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                                                                   Exhibit 10.38

February 20, 2003

Mpower Communications Holding Corporation
175 Sully's Trail, Suite 300
Pittsford, NY 14534

Attention: Rolla Huff, Chairman and CEO

Ladies and Gentlemen:

         We are pleased to set forth the terms of the retention of Pacific
Alliance Limited, LLC ("Pacific Alliance") by Mpower Holding Corporation
(collectively with its affiliates, the "Company").

         1.       Pacific Alliance will assist the Company as its financial
advisor and agent in connection with any Financing (as such term is defined
below). We have been advised that the Company will require an aggregate of up to
$10 to $15 million to finance the Company's working capital requirements as the
Company concludes an operational reorganization intended to result in
self-funding business operations (the "Transaction"). We are further advised
that such amount is expected to be obtained from one or more issuances of
publicly or privately placed debt or equity securities of the Company (the
"Financing"). Pacific Alliance will assist the Company in analyzing,
structuring, negotiating and effecting the proposed Financing. The term
"Financing" as used in this Agreement expressly includes the negotiation of and
entering into letters of credit, standby letters of credit and other types of
third party guarantees used to secure indebtedness or otherwise (regardless of
whether any underlying indebtedness is repaid as part of the Transaction).

         2.       In connection with Pacific Alliance's activities on the
Company's behalf, the Company will cooperate with Pacific Alliance and will
furnish Pacific Alliance with all information and data concerning the Company,
the Financing and the Transaction (the "Information") which Pacific Alliance
deems appropriate and will provide Pacific Alliance and any prospective
Financing sources with access to the Company's officers, directors, employees,
independent accountants and legal counsel. The Company represents and warrants
that all Information (a) made available to Pacific Alliance by the Company or
(b) contained in any private placement memorandum prepared by the Company with
respect to the Financing (the "Memorandum") will be complete and accurate in all
material respects at the time it is furnished and the Company agrees to keep
Pacific Alliance advised of all material developments affecting the Company or
its financial position. The Company further represents and warrants that any
projections provided by it to Pacific Alliance or contained in the Memorandum
will have been prepared in good faith and will be based upon assumptions which,
in light of the circumstances under which they are made, are reasonable. The
Company acknowledges and agrees that in

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rendering its services hereunder, Pacific Alliance will be using and relying on
the Information (and information available from public sources and other sources
deemed reliable by Pacific Alliance) without independent verification thereof by
Pacific Alliance or independent appraisal by Pacific Alliance of any of the
Company's assets. Pacific Alliance does not assume responsibility for the
accuracy or completeness of the Information or any other information regarding
the Company, the Financing or any Transaction. Except in compliance with
applicable law, any advice or written materials rendered by Pacific Alliance
pursuant to this Agreement may not be disclosed publicly without Pacific
Alliance' prior written consent.

         3.       In consideration of our services pursuant to this Agreement,
Pacific Alliance shall be entitled to receive, and the Company agrees to pay,
Pacific Alliance the following compensation:

         (a)      A monthly cash retainer (the "Retainer") of $15,000, earned
monthly in advance on the 20th day of each calendar month during the term of
this Agreement; provided, however, that prior May 19, 2003, the Retainer shall
not be paid in cash but shall accrue and be paid only in accordance with
paragraph 3(c) below. From and after May 19, 2003, and provided that this
Agreement shