2002                     |             | 2001                    |            | 2002          |             | 2001         
|                                            |                                     |                                                            |            |                          |             |                         |            |               |             |              
|Revenues                                    |                                     | $                                                          | 34,201,000 |                          |             | $                       | 35,521,000 |               |             | $             | 115,792,000 |             |             | $ | 113,744,000 |            
|                                            |                                     |                                                            |            |                          |             |                         |            |               |             |               |             |             |             |   |             |            
|Costs and Expenses:                         |                                     |                                                            |            |                          |             |                         |            |               |             |               |             |             |             |   |             |            
|                                           
|                                           
|                                           
|                                           
|                                            | Cost of sales and operating         |                                                            |            | 12,478,000               |             |                         |            | 16,471,000    |             |               |             | 40,245,000  |             |   |             | 43,305,000  |            
|                                           
|                                           
|                                           
|                                           
|                                            | Selling, general and administrative |                                                            |            | 14,592,000               |             |                         |            | 16,532,000    |             |               |             | 45,089,000  |             |   |             | 51,575,000  |            
|                                           
|                                           
|                                           
|                                           
|                                            | Depreciation and amortization       |                                                            |            | 10,097,000               |             |                         |            | 9,223,000     |             |               |             | 30,239,000  |             |   |             | 25,194,000  |            
|                                           
|                                           
|                                           
|                                           
|                                            | Restructuring charge                |                                                            |            | 21,000                   |             |                         |            | 8,764,000     |             |               |             | 9,325,000   |             |   |             | 8,764,000   |            
|                                           
|                                           
|                                           
|                                           
|                                            | Impairment of assets                |                                                            |            |                         |             |                         |            | 16,787,000    |             |               |             | 7,153,000   |             |   |             | 16,787,000  |            
|                                            |                                     |                                                            |            |                          |             |                         |            |               |             |               |             |             |             |   |             |            
|                                            |                                     | Total operating expenses                                   |            |                          | 37,188,000  |                         |            |               | 67,777,000  |               |             |             | 132,051,000 |   |             |             | 145,625,000 |  
|                                           
|                                           
|                                           
|                                           
|                                            |                                     | Loss from operations                                       |            |                          | (2,987,000  | )                       |            |               | (32,256,000 | )             |             |             | (16,259,000 | ) |             |             | (31,881,000 | )
|                                           
|                                           
|                                           
|                                           
|Other (Income) Expense:                     |                                     |                                                            |            |                          |             |                         |            |               |             |               |             |             |             |   |             |            
|                                           
|                                           
|                                           
|                                           
|                                            | Interest expense                    |                                                            |            | 4,116,000                |             |                         |            | 5,311,000     |             |               |             | 13,659,000  |             |   |             | 14,698,000  |            
|                                           
|                                           
|                                           
|                                           
|                                            | Interest income                     |                                                            |            | (408,000                 | )           |                         |            | (770,000      | )           |               |             | (1,276,000  | )           |   |             | (3,650,000  | )          
|                                           
|                                           
|                                           
|                                           
|                                            | Gain on repurchase of bonds         |                                                            |            | (14,854,000              | )           |                         |            |              |             |               |             | (26,796,000 | )           |   |             |            |            
|                                           
|                                           
|                                           
|                                           
|                                            | Other (income) expense              |                                                            |            | 12,000                   |             |                         |            | (55,000       | )           |               |             | 13,000      |             |   |             | (44,000     | )          
|                                            |                                     |                                                            |            |                          |             |                         |            |               |             |               |             |             |             |   |             |            
|                                            |                                     | Total other (income) expense, net                          |            |                          | (11,134,000 | )                       |            |               | 4,486,000   |               |             |             | (14,400,000 | ) |             |             | 11,004,000  |  
|                                            |                                     |                                                            |            |                          |             |                         |            |               |             |               |             |             |             |   |             |            
|                                            |                                     | Income (loss) before provision
(benefit) from income taxes |            |                          | 8,147,000   |                         |            |               | (36,742,000 | )             |             |             | (1,859,000  | ) |             |             | (42,885,000 | )
|                                           
|                                           
|                                           
|                                           
|Provision (benefit) from income taxes       |                                     |                                                            | 3,258,000  |                          |             |                         | (9,958,000 | )             |             |               | (744,000    | )           |             |   | (11,992,000 | )          
|                                            |                                     |                                                            |            |                          |             |                         |            |               |             |               |             |             |             |   |             |            
|                                            |                                     | Net income (loss)                                          |            | $                        | 4,889,000   |                         |            | $             | (26,784,000 | )             |             | $           | (1,115,000  | ) |             | $           | (30,893,000 | )
|                                            |                                     |                                                            |            |                          |             |                         |            |               |             |               |             |             |             |   |             |            
|Basic and diluted income (loss) per share   |                                     | $                                                          | 0.13       |                          |             | $                       | (0.74      | )             |             | $             | (0.03       | )           |             | $ | (0.86       | )          
|                                           
|                                           
|                                           
|                                           
|Basic weighted average shares outstanding   |                                     |                                                            | 36,398,531 |                          |             |                         | 36,103,929 |               |             |               | 36,276,316  |             |             |   | 36,042,193  |            
|                                           
|                                           
|                                           
|                                           
|Diluted weighted average shares
outstanding |                                     |                                                            | 36,401,078 |                          |             |                         | 36,103,929 |               |             |               | 36,276,316  |             |             |   | 36,042,193  |            
|                                           
|                                           
|                                           
|                                           
|Comprehensive income (loss):                |                                     |                                                            |            |                          |             |                         |            |               |             |               |             |             |             |   |             |            
|                                           
|                                           
|                                           
|                                           
|                                            | Net income (loss)                   |                                                            | $          | 4,889,000                |             |                         | $          | (26,784,000   | )           |               | $           | (1,115,000  | )           |   | $           | (30,893,000 | )          
|                                           
|                                           
|                                           
|                                           
|                                            | Other comprehensive loss            |                                                            |            | (19,000                  | )           |                         |            | (12,000       | )           |               |             | (30,000     | )           |   |             | (273,000    | )          
|                                            |                                     |                                                            |            |                          |             |                         |            |               |             |               |             |             |             |   |             |            
|                                            |                                     | Comprehensive income (loss)                                |            | $                        | 4,870,000   |                         |            | $             | (26,796,000 | )             |             | $           | (1,145,000  | ) |             | $           | (31,166,000 | )
|                                            |                                     |                                                            |            |                          |             |                         |            |               |             |               |             |             |             |   |             |            

See accompanying notes to unaudited condensed consolidated financial statements.

4



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##### Table of Contents






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

|                                                  |                                                                                 |                                                   |                                                |                                                      |             |                         |             |                    |             |            |            |  
|------------------------------------------------- | ------------------------------------------------------------------------------- | ------------------------------------------------- | ---------------------------------------------- | ---------------------------------------------------- | ----------- | ----------------------- | ----------- | ------------------ | ----------- | ---------- | ---------- | -
|                                                  |                                                                                 |                                                   |                                                |                                                      |             | Nine Month Period Ended
|                                                  |                                                                                 |                                                   |                                                |                                                      |             |                        
|                                                  |                                                                                 |                                                   |                                                |                                                      |             | September 30, 2002      |             | September 30, 2001
|                                                  |                                                                                 |                                                   |                                                |                                                      |             |                         |             |                   
|Operating activities:                             |                                                                                 |                                                   |                                                |                                                      |             |                         |             |                   
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Net loss                                                                        |                                                   | $                                              | (1,115,000                                           | )           |                         | $           | (30,893,000        | )          
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Adjustments to reconcile net loss to net cash provided by operating activities: |                                                   |                                                |                                                      |             |                         |             |                    |            
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                                 | Depreciation and amortization                     |                                                |                                                      | 30,239,000  |                         |             |                    | 25,194,000  |           
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                                 | Amortization of deferred financing costs          |                                                |                                                      | 575,000     |                         |             |                    | 652,000     |           
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                                 | Amortization of deferred stock compensation       |                                                |                                                      | 78,000      |                         |             |                    | 58,000      |           
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                                 | Impairment of assets                              |                                                |                                                      | 7,153,000   |                         |             |                    |            |           
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                                 | Impairment of enterprise goodwill                 |                                                |                                                      |            |                         |             |                    | 16,787,000  |           
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                                 | Non-cash restructuring charges                    |                                                |                                                      | 3,408,000   |                         |             |                    | 5,000,000   |           
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                                 | Gain on repurchase of bonds                       |                                                |                                                      | (26,796,000 | )                       |             |                    |            |           
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                                 | Provision for doubtful accounts receivable        |                                                |                                                      | 1,596,000   |                         |             |                    | 2,432,000   |           
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                                 | Provision for inventory obsolescence              |                                                |                                                      | 1,148,000   |                         |             |                    | 550,000     |           
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                                 | Deferred income tax benefit                       |                                                |                                                      | (744,000    | )                       |             |                    | (11,992,000 | )         
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                                 | (Gain) loss on disposal of property and equipment |                                                |                                                      | 14,000      |                         |             |                    | (44,000     | )         
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                                 | Changes in operating assets and liabilities:      |                                                |                                                      |             |                         |             |                    |             |           
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                                 |                                                   | Accounts receivable                            |                                                      |             | 726,000                 |             |                    |             | 420,000    |           
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                                 |                                                   | Income taxes receivable                        |                                                      |             | 7,386,000               |             |                    |             | 1,953,000  |           
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                                 |                                                   | Inventories                                    |                                                      |             | 942,000                 |             |                    |             | 1,054,000  |           
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                                 |                                                   | Prepaid expenses and other current assets      |                                                      |             | 1,089,000               |             |                    |             | 795,000    |           
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                                 |                                                   | Other assets                                   |                                                      |             | (12,000                 | )           |                    |             | (2,000     | )         
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                                 |                                                   | Accounts payable and other accrued liabilities |                                                      |             | 5,354,000               |             |                    |             | (3,180,000 | )         
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                                                                 |                                                   | Accrued interest                               |                                                      |             | (5,285,000              | )           |                    |             | (5,062,000 | )         
|                                                  |                                                                                 |                                                   |                                                |                                                      |             |                         |             |                   
|                                                  |                                                                                 |                                                   |                                                | Net cash provided by operating activities            |             |                         | 25,756,000  |                    |             |            | 3,722,000  |  
|                                                  |                                                                                 |                                                   |                                                |                                                      |             |                         |             |                   
|Investing activities:                             |                                                                                 |                                                   |                                                |                                                      |             |                         |             |                   
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Purchase
of property and equipment                                              |                                                   |                                                | (17,460,000                                          | )           |                         |             | (32,808,000        | )          
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Proceeds from disposal of property and equipment                                |                                                   |                                                | 151,000                                              |             |                         |             | 190,000            |            
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Purchase of investments, net                                                    |                                                   |                                                | (7,614,000                                           | )           |                         |             | 27,198,000         |            
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Costs of acquisitions                                                           |                                                   |                                                |                                                     |             |                         |             | 10,000             |            
|                                                  |                                                                                 |                                                   |                                                |                                                      |             |                         |             |                   
|                                                  |                                                                                 |                                                   |                                                | Net cash used in investing activities                |             |                         | (24,923,000 | )                  |             |            | (5,410,000 | )
|                                                  |                                                                                 |                                                   |                                                |                                                      |             |                         |             |                   
|Financing activities:                             |                                                                                 |                                                   |                                                |                                                      |             |                         |             |                   
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Proceeds (payments) from borrowings 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                                              |             |                         |             | 187,000            |            
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Principal payments on capital leases                                            |                                                   |                                                | (5,914,000                                           | )           |                         |             | (3,140,000         | )          
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Principal payments on notes payable                                             |                                                   |                                                |                                                     |             |                         |             | (16,000            | )          
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Payments for deferred financing costs                                           |                                                   |                                                |                                                     |             |                         |             | (50,000            | )          
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Repurchase of Senior Notes payable                                              |                                                   |                                                | (15,998,000                                          | )           |                         |             |                   |            
|                                                  |                                                                                 |                                                   |                                                |                                                      |             |                         |             |                   
|                                                  |                                                                                 |                                                   |                                                | Net cash provided by (used in) financing activities  |             |                         | (40,416,000 | )                  |             |            | 6,981,000  |  
|                                                  |                                                                                 |                                                   |                                                |                                                      |             |                         |             |                   
|                                                  |                                                                                 |                                                   |                                                | Net increase (decrease) in cash and cash equivalents |             |                         | (39,583,000 | )                  |             |            | 5,293,000  |  
|                                                 
|                                                 
|                                                 
|                                                 
|Cash and cash equivalents:                        |                                                                                 |                                                   |                                                |                                                      |             |                         |             |                   
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Beginning of period                                                             |                                                   |                                                | 64,029,000                                           |             |                         |             | 56,675,000         |            
|                                                  |                                                                                 |                                                   |                                                |                                                      |             |                         |             |                   
|                                                  | End of period                                                                   |                                                   | $                                              | 24,446,000                                           |             |                         | $           | 61,968,000         |            
|                                                  |                                                                                 |                                                   |                                                |                                                      |             |                         |             |                   
|Supplemental Disclosure of Cash Flow Information: |                                                                                 |                                                   |                                                |                                                      |             |                         |             |                   
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Cash paid for interest                                                          |                                                   | $                                              | 19,948,000                                           |             |                         | $           | 20,577,000         |            
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Equipment purchased under capital lease obligations                             |                                                   | $                                              |                                                     |             |                         | $           | 1,962,000          |            

See accompanying notes to unaudited condensed consolidated financial statements.

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PAC-WEST TELECOMM, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 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) and enhanced communications service
providers, collectively referred to as service providers, and small and
medium-sized businesses, many of which are communications intensive users.

These accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with accounting principles generally accepted
for interim financial information in the United States of America and
pursuant to the rules and regulations of the Securities and Exchange
Commission. 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 nine month
periods ended September 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 the Company and its subsidiaries. All intercompany
accounts and transactions have been eliminated. Certain prior period amounts
have been reclassified to conform to current period presentations.

2. Revenue Recognition:

In accordance with Staff Accounting Bulletin No. 101 Revenue Recognition
in Financial Statements, 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 service access agreements
are recognized as the service is provided, except for reciprocal compensation
generated by calls placed to ISPs connected through the Companys network. The
right of competitive local exchange carriers (CLECs), such as the Company, to
receive this type of compensation is the subject of numerous regulatory and
legal challenges (see Note 14). Until this issue is ultimately resolved, the
Company will continue to recognize reciprocal compensation as revenue when
received in cash or when collectibility is reasonably assured. Accordingly,
settlements the Company receives in connection with previously disputed
reciprocal compensation billings are recognized as revenue in the month the
cash is received. Revenues from the sale of telecommunications products are
recognized upon installation, or if no installation is required, upon
shipment, which is concurrent with transfer of legal title.
Substantially all our revenues from the sale of telecommunications products
resulted from the sale of replacement parts for customer owned and maintained
(COAM) equipment, which is a product that the Company no longer sells.
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.

3. Concentration of Customers:

During the quarter ended September 30, 2002, one of the Companys service
provider customers accounted for approximately 14% and 8% of its revenues for
the three and nine month periods ended September 30, 2002, respectively, and
for approximately 11% of its gross accounts receivable balance at September 30,
2002. With the exception of two Incumbent Local Exchange Carriers (ILECs),
each of which continue to represent a significant portion of the Companys
total revenues, 19% and 25%, for the three and nine month period ended
September 30, 2002, respectively, and 15% and 17% for the three and nine month
period ended September 30, 2001, respectively, the Company did not have any
other customers that

6



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represented more than 10% of its revenues during these periods. These two
ILECs represented 16% and 14% of the Companys gross accounts receivable
balance at September 30, 2002.

4. Restructuring Charges:

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
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.

In June 2002, the Company approved a restructuring plan that contained
additional business initiatives to those approved and announced in August 2001.
The June 2002 initiative was in response to significant negative industry trends
including bankruptcies and depressed valuations of public telecommunication
companies and 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 the net book value 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 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. Accordingly, the Company
believed the net book value of the leasehold improvements for the
facilities had a fair market value of zero.

During the third quarter of 2002, the Company recorded an additional
charge of $21,000 representing the net difference between the amount estimated
and the actual net book value of impaired leasehold improvements and equipment,
which could not be redeployed to other locations that was written off. As of
September 30, 2002 and December 31, 2001, a remaining restructuring liability
of $7.6 million and $2.5 million, respectively, net of non-cash charges,
related to these restructuring initiatives is included in other accrued
liabilities in the accompanying unaudited condensed consolidated balance
sheets. A roll-forward summary of the Companys restructuring activities
during the first nine months of 2002 is outlined as follows:

|                                     |  |                 |           |               |  |               |           |              |  |                 |            |   |  |   |          |   |  |   |           | 
|------------------------------------ |  | --------------- | --------- | ------------- |  | ------------- | --------- | ------------ |  | --------------- | ---------- | - |  | - | -------- | - |  | - | --------- | 
|                                     |  |                 |           |               |  | 2002 Activity |           |              |  |                
|                                     |  |                 |           |               |  |               |           |              |  |                
|                                     |  | Remaining       |           | Additional    |  | Non-Cash      |           | Cash         |  | Balance of     
|                                     |  | Restructuring   |           | Restructuring |  | Charges       |           | Payments     |  | Restructuring  
|                                     |  | Liability as of |           | Expense       |  | Applied to    |           | Charged      |  | Liability as of
|                                     |  | Dec. 31, 2001   |           | Incurred      |  | Liability     |           | to Liability |  | Sept. 30, 2002 
|                                     |  |                 |           |               |  |               |           |              |  |                
|                                     |  | (Unaudited)    
|Leasehold
improvements and
equipment |  | $               | 171,000   |               |  | $             | 3,237,000 |              |  | $               | (3,408,000 | ) |  | $ |         |   |  | $ |          | 
|                                    
|                                    
|                                    
|                                    
|Rent expense for
vacated premises    |  |                 | 2,147,000 |               |  |               | 3,169,000 |              |  |                 |           |   |  |   | (692,000 | ) |  |   | 4,624,000 | 
|                                    
|                                    
|                                    
|                                    
|Circuit
obligations                  |  |                 |          |               |  |               | 2,800,000 |              |  |                 |           |   |  |   |         |   |  |   | 2,800,000 | 
|                                    
|                                    
|                                    
|                                    
|Other charges                        |  |                 | 142,000   |               |  |               | 119,000   |              |  |                 |           |   |  |   | (68,000  | ) |  |   | 193,000   | 
|                                     |  |                 |           |               |  |               |           |              |  |                 |            |   |  |   |          |   |  |   |           | 
|                                     |  | $               | 2,460,000 |               |  | $             | 9,325,000 |              |  | $               | (3,408,000 | ) |  | $ | (760,000 | ) |  | $ | 7,617,000 | 
|                                     |  |                 |           |               |  |               |           |              |  |                 |            |   |  |   |          |   |  |   |           | 

5. Impairment of Goodwill and Long-Lived Assets:

Goodwill

In accordance with Accounting Principles Board Opinion No. 17 (APB 17),
Intangible Assets, in the third quarter of 2001 the Company determined its
goodwill was fully impaired and recorded an impairment

7



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charge of $16.8 million, an amount that represented the entire net
goodwill balance. Accordingly, the Company discontinued recording further
amortization expense related to such goodwill after the impairment was
recorded.

Property and Equipment

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 trends including bankruptcies and depressed
valuations of public telecommunication companies, the Companys analysis
indicated that certain leasehold improvements residing outside of California
and Nevada, the Companys primary business locations, was impaired. During the second quarter of 2002,
in accordance with SFAS No. 144, the Company recorded an impairment charge of
$7.2 million, which represented the difference between the net book value of
the identified fixed assets and the estimated discounted future cash flows the
Company expected to be generated from the use of these assets over the average
remaining useful lives. The Company's cash flow projections for each
of the Company's geographic locations were developed using each
location's historical growth rate. Certain locations outside of the
Company's primary business locations had negative cash flows over the
estimated useful lives of the assets under evaluation. The Company
assigned a fair value of zero for those assets that could not be
redeployed to business locations with positive cash flows.

6. Gain on Repurchase of Bonds:

During the first and third quarters of 2002, the Company purchased from
holders of its Senior Notes an aggregate of approximately $21 million and $23
million, respectively, 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 repurchase of bonds of $14.9 million and $26.8 million for the three
and nine month periods ended September 30, 2002, respectively. The Company
has recorded the gains on repurchase of bonds in accordance with 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, issued in April 2002, 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.

7. Income Taxes:

The Companys effective income tax rates for the three and nine month
periods ended September 30, 2002 and 2001 reflect the applicable federal and
state statutory income tax rates. For the three month
periods ended September 30, 2002 and 2001, the Companys effective income tax
rate was 40% and 27%, respectively. For the nine month periods ended September
30, 2002 and 2001, the Companys effective income tax rate was 40% and 28%,
respectively.

8. Comprehensive Income (Loss):

For the three month periods ended September 30, 2002 and 2001, there was
$19,000 and $12,000, respectively, of other comprehensive loss pertaining to
the net unrealized investment losses on available-for-sale marketable
securities. For the nine month periods ended September 30, 2002 and 2001,
there was $30,000 and $273,000, respectively, of other comprehensive loss
pertaining to the net unrealized investment losses.

9. Short-Term Investments:

All investments are accounted for in accordance with SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities. All of the
Companys investments are available for current operations as they are highly
liquid and can be converted into cash at any time. The Companys investments
are not subject to penalties for early terminations or sales. Accordingly, the
Company classifies these investments as available-for-sale and carries them at
fair value. At September 30, 2002 and December 31, 2001, the Company had net

8



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unrealized losses on investments of $83,000 and $53,000, respectively,
which are recorded as accumulated other comprehensive loss in the accompanying
condensed consolidated balance sheets. Realized gains and losses,
which are immaterial, are included
in interest income in the accompanying condensed consolidated statements of
operations.

10. 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 $425,000 and $180,000 was
recorded during the three month periods ended September 30, 2002 and 2001,
respectively, and $890,000 and $1,453,000 was recorded during the nine month
periods ended September 30, 2002 and 2001, respectively. Depreciation expense
of $10,043,000 and $8,889,000 was recorded during the three month periods ended
September 30, 2002 and 2001, respectively, and $30,077,000 and $23,061,000 was
recorded during the nine month periods ended September 30, 2002 and 2001,
respectively.

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

|                                                |  |               |             |              |  |   |             | 
|----------------------------------------------- |  | ------------- | ----------- | ------------ |  | - | ----------- | 
|                                                |  | September 30, |             | December 31,
|                                                |  | 2002          |             | 2001        
|                                                |  |               |             |             
|                                                |  | (Unaudited)   |             |              |  |  
|Network and other communications equipment      |  | $             | 188,899,000 |              |  | $ | 146,703,000 | 
|                                               
|                                               
|                                               
|                                               
|Equipment under capital leases                  |  |               | 23,273,000  |              |  |   | 23,273,000  | 
|                                               
|                                               
|                                               
|                                               
|Office furniture                                |  |               | 2,641,000   |              |  |   | 2,624,000   | 
|                                               
|                                               
|                                               
|                                               
|Business software and computer equipment        |  |               | 27,192,000  |              |  |   | 25,346,000  | 
|                                               
|                                               
|                                               
|                                               
|Vehicles                                        |  |               | 1,592,000   |              |  |   | 2,004,000   | 
|                                               
|                                               
|                                               
|                                               
|Leasehold improvements                          |  |               | 21,540,000  |              |  |   | 30,149,000  | 
|                                               
|                                               
|                                               
|                                               
|Projects-in-progress                            |  |               | 2,868,000   |              |  |   | 32,775,000  | 
|                                                |  |               |             |              |  |   |             | 
|                                                |  |               | 268,005,000 |              |  |   | 262,874,000 | 
|                                               
|                                               
|                                               
|                                               
|Less: accumulated depreciation and
amortization |  |               | 90,312,000  |              |  |   | 61,838,000  | 
|                                                |  |               |             |              |  |   |             | 
|Property and equipment, net                     |  | $             | 177,693,000 |              |  | $ | 201,036,000 | 
|                                                |  |               |             |              |  |   |             | 

11. Other Assets:

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

|                                                   |  |               |           |              |  |   |           | 
|-------------------------------------------------- |  | ------------- | --------- | ------------ |  | - | --------- | 
|                                                   |  | September 30, |           | December 31,
|                                                   |  | 2002          |           | 2001        
|                                                   |  |               |           |             
|                                                   |  | (Unaudited)   |           |              |  |  
|Deferred financing costs                           |  | $             | 2,518,000 |              |  | $ | 4,148,000 | 
|                                                  
|                                                  
|                                                  
|                                                  
|Acquisition of lease rights                        |  |               | 864,000   |              |  |   | 1,026,000 | 
|                                                  
|                                                  
|                                                  
|                                                  
|Long-term portion of deferred
installation costs   |  |               | 358,000   |              |  |   | 448,000   | 
|                                                  
|                                                  
|                                                  
|                                                  
|Long-term portion of prepaid expenses
and deposits |  |               | 290,000   |              |  |   | 133,000   | 
|                                                  
|                                                  
|                                                  
|                                                  
|Employee receivable                                |  |               | 50,000    |              |  |   | 105,000   | 
|                                                   |  |               |           |              |  |   |           | 
|                                                   |  | $             | 4,080,000 |              |  | $ | 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 September 30, 2002 and 2001
was $143,000 and $226,000, respectively, and was $575,000 and $652,000 for the
nine month periods ended September 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 and third quarter of 2002, the Company purchased from holders of its
Senior Notes an aggregate of approximately $21 million and $23 million
principal amount of Senior Notes at a substantial discount to face value. In
connection with these

9



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transactions, the Company wrote-off a portion of deferred financing costs
associated with the Senior Notes redeemed.

During 1999, the Company purchased lease rights for additional space in
its Los Angeles facility. Amortization expense for the lease rights of this
facility was $54,000 for each of the three month periods ended September 30,
2002 and 2001, respectively, and was $162,000 and $174,000 for the nine month
periods ended September 30, 2002 and 2001, respectively. These amounts are
included within depreciation and amortization expense in the accompanying
unaudited condensed consolidated statements of operations.

12. Other Accrued and Other Liabilities:

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

|                                        |  |               |            |              |  |   |           | 
|--------------------------------------- |  | ------------- | ---------- | ------------ |  | - | --------- | 
|                                        |  | September 30, |            | December 31,
|                                        |  | 2002          |            | 2001        
|                                        |  |               |            |             
|                                        |  | (Unaudited)   |            |              |  |  
|Taxes payable, collected from customers |  | $             | 497,000    |              |  | $ | 361,000   | 
|                                       
|                                       
|                                       
|                                       
|Acquisition holdbacks                   |  |               | 533,000    |              |  |   | 608,000   | 
|                                       
|                                       
|                                       
|                                       
|Deferred revenue                        |  |               | 1,940,000  |              |  |   | 964,000   | 
|                                       
|                                       
|                                       
|                                       
|Accrued restructuring charges (Note 4)  |  |               | 7,617,000  |              |  |   | 2,460,000 | 
|                                       
|                                       
|                                       
|                                       
|Other                                   |  |               | 5,137,000  |              |  |   | 3,175,000 | 
|                                        |  |               |            |              |  |   |           | 
|                                        |  | $             | 15,724,000 |              |  | $ | 7,568,000 | 
|                                        |  |               |            |              |  |   |           | 

13. Long-Term Debt and Capital Lease Obligations:

On January 29, 1999, the Company issued $150 million of Senior Notes at
par. The Senior Notes bear interest at 13.5 percent per annum payable in
semiannual installments, with all principal due in full on February 1, 2009.
During the first and third quarters of 2002, the Company purchased from holders
of its Senior Notes an aggregate of approximately $43.5 million principal
amount of Senior Notes at a substantial discount to face value. As of
September 30, 2002, the principal amount due on the Senior Notes is $106.5
million.

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, the Senior Credit Facility was paid in full.

In 2001 and 2000, the Company leased $23.3 million of networking products
manufactured by Cisco Systems, Inc. Equipment financed under this lease
facility is being leased for a term of 36 months at which time the Company may
purchase the equipment at fair market value. These networking products have
been accounted for as a capital lease. During the three month periods ended
September 30, 2002 and 2001, the Company made principal payments and recorded
depreciation expense of approximately $2.0 million and $1.5 million,
respectively, related to this leased equipment. During the nine month periods
ended September 30, 2002 and 2001, the Company made principal payments and
recorded depreciation expense of approximately $5.9 million and $3.1 million,
respectively. As of September 30, 2002, the Company has future obligations,
excluding interest, of $12.2 million that will be paid over the remaining terms
of the leased equipment.

14. 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 have
equipment or inventory available for purchase based upon criteria as defined by
the

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Company. As of September 30, 2002, the Company did not have any material
future purchase 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 entered into a short-term note payable, which extended the payment
terms beyond the date the IRU became operational. In accordance with the new
agreement, the Company paid Qwest $8.6 million on May 15, 2002, while the
balance of $8.6 million consists of two principal payments of $4.4 million and
$4.2 million, 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. As the payment terms were revised
from a traditional trade accounts payable activity to a financing activity
under the terms of the amended payable to Qwest, the Company classified the
$8.6 million payment made on May 15, 2002 as a financing activity within the
condensed consolidated statements of cash flows for the nine month period ended
September 30, 2002. The IRU is included in network and other communications
equipment as of September 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 September 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 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.

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

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

In the latter 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. 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 CPUC 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. The impact of this
pricing structure has reduced the Companys reciprocal compensation revenues by
approximately $2.0 million per month from previous billings.

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, 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 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. In October 2002, the executive officers initially named in the
complaint were dismissed from the complaint.

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.

15. Income (Loss) Per Share:

For the nine month period ended September 30, 2002 and the three and nine
month periods ended September 30, 2001, dilutive securities were antidilutive,
as they decreased the loss for these periods. Accordingly, options to purchase
33,099 shares were excluded from the diluted net loss per share calculation for
the nine month period ended September 30, 2002 and options to purchase 499,512
and 872,551 shares were excluded from the calculation for the three and nine
month periods ended September 30, 2001, respectively. Dilutive securities
were included in the diluted net income per share calculation for the three
month period ended September 30, 2002, as the securities were not antidilutive.

Basic and diluted net income (loss) per share for the three and nine month
periods ended September 30, 2002 and 2001 has been determined as follows:

|                                                   |  |                    |            |                    |  |   |             |  
|-------------------------------------------------- |  | ------------------ | ---------- | ------------------ |  | - | ----------- | -
|                                                   |  | Three Months Ended |            | Three Months Ended
|                                                   |  | Sept. 30, 2002     |            | Sept. 30, 2001    
|                                                   |  |                    |            |                   
|                                                   |  | (Unaudited)        |            | (Unaudited)       
|Net income (loss) available to common
shareholders |  | $                  | 4,889,000  |                    |  | $ | (26,784,000 | )
|                                                  
|                                                  
|                                                  
|                                                  
|Basic weighted average shares outstanding          |  |                    | 36,398,531 |                    |  |   | 36,103,929  |  
|                                                  
|                                                  
|                                                  
|                                                  
|Diluted weighted average shares outstanding        |  |                    | 36,401,078 |                    |  |   | 36,103,929  |  
|                                                   |  |                    |            |                    |  |   |             |  
|Basic and diluted net income (loss) per share      |  | $                  | 0.13       |                    |  | $ | (0.74       | )
|                                                   |  |                    |            |                    |  |   |             |  

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|                                                      |  |                   |            |                   |  |   |             |  
|----------------------------------------------------- |  | ----------------- | ---------- | ----------------- |  | - | ----------- | -
|                                                      |  | Nine Months Ended |            | Nine Months Ended
|                                                      |  | Sept. 30, 2002    |            | Sept. 30, 2001   
|                                                      |  |                   |            |                  
|                                                      |  | (Unaudited)       |            | (Unaudited)      
|Net loss available to common shareholders             |  | $                 | (1,115,000 | )                 |  | $ | (30,893,000 | )
|                                                     
|                                                     
|                                                     
|                                                     
|Basic and diluted weighted average shares
outstanding |  |                   | 36,276,316 |                   |  |   | 36,042,193  |  
|                                                      |  |                   |            |                   |  |   |             |  
|Basic and diluted net loss per share                  |  | $                 | (0.03      | )                 |  | $ | (0.86       | )
|                                                      |  |                   |            |                   |  |   |             |  

16. 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 (SFAS No. 145). 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. In the second quarter of 2002, the Company adopted the
provisions of SFAS No. 145.

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.

17. Segment Reporting

Based upon the criteria established by SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information, the Company has determined
that it 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, the
revenue streams share almost all of the various operating expenses. 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
|                             |  |                          
|                             |  | Sept. 30, 2002            |            | Sept. 30, 2001
|                             |  |                           |            |               
|                             |  | (Unaudited)              
|Local services               |  | $                         | 27,850,000 |                |  | $ | 27,416,000 | 
|                            
|                            
|                            
|                            
|Long distance service        |  |                           | 3,476,000  |                |  |   | 3,877,000  | 
|                            
|                            
|                            
|                            
|Dedicated transport services |  |                           | 2,265,000  |                |  |   | 2,519,000  | 
|                            
|                            
|                            
|                            
|Product and services         |  |                           | 13,000     |                |  |   | 1,218,000  | 
|                            
|                            
|                            
|                            
|Other                        |  |                           | 597,000    |                |  |   | 491,000    | 
|                             |  |                           |            |                |  |   |            | 
|                             |  | $                         | 34,201,000 |                |  | $ | 35,521,000 | 
|                             |  |                           |            |                |  |   |            | 

|                             |  |                          |             |                |  |   |             | 
|---------------------------- |  | ------------------------ | ----------- | -------------- |  | - | ----------- | 
|                             |  | Nine Month Periods Ended
|                             |  |                         
|                             |  | Sept. 30, 2002           |             | Sept. 30, 2001
|                             |  |                          |             |               
|                             |  | (Unaudited)             
|Local services               |  | $                        | 96,860,000  |                |  | $ | 87,187,000  | 
|                            
|                            
|                            
|                            
|Long distance service        |  |                          | 10,162,000  |                |  |   | 11,003,000  | 
|                            
|                            
|                            
|                            
|Dedicated transport services |  |                          | 7,021,000   |                |  |   | 7,298,000   | 
|                            
|                            
|                            
|                            
|Product and services         |  |                          | 383,000     |                |  |   | 6,689,000   | 
|                            
|                            
|                            
|                            
|Other                        |  |                          | 1,366,000   |                |  |   | 1,567,000   | 
|                             |  |                          |             |                |  |   |             | 
|                             |  | $                        | 115,792,000 |                |  | $ | 113,744,000 | 
|                             |  |                          |             |                |  |   |             | 

18. Related Party Transactions:

The Companys investments are maintained by professional asset management
firms. A portion of the Companys 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.

19. Subsequent Events:

On October 29, 2002, Pac-West entered into a Settlement Agreement with
Pacific Bell regarding various disputes between the parties for charges billed
by Pac-West in prior fiscal years and during 2002 through August 31st. Under
the terms of the Settlement Agreement, Pacific Bell agreed to pay Pac-West
Fifteen Million Eight Hundred Thousand Dollars in settlement of those claims.

On November 12, 2002, the Company initiated an invitation to its
noteholders to offer to sell their Senior Notes, an aggregate outstanding
principal balance of $106,489,000, to the Company for cash at a price within
the range of $34 to $42 per $100 in principal amount. The Companys purchase
price (not including accrued interest) for the Senior Notes will be determined
by the Modified Dutch Auction procedure. The Company is under no obligation
to purchase any Senior Notes offered in connection with this invitation.
Accordingly, the Company may decide to purchase all, less than all, or none of
the Senior Notes from its noteholders. In connection with the invitation to
offer Senior Notes, the Company is also conducting a consent solicitation to
amend the indenture relating to the Senior Notes. The proposed amendments
would, among other things, substantially remove all of the restrictive
covenants as well as certain events of default related to such covenants.

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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; further reduction of the liquidity of the
market for our common stock as a result of potential delisting from the Nasdaq
SmallCap Market; and our ability to successfully access markets, install
switching electronics, and obtain 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. 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, we 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 September 30, 2002 and 2001, we had net
revenues of approximately $34.2 million and $35.5 million, respectively, net
income (loss) of $4.9 million and $(26.8) million, respectively, and adjusted
EBITDA (earnings before interest, net, income taxes, depreciation and
amortization, restructuring and impairment charges, gain on repurchase of
bonds, and income or loss on asset dispositions) of approximately $7.1 million
and $2.5 million, respectively. For the nine month periods ended September 30,
2002 and 2001, we had net revenues of approximately $115.8 million and $113.7
million, respectively, adjusted EBITDA, as previously defined, of approximately
$30.5 million and $18.9 million, respectively, and net losses of $1.1 million
(including restructuring and impairment charges and gains on repurchase of
bonds) and $30.9 million (including restructuring and impairment charges),
respectively.

Adjusted EBITDA is not a defined measurement accepted by accounting
principles generally accepted in the United States of America, and our
definition of adjusted EBITDA may not necessarily be comparable to EBITDA used
by other companies. Net income includes a number of non-cash factors, such as
depreciation and amortization and impairment of assets, in addition to
infrequently occurring items, such as restructuring

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charges and gains on repurchase of bonds, and as a result we believe that
adjusted EBITDA is an important aid in providing information regarding how our
operating activities contribute to cash flow. The following table reconciles adjusted
EBITDA to the results of operations as reported in our financial statements:

|                                             |  |                          |            |                         |  |                |            |                |  |   |             |  |  |   |             | 
|-------------------------------------------- |  | ------------------------ | ---------- | ----------------------- |  | -------------- | ---------- | -------------- |  | - | ----------- |  |  | - | ----------- | 
|                                             |  | Three Month Period Ended |            | Nine Month Period Ended
|                                             |  |                          |            |                        
|                                             |  | Sept. 30, 2002           |            | Sept. 30, 2001          |  | Sept. 30, 2002 |            | Sept. 30, 2001
|                                             |  |                          |            |                         |  |                |            |               
|Revenues                                     |  | $                        | 34,201,000 |                         |  | $              | 35,521,000 |                |  | $ | 115,792,000 |  |  | $ | 113,744,000 | 
|                                            
|                                            
|                                            
|                                            
|Less:                                        |  |                          |            |                         |  |                |            |                |  |   |             |  |  |   |             | 
|                                            
|                                            
|                                            
|                                            
|Cost of sales and operating expenses         |  |                          | 12,478,000 |                         |  |                | 16,471,000 |                |  |   | 40,245,000  |  |  |   | 43,305,000  | 
|                                            
|                                            
|                                            
|                                            
|Selling, general and
administrative expenses |  |                          | 14,592,000 |                         |  |                | 16,532,000 |                |  |   | 45,089,000  |  |  |   | 51,575,000  | 
|                                             |  |                          |            |                         |  |                |            |                |  |   |             |  |  |   |             | 
|Adjusted EBITDA                              |  | $                        | 7,130,000  |                         |  | $              | 2,518,000  |                |  | $ | 30,458,000  |  |  | $ | 18,864,000  | 
|                                             |  |                          |            |                         |  |                |            |                |  |   |             |  |  |   |             | 

As of September 30, 2002, we had 324,100 total DS-0 (digital signal level
of 64,000 bits per second) equivalent lines in service, referred to as
lines going forward, a 34% increase from
lines in service as of September 30, 2001. In response to technology and
network design evolution toward increased data and VoIP standards, in the
fourth quarter of 2001 we retroactively adjusted our line counting methodology
to adopt industry standard bandwidth based measurement of lines in DS-0
equivalents. Our total lines in service, include wholesale and on-network retail DS-0 line
equivalents. We have also segregated small to medium-size lines into
on-network and off-network components as related to our decision to exit a
number of off-network lines of business. For the quarter ended September 30,
2002, our minutes of use were 8.2 billion, an increase of 28% over the third
quarter of 2001. For the nine month period ended September 30, 2002, our
minutes of use were 23.6 billion, an increase of 22% over the nine month period
ended September 30, 2001.

In June 2002, we approved a restructuring plan that contained additional
business initiatives to those approved and announced in August 2001. The
June 2002 initiative was in to response to significant negative industry trends
including bankruptcies and depressed valuations of public telecommunication
companies, and included the closing of our switch facility in Colorado. In
connection with such closing, we 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 the net book value 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 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, we
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 in Colorado, no sublease income was
estimated. We anticipate operating and selling, general and administrative
savings of approximately $0.5 million per quarter from the implementation of
this restructuring plan, beginning in the fourth quarter of 2002. 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 September 30, 2002, a remaining restructuring
liability of $7.6 million, net of non-cash charges, relating to both of the
restructuring initiatives 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.

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During the second quarter of fiscal year 2002, as a result of continued
significant negative industry trends including bankruptcies and depressed
valuations of public telecommunication companies, the Companys analysis
indicated certain property and equipment residing outside of California and
Nevada, the Companys primary business locations, that could not be redeployed
in other locations was impaired. During the second quarter of 2002, in
accordance with SFAS No. 144, the Company recorded an impairment charge of $7.2
million, which represented the difference between the net book value of the
identified fixed assets and the discounted future cash flows resulting from the
use of these assets over the average remaining useful lives. The Company's cash flow projections for each
of the Company's geographic locations were developed using each
location's historical growth rate. Certain locations outside of the
Company's primary business locations had negative cash flows over the
estimated useful lives of the assets under evaluation. The Company
assigned a fair value of zero for those assets that could not be
redeployed to business locations with positive cash flows.

During the first and third quarters of 2002, we purchased from holders of
our Senior Notes an aggregate of approximately $21 million and $23 million,
respectively, principal amount of Senior Notes at a substantial discount to
face value. The differences between the amounts we paid to the holders of the
Senior Notes and the face values of the amounts purchased and costs paid to
outside parties to complete the transaction, were recorded as gains on
repurchase of bonds of $14.9 million and $26.8 million for the three and nine
month periods ended September 30, 2002, respectively. We have recorded the
gains on repurchase of bonds in accordance with 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, issued in April 2002, 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. 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. We continue to review all of our
debt obligations and are considering various alternatives to continue to reduce
such obligations, including, among other things, the purchase of additional
Senior Notes. Accordingly, on November 12, 2002, the Company initiated an
invitation to its noteholders to offer to sell their Senior Notes, an aggregate
outstanding principal balance of $106,489,000, to the Company for cash at a
price within the range of $34 to $42 per $100 in principal amount and a related
consent solicitation. See Note 19  Subsequent Events and discussion in Liquidity and Capital Resources.

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
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 close 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 were afforded until August 13, 2002, to regain
compliance with the minimum $1.00 bid price per share requirement. Although we
did not meet the minimum per share requirement by this date, we did meet other
financial criteria that enabled us to be afforded an additional 180 calendar
days, or until February 10, 2003, to regain compliance. If we are unable to
regain compliance with the Nasdaqs minimum bid price requirements by February
10, 2003, we will receive notification that our securities will be delisted
from the Nasdaq SmallCap Market. If this happens, we may appeal the decision
to a Listing Qualifications Panel, however there can be no assurance that we
will be afforded any additional time to regain compliance.

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-

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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. In accordance with Staff Accounting
Bulletin No. 101 Revenue Recognition in Financial Statements, 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.

A substantial portion of our revenues is derived from reciprocal
compensation paid by incumbent local exchange carriers with which we have
interconnection agreements. The right of competitive local exchange carriers,
such as the Company, to receive this type of compensation is the subject of
numerous regulatory and legal challenges, further described below. Until the
issues surrounding reciprocal compensation are ultimately resolved, the Company
will continue to recognize reciprocal compensation as revenue when received in
cash or when collectibility is reasonably assured. Accordingly, settlements
the Company receives in connection with previously withheld reciprocal
compensation billings are recognized as revenue in the month the cash is
received. For the quarters ended September 30, 2002 and 2001, reciprocal
compensation accounted for approximately 35% and 40%, respectively, of our
revenues. For the nine month periods ended September 30, 2002 and 2001,
reciprocal compensation accounted for approximately 45% and 41%, respectively,
of our revenues. Reciprocal compensation revenue recorded in the first nine
months of 2002 includes a settlement of $4.8 million received from Verizon,
formerly known as GTE, related to previously withheld reciprocal compensation
billings.

On October 29, 2002, Pac-West entered into a Settlement Agreement with
Pacific Bell regarding various disputes between the parties for charges billed
by Pac-West in prior fiscal years and during 2002 through August 31st. Under
the terms of the Settlement Agreement, Pacific Bell agreed to pay Pac-West
Fifteen Million Eight Hundred Thousand Dollars in settlement of those claims.

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 reciprocal compensation 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. The impact of this pricing structure has
reduced the Companys reciprocal compensation revenues by approximately $2.0
million per month from previous billings.

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 14 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

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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 review on remand from 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 we pay to other companies 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, or circuits, 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 operating costs are a
significant component of total costs as a result of our strategy of leasing
rather than building our own transport facilities. Our lease commitments often
have initial lease terms in excess of one-year from the commitment date. When
the lease commitment is fulfilled, the lease often converts to a month-to-month
agreement and thus reduces our future lease commitments. In fiscal years 2000
and 2001, our lease payments for transmission facilities increased
significantly as a result of our expansion at that time. During these years,
we increased the capacity of our switching facilities in Los Angeles, Oakland
and Stockton, California and completed new switching facilities in, or near,
Phoenix, Arizona, Seattle, Washington, Denver Colorado and Salt Lake City,
Utah. However, in connection with our restructuring initiatives announced in
the third quarter of 2001 and the second quarter of 2002, designed, among other
things, to improve our capital utilization and efficiencies, our recurring
operating costs have decreased from prior periods. Although we continue to
look for ways to continue to reduce our operating costs, we cannot guarantee
that our operating costs will continue to decline in the future.

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 nine month periods ended September 30, 2002 and
2001. Revenues for the nine 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 Sept. 30,
|                                             |  |                                    
|                                             |  | 2002                                |       | 2001
|                                             |  |                                     |       |     
|                                             |  | (unaudited)                        
|Consolidated Statements of Operations Data:  |  |                                     |       |      |  |  |       |   
|                                            
|                                            
|                                            
|                                            
|Revenue                                      |  |                                     | 100.0 | %    |  |  | 100.0 | % 
|                                            
|                                            
|                                            
|                                            
|Costs of sales and operating expenses        |  |                                     | 36.5  | %    |  |  | 46.4  | % 
|                                            
|                                            
|                                            
|                                            
|Selling, general and administrative
expenses |  |                                     | 42.7  | %    |  |  | 46.5  | % 
|                                            
|                                            
|                                            
|                                            
|Depreciation and amortization expenses       |  |                                     | 29.5  | %    |  |  | 26.0  | % 
|                                            
|                                            
|                                            
|                                            
|Restructuring and impairment charges         |  |                                     | 0.1   | %    |  |  | 71.9  | % 
|                                            
|                                            
|                                            
|                                            
|Loss from operations                         |  |                                     | (8.7  | )%   |  |  | (90.8 | )%
|                                            
|                                            
|                                            
|                                            
|Gain on repurchase of bonds                  |  |                                     | 43.4  | %    |  |  |      |   
|                                            
|                                            
|                                            
|                                            
|Net income (loss)                            |  |                                     | 14.3  | %    |  |  | (75.4 | )%

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|                                             |  |                                    |       |      |  |  |       |   
|-------------------------------------------- |  | ---------------------------------- | ----- | ---- |  |  | ----- | --
|                                             |  | Nine Month Periods Ended Sept. 30,
|                                             |  |                                   
|                                             |  | 2002                               |       | 2001
|                                             |  |                                    |       |     
|                                             |  | (unaudited)                       
|Consolidated Statements of Operations Data:  |  |                                    |       |      |  |  |       |   
|                                            
|                                            
|                                            
|                                            
|Revenue                                      |  |                                    | 100.0 | %    |  |  | 100.0 | % 
|                                            
|                                            
|                                            
|                                            
|Costs of sales and operating expenses        |  |                                    | 34.8  | %    |  |  | 38.1  | % 
|                                            
|                                            
|                                            
|                                            
|Selling, general and administrative expenses |  |                                    | 38.9  | %    |  |  | 45.3  | % 
|                                            
|                                            
|                                            
|                                            
|Depreciation and amortization expenses       |  |                                    | 26.1  | %    |  |  | 22.1  | % 
|                                            
|                                            
|                                            
|                                            
|Restructuring and impairment charges         |  |                                    | 14.2  | %    |  |  | 22.5  | % 
|                                            
|                                            
|                                            
|                                            
|Loss from operations                         |  |                                    | (14.0 | )%   |  |  | (28.0 | )%
|                                            
|                                            
|                                            
|                                            
|Gain on repurchase of bonds                  |  |                                    | 23.1  | %    |  |  |      |   
|                                            
|                                            
|                                            
|                                            
|Net loss                                     |  |                                    | (1.0  | )%   |  |  | (27.2 | )%

The following table sets forth unaudited statistical data for each of the
specified quarters of 2002 and 2001. 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
|                                                  |  |              
|                                                  |  | 2002          |         | 2001   
|                                                  |  |               |         |        
|                                                  |  | Sept. 30      |         | Jun. 30 |  | Mar. 31 |         | Dec. 31 |  | Sept. 30
|                                                  |  |               |         |         |  |         |         |         |  |         
|                                                  |  | (unaudited)  
|Ports equipped                                    |  |               | 944,644 |         |  |         | 944,644 |         |  |          | 768,000 |  |  |   | 652,800 |  |  |   | 672,000 | 
|                                                 
|                                                 
|                                                 
|                                                 
|Lines sold to date, net                           |  |               | 328,649 |         |  |         | 323,249 |         |  |          | 322,939 |  |  |   | 240,053 |  |  |   | 253,434 | 
|                                                 
|                                                 
|                                                 
|                                                 
|Service provider DS-0 equivalent
lines in service |  |               | 272,950 |         |  |         | 271,802 |         |  |          | 214,145 |  |  |   | 193,266 |  |  |   | 202,801 | 
|                                                 
|                                                 
|                                                 
|                                                 
|Retail DS-0 equivalent lines in
service           |  |               | 51,150  |         |  |         | 48,240  |         |  |          | 43,461  |  |  |   | 41,978  |  |  |   | 39,650  | 
|                                                 
|                                                 
|                                                 
|                                                 
|Total DS-0 equivalent lines in
service            |  |               | 324,100 |         |  |         | 320,042 |         |  |          | 257,606 |  |  |   | 235,244 |  |  |   | 242,451 | 
|                                                 
|                                                 
|                                                 
|                                                 
|Quarterly minutes of use switched
(in millions)   |  |               | 8,211   |         |  |         | 7,656   |         |  |          | 7,714   |  |  |   | 7,286   |  |  |   | 6,436   | 
|                                                 
|                                                 
|                                                 
|                                                 
|Capital expenditures (in thousands)               |  | $             | 3,511   |         |  | $       | 6,461   |         |  | $        | 7,488   |  |  | $ | 2,406   |  |  | $ | 5,092   | 
|                                                 
|                                                 
|                                                 
|                                                 
|Employees                                         |  |               | 402     |         |  |         | 406     |         |  |          | 402     |  |  |   | 407     |  |  |   | 428     | 

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

Consolidated revenues for the three month period ended September 30, 2002
decreased $1.3 million, or 3.7%, to $34.2 million from $35.5 million for the
same period ended in 2001. The decrease in revenues was primarily attributed
to a decrease from paid local interconnection charges, or reciprocal
compensation revenue, of $2.0 million, or 14.2%, to $12.1 million from $14.1
million for the same period ended 2001. Although the number of minutes billed
subject to reciprocal compensation revenues, in accordance with interconnection
agreements the Company has with various carriers, increased 28% during the
three month period ended September 30, 2002 from the same period ended
September 30, 2001, this increase was offset by amounts SBC continued to
withhold during the third quarter as a result of the UNE pricing structure for
local traffic implemented by the California Public Utilities Commission. These
withheld revenues were not recognized during the third quarter of 2002 due to the
uncertainty of collection.

Additionally, during the three month period ended September 30, 2002,
product and service revenues related to discontinued sales of COAM equipment
decreased $1.2 million to $13,000, or 98.9%, from $1.2 million for the same
period ended in 2001 and revenues from local and long distances services
decreased $0.4

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million, or 10.3%, to $3.5 million from $3.9 million for the same period ended
in 2001. These unfavorable variances between periods were partially offset by
increased billings to our service provider customers of
$0.8 million, or 8.2%,
to $10.5 million from $9.7 million, increased billings to our business
customers of $0.5 million, or 17.9%, to $3.3 million from $2.8 million, and an
increase of $1.0 million, net in other
interconnection charges for the three month period ended September 30, 2002
from the same period ended 2001.

In 2001, 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 $1.2 million, or
98.9%, in the third quarter of 2002 compared to the same period ended 2001.

Outbound local and long distance revenues, including toll-free numbers and
travel card calls, decreased $0.4 million, or 10.3%, during the three month
period ended September 30, 2002 from the same period ended in 2001. This
decline in revenues between periods was a result of an unusually high number of
minutes billed in the third quarter of 2001, combined with a decrease in the
average rate per minute charged to customers during the three month period
ended September 30, 2002 compared to the same period ended in 2001 as a result
of competitive pricing pressures experienced in the marketplace.

Direct billings to our service provider customers increased $0.8 million,
or 8.2%, during the three month period ended September 30, 2002 from the same
period ended September 30, 2001. As of September 30, 2002, lines in service to
this market were 272,950 compared to 202,801 lines at September 30, 2001, a net
increase of 34.6%. A significant portion of this line growth is related to one
customer.

Direct billings to small and medium-sized business customers also
increased from September 30, 2001 generating $0.5 million,
or 17.9%, in
additional revenue during the quarter ended September 30, 2002. As of
September 30, 2002 lines in service to our retail market increased from 39,650
lines at September 30, 2001 to 51,150 lines at September 30, 2002, an increase
of 29.0%.

Our consolidated operating costs for the three month period ended
September 30, 2002 decreased $4.0 million, or 24.2%, to $12.5 million from
$16.5 million for the corresponding period in 2001. Although we continue to
experience an increase in network operations associated with a higher level of
telecommunications activity our operating costs are declining from prior
periods as a result of discontinuing certain low-margin products and services,
specifically products and services related to COAM equipment and DSL, and
improving capital utilization.

Our consolidated selling, general and administrative expenses for the
three month period ended September 30, 2002 decreased $1.9 million, or 11.5%,
to $14.6 million from $16.5 million for the corresponding period in 2001. In
2001 and 2000, we incurred significant selling and marketing costs in
connection with our efforts to expand our operations and establish a brand
presence in markets before switches became operational and generated revenues.
As a result of normal attrition and the workforce reduction implemented to
respond to unfavorable market conditions and scale back our growth, described
below, our headcount declined by 217 employees during the quarter ended
September 30, 2001. As anticipated, this workforce reduction resulted in
payroll savings of approximately $2.0 million for the three month period ended
September 30, 2002 compared to the same three month period ended 2001.
Additionally, the Companys bad debt expense declined $1.1 million, or 93%,
during the three month period ended September 30, 2002 from the same period
ended 2001 as result of increased bad debt charges taken in 2001 relative to
the softening economy. 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, and additional maintenance and
property tax expense incurred on purchases of equipment between periods.
Selling, general and administrative expenses were 42.7% and 46.5% of revenues
for the three month periods ended September 30, 2002 and 2001, respectively.

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
COAM equipment, and undertaking certain cost reduction initiatives. In
addition to restructuring

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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.

Our consolidated depreciation and amortization expense for the three month
period ended September 30, 2002 increased $0.9 million to $10.1 million, from
$9.2 million for the same period in 2001. Depreciation and amortization as a
percentage of revenues increased to 29.5% for the quarter ended September 30,
2002 from 26.0% 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 September 30, 2001.
During the twelve month period ended September 30, 2002 the Company acquired an
additional $19.9 million of property and equipment. Increased depreciation
expense between periods was partially offset by decreased amortization expense
of $0.6 million as a result of writing off the full net book value of our
goodwill in the third quarter of 2001.

During the third quarter of 2002, the Company purchased from holders of
its Senior Notes an aggregate of approximately $23 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 repurchase of bonds of $14.9 million.
We have recorded the gain on repurchase of bonds in accordance with 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, issued in April 2002, 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. 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. We continue to
review all of our debt obligations and are considering various alternatives to
continue to reduce such obligations, including, among other things, the
purchase of additional Senior Notes. Accordingly, on November 12, 2002, the
Company initiated an invitation to its noteholders to offer to sell their
Senior Notes, an aggregate outstanding principal balance of $106,489,000, to
the Company for cash at a price within the range of $34 to $42 per $100 in
principal amount and a related consent solicitation. See Note 19  Subsequent
Events.

Our consolidated interest expense for the three month periods ended
September 30, 2002 decreased $1.2 million, or 22.6%, to $4.1 million from $5.3
million for the same period ended 2001. 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 and $23 million principal amount of Senior Notes
during the first and third quarters of 2002, interest expense declined between
quarters. During the three month period ended September 30, 2002 and 2001, the
Company capitalized interest of $0.4 million and $0.2 million, respectively.

The Companys effective income tax rates for the three month periods ended
September 30, 2002 and 2001 reflect the applicable Federal and state statutory
income tax rates. For the three month periods ended
September 30, 2002 and 2001, the Companys effective income tax rate was 40%
and 27%, respectively.

Nine Month Period Ended September 30, 2002 Compared to the Nine Month Period
Ended September 30, 2001:

Consolidated revenues for the nine month period ended September 30, 2002
increased $2.1 million, or 1.8%, to $115.8 million from $113.7 million for the
same period ended in 2001. The increase in revenues was primarily attributed
to an increase in local interconnection revenues of $4.8 million, or 10.3%, to
$51.6 million from $46.8 million, increased billings to our service provider
customers of $2.0 million, or 6.7%, to $31.6 million from $29.6 million,
increased billings to our business customers of $1.5 million, or 19.2%, to $9.3
million from $7.8 million and an increase in other interconnection charges of
$0.8 million from the same period
ended 2001. These favorable variances were partially offset by a decrease in
local and long distance usage revenues of $0.8 million, net or 7.3%, to $10.2
million from $11.0

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million, and a decrease in product and service revenues related to
discontinued sales of COAM equipment of $6.3 million, or 94.0%, to $0.4
million from $6.7 million for the same period ended in 2001.

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 22% during the nine month period
ended September 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
and not recorded as revenue during the
second quarter and third quarter as a result of the UNE pricing structure for
local traffic implemented by the California Public Utilities Commission,
resulted in a $4.8 million, or 10.3%, increase in paid interconnection revenues
for the nine month period ended September 30, 2002 over the corresponding
period in 2001.

Direct billings
 to our service provider customers increased $2.0 million,
or 6.7%, during the nine month period ended September 30, 2002 from the same
period ended September 30, 2001. As of September 30, 2002, lines in service to
this market were 272,950 compared to 202,801 lines at September 30, 2001, a net
increase of 34.6%. A significant portion of this line growth is related to one
customer.

Direct billings to small and medium-sized business customers also
increased from the nine month period ended September 30, 2001 generating $1.5
million, or 19.2%, in additional revenue during the nine month period ended
September 30, 2002. As of September 30, 2002 lines in service to our retail
market increased from 39,650 lines at September 30, 2001 to 51,150 lines at
September 30, 2002, an increase of 29.0%.

Outbound local and long distance revenues, including toll-free numbers and
travel card calls, decreased $0.8 million, or 7.3%, during the
nine month period ended September 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 nine months of 2002
than it was in the same period ended in 2001 as a result of competitive pricing
pressures experienced in the marketplace.

In 2001, we 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 $6.3 million, or 94.0%, in the first nine months of
2002 compared to the same period ended 2001.

Our consolidated operating costs for the nine month period ended September
30, 2002 decreased $3.1 million, or 7.2%, to $40.2 million from $43.3 million
for the corresponding period in 2001. Although we continue to experience an
increase in network operations associated with a higher level of
telecommunications activity our operating costs are declining from prior
periods as a result of discontinuing certain low-margin products and services,
specifically products and services related to COAM equipment and DSL, and
improving capital utilization.

Our consolidated selling, general and administrative expenses for the nine
month period ended September 30, 2002 decreased $6.5 million, or 12.6%, to
$45.1 million from $51.6 million for the corresponding period in 2001. In 2001
and 2000, 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 previously
described, our headcount declined by 217 employees during the quarter ended
September 30, 2001. As anticipated, this workforce reduction resulted in
payroll savings of approximately $7.5 million for the nine month period ended
September 30, 2002 from the same nine month period ended 2001. Additionally,
the Companys bad debt expense declined $0.8 million, or 34.4%, during the nine
month period ended 2002 from the same period ended 2001 as result of increased
bad debt charges taken in 2001 relative to the softening economy. Partially
offsetting these cost savings, however, were additional legal expenses incurred
in connection with the

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Companys efforts to defend its position on various reciprocal
compensation proceedings described above in Factors Affecting Operations,
and additional maintenance and property tax expense incurred on purchases of
equipment between periods. Selling, general and administrative expenses were
38.9% and 45.3% of revenues for the nine month periods ended September 30, 2002
and 2001, respectively.

Our consolidated depreciation and amortization expense for the nine month
period ended September 30, 2002 increased $5.0 million, or 19.8%, to $30.2
million from $25.2 million for the same period in 2001. Depreciation and
amortization as a percentage of revenues increased to 26.1% for the nine month
period ended September 30, 2002 from 22.1% 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 September 30, 2001. During the twelve month period ended
September 30, 2002 the Company acquired an additional $19.9 million of property
and equipment. Increased depreciation expense between periods was partially
offset by decreased amortization expense of $2.0 million as a result of writing
off the full net book value of our goodwill in the third quarter of 2001.

In June 2002, we approved a restructuring plan that contained additional
business initiatives to those approved and announced in August 2001.
The June 2002 initiative was in to response to significant negative industry trends
including bankruptcies and depressed valuations of public telecommunication
companies, and included the closing of our switch facility in Colorado. In
connection with this closing, we 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 we 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. 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
September 30, 2002, a remaining restructuring liability of $7.6 million, net of
non-cash charges, relating to both of the restructuring initiatives 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 trends including bankruptcies and depressed
valuations of public telecommunication companies, the Companys analysis
indicated that certain property and equipment residing outside of California
and Nevada, the Companys primary business locations, that could not be
redeployed in other locations was impaired. During the second quarter of 2002,
in accordance with SFAS No. 144, the Company recorded an impairment
charge of $7.2 million, which represented the difference between the net book
value of the identified fixed assets and the discounted future cash flows
resulting from the use of these assets over the average remaining useful lives.

During the first and third quarters of 2002, the Company purchased from
holders of its Senior Notes an aggregate of approximately $43.5 million
principal amount of Senior Notes at a substantial discount to face value. The
differences between the amounts we paid to the holders of the Senior Notes and
the face value of the amounts retired and costs paid to outside parties to
complete the transactions, were recorded as gains on repurchase of bonds which
totaled of $26.8 million for the nine month period ended September 30, 2002.
We have recorded the gains on repurchase of bonds in accordance with Financial
Accounting Standards Board (FASB) issued SFAS No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB

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Statement No. 13, and Technical Corrections. This Statement, issued in
April 2002, 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. 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. We continue to review all of our debt obligations and are
considering various alternatives to continue to reduce such obligations,
including, among other things, the purchase of additional Senior Notes.
Accordingly, on November 12, 2002, the Company initiated an invitation to its
noteholders to offer to sell their Senior Notes, an aggregate outstanding
principal balance of $106,489,000, to the Company for cash at a price within
the range of $34 to $42 per $100 in principal amount and a related consent
solicitation. See Note 19  Subsequent Events and discussion in
Liquidity and Capital Resources.

Our consolidated interest expense for the nine month periods ended
September 30, 2002 decreased $1.0 million, or 6.8%, to $13.7 million from $14.7
million for the same period ended 2001. 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 $43.5 million principal amount of Senior Notes during the
first and third quarters of 2002, described above, interest expense on our
Senior Notes declined between periods. However, these interest savings were
partially offset by a reduction of capitalized interest between periods.
During the nine month periods ended September 30, 2002 and 2001, the Company
capitalized interest of $.9 million and $1.5 million, respectively.

Our effective income tax rates for the nine month periods ended September
30, 2002 and 2001 reflect the applicable federal and state statutory income tax
rates. For the nine month periods ended September 30, 2002 and 2001, our effective income tax rate was 40% and 28%, respectively.

Liquidity and Capital Resources:

Net cash provided by operating activities was $25.8 million for the nine
month period ended September 30, 2002 and was $3.7 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 repurchase of bonds,
restructuring and impairment charges and provision (benefit) from income taxes)
of $8.0 million. Favorable operating income between periods is primarily due
to reduced operating and selling, general and administrative expenses resulting
from the implementation of our restructuring initiatives announced in the third
quarter of 2001 combined with higher revenues. Operating cash flow also
benefited in 2002 from $7.2 million of income tax refunds received in 2002
coupled with increased liabilities primarily resulting from accrued
restructuring charges relating to our initiatives announced in the second
quarter of 2002, which will be paid in the future.

Net cash used in investing activities was $24.9 million for the nine month
period ended September 30, 2002 compared to $5.4 million for the same period
ended in 2001. During the nine month period ended September 30, 2002, the
Company purchased $7.6 million, net of investments and sold $27.2 million, net
of investments during the same period ended September 30, 2001. Partially
offsetting 2002 purchases, was reduced capital spending between periods.
During the nine month period ended September 30, 2002, the Company invested
$17.5 million in capital equipment as compared to $32.8 million during the same
period ended in 2001.

Net cash provided by (used by) financing activities was $(40.4) million
for the nine month period ended September 30, 2002 as compared to $7.0 million
for the same period ended in 2001. During the first nine 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 nine month period
ended September 30, 2002, the Company purchased from holders of its Senior
Notes an aggregate of approximately $43.5 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 principal and interest was
approximately $16.0 million. Additionally, during the nine month period ended
September 30, 2002, the Company made a principal payment related to its

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Indefeasible Right of Use (IRU) agreement with Qwest Communications, as
described below, in addition to principal payments on its capital leases of
$5.9 million compared to $3.1 million during the same period ended 2001.

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 entered into a short-term note payable, which extended the payment
terms beyond the date the IRU became operational. In accordance with the new
agreement, the Company paid Qwest $8.6 million on May 15, 2002, while the
balance of $8.6 million consists of two principal payments of $4.4 million and
$4.2 million, 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. As the payment terms were revised
from a traditional trade accounts payable activity to a financing activity
under the terms of the amended payable to Qwest, the Company classified the
$8.6 million payment made on May 15, 2002 as a financing activity within the
condensed consolidated statements of cash flows for the nine month period ended
September 30, 2002. 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 September 30, 2002 and December 31, 2001, respectively, is
classified as Fiber IRU liability in the accompanying unaudited condensed
consolidated balance sheets.

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 $3.0 million during the balance of 2002, which is significantly
lower than previously anticipated. Many capital purchases previously
anticipated to be incurred in 2002 have been postponed to 2003. 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. On November 12, 2002, the Company
initiated an invitation to its noteholders to offer to sell their Senior Notes,
an aggregate outstanding principal balance of $106,489,000, to the Company for
cash at a price within the range of $34 to $42 per $100 in principal amount.
The Companys purchase price (not including accrued interest) for the Senior
Notes will be determined by the Modified Dutch Auction procedure. The
Company is under no obligation to purchase any Senior Notes offered in
connection with this invitation. Accordingly, the Company may decide to
purchase all, less than all, or none of the Senior Notes from its noteholders.
The Company expects to fund any purchases of its Senior Notes using available
funds. Any such purchases could have a significant impact on the Companys
available cash position. However, the Company believes that the use of
available cash to repurchase the Senior Notes will accelerate the Companys
goals of attaining future cash flow as a result of reduced annual interest
expense. In connection with the invitation to offer Senior Notes, the Company
is also conducting a consent solicitation to amend the indenture relating to
the Senior Notes. The proposed amendments would, among other things,
substantially remove all of the restrictive covenants as well as certain events
of default related to such covenants.

In 2001 and 2000, the Company leased $23.3 million of networking products
manufactured by Cisco Systems, Inc. Equipment financed under this lease
facility is being leased for a term of 36 months at which time the Company may
purchase the equipment at fair market value. These networking products have
been accounted for as a capital lease. During the three month periods ended
September 30, 2002 and 2001, the

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Company made principal payments and recorded depreciation expense of
approximately $2.0 million and $1.5 million, respectively, related to this
leased equipment. During the nine month periods ended September 30, 2002 and
2001, the Company made principal payments and recorded depreciation expense of
approximately $5.9 million and $3.1 million, respectively. As of September 30,
2002, the Company has future obligations, excluding interest, of $12.2 million
that will be paid over the remaining terms of the leased equipment.

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 $9.0 million
reduction in revenue recorded by the Company during the second and third
quarters of 2002 pending regulatory clarity and a finalized interconnection
agreement with SBC. If 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 continue to have a negative impact on
revenues of approximately $2.0 million per month for the balance of 2002.
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 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 have
equipment or inventory available for purchase based upon criteria as defined by
the Company. As of September 30, 2002, the Company did not have any material
future purchase 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.

The Companys principal sources of funds for the next twelve months are
anticipated to be from current cash and investment balances and cash flows from
operating activities. The Company believes that these funds will provide
sufficient liquidity and capital resources for the Company to fund its business
plan, and any purchases of Senior Notes pursuant to the invitation to
offer Senior Notes described above, 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 and the first nine months of 2003 the Company expects to fund, among other
things, its February 1, 2003 and August 1, 2003 semi-annual interest payment on
the Senior Notes of approximately $7.2 million each (based upon the outstanding
principal balance of $106,489,000 as of September 30, 2002), its $4.4 million
and $4.2 million principal payment on the Fiber IRU due December 15th 2002 and
May 15, 2003, respectively, anticipated capital expenditures of
$20.0 million,
and capital lease payments of $7.9 million. Although not currently contemplated, the
foregoing statements do not take into account 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.

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Subsequent Events:

On October 29, 2002, Pac-West entered into a Settlement Agreement with
Pacific Bell regarding various disputes between the parties for charges billed
by Pac-West in prior fiscal years and during 2002 through August 31st. Under
the terms of the Settlement Agreement, Pacific Bell agreed to pay Pac-West
Fifteen Million Eight Hundred Thousand Dollars in settlement of those claims.

On November 12, 2002, the Company initiated an invitation to its
noteholders to offer to sell their Senior Notes, an aggregate outstanding
principal balance of $106,489,000, to the Company for cash at a price within
the range of $34 to $42 per $100 in principal amount. The Companys purchase
price (not including accrued interest) for the Senior Notes will be determined
by the Modified Dutch Auction procedure. The Company is under no obligation
to purchase any Senior Notes offered in connection with this invitation.
Accordingly, the Company may decide to purchase all, less than all, or none of
the Senior Notes from its noteholders. In connection with the invitation to
offer Senior Notes, the Company is also conducting a consent solicitation to
amend the indenture relating to the Senior Notes. The proposed amendments
would, among other things, substantially remove all of the restrictive
covenants as well as certain events of default related to such covenants.

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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 September 30, 2002,
the Company had $106.5 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 investments. Substantially all of its
investments in cash equivalents and 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 $50.5 million of cash equivalents and short-term
investments at September 30, 2002 by approximately $0.5 million.




ITEM 4. CONTROLS AND PROCEDURES



| | (a) |  | Within 90 days prior to the filing of this Report, the Company
carried out an evaluation, under the supervision and with the
participation of the Companys management, including the Chief
Executive Officer and Chief Financial Officer, of the effectiveness of
the design and operation of the Companys disclosure controls and
procedures (as defined in Rule 13a-14(c) of the Securities Exchange
Act of 1934, as amended (the Exchange Act)), in accordance with Rule
13a-15 of the Exchange Act. Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer, together with the other
members of management participating in the evaluation, concluded that
the Company is in compliance with the requirements of Rule 13a-15(a) of
the Exchange Act.
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | There have been no significant changes in the Companys internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of the Companys evaluation of its
disclosure controls and procedures. It should be recognized that the
design of any system of controls is based upon certain assumptions
about the scope of the tasks to be performed and the environment in
which such tasks are to be performed, and there can be no assurance
that any system will achieve its intended results under all
circumstances.                                                                                                                                                                                                                    

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PART II
OTHER INFORMATION




ITEM 1. Legal Proceedings

See Note 14 to the Unaudited Condensed Consolidated Financial Statements
included elsewhere in this Form 10-Q and Managements Discussion and Analysis
of Financial Condition and Results of OperationsFactors Affecting
OperationsRevenues for a description of certain legal proceedings involving
the Company.




ITEM 6. Exhibits and Reports on Form 8-K



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

|     |  |                                                                                                                             
|---- |  | ----------------------------------------------------------------------------------------------------------------------------
|99.1 |  | Certification of Periodic Report by Wallace W. Griffin and
H. Ravi Brar under Section 906 of the Sarbanes-Oxley Act of
2002.



|(b) |  | Reports on Form 8-K                                                                                                                                                                                                                                                                                                            
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | On November 12, 2002, the Company filed a Current Report on form 8-K,
which set forth as an exhibit thereto a press release announcing the
Companys initiation of an invitation to noteholders to offer to the
Company for cash up to $106,489,000 in principal amount of its Senior
Notes and a related consent solicitation.

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

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized on November 14, 2002.

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

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##### Table of Contents



Certification Pursuant to Rule 13a-14 and Rule 15d-14
of the Securities and Exchange Act of 1934

I, Wallace W. Griffin certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of
Pac-West Telecomm, Inc.                                                                                                                                                                                                                                                 
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report;
|  
|3. |  | Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;                   
|  
|4. |  | The registrants other certifying officers and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Rules 13a-14 and 15d-14) for the
registrant and have:                                                                                                            



| | (a) |  | designed such disclosure controls and
procedures to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during the period in which this quarterly report
is being prepared;
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | evaluated the effectiveness of the registrants
disclosure controls and procedures as of a date within 90
days prior to the filing date of this quarterly report (the
Evaluation Date); and                                                                                                  
|
| | (c) |  | presented in this quarterly report our
conclusions about the effectiveness of the disclosure
controls and procedures based on our evaluation as of the
Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officers and I have
disclosed, based on our most recent evaluation, to the registrants
auditors and the audit committee of the registrants board of
directors (or persons performing the equivalent function):
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (a) |  | all significant deficiencies in the design or
operation of internal controls which could adversely affect
the registrants ability to record, process, summarize and
report financial data and have identified for the
registrants auditors any material weaknesses in internal
controls; and
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | any fraud, whether or not material, that
involves management or other employees who have a
significant role in the registrants internal controls: and                                                                                                                                        



|6. |  | The registrants other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Date: November 14, 2002

/s/ Wallace W. Griffin
Wallace W. Griffin
Chairman and Chief Executive Officer

33



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##### Table of Contents



Certification Pursuant to Rule 13a-14 and Rule 15d-14
of the Securities and Exchange Act of 1934

I, H. Ravi Brar certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of
Pac-West Telecomm, Inc.                                                                                                                                                                                                                                                 
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report;
|  
|3. |  | Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;                   
|  
|4. |  | The registrants other certifying officers and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Rules 13a-14 and 15d-14) for the
registrant and have:                                                                                                            



| | (a) |  | designed such disclosure controls and
procedures to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during the period in which this quarterly report
is being prepared;
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | evaluated the effectiveness of the registrants
disclosure controls and procedures as of a date within 90
days prior to the filing date of this quarterly report (the
Evaluation Date); and                                                                                                  
|
| | (c) |  | presented in this quarterly report our
conclusions about the effectiveness of the disclosure
controls and procedures based on our evaluation as of the
Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officers and I have
disclosed, based on our most recent evaluation, to the registrants
auditors and the audit committee of the registrants board of
directors (or persons performing the equivalent function):
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (a) |  | all significant deficiencies in the design or
operation of internal controls which could adversely affect
the registrants ability to record, process, summarize and
report financial data and have identified for the
registrants auditors any material weaknesses in internal
controls; and
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | any fraud, whether or not material, that
involves management or other employees who have a
significant role in the registrants internal controls: and                                                                                                                                        



|6. |  | The registrants other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Date: November 14, 2002

/s/ H. Ravi Brar
H. Ravi Brar
Chief Financial Officer

34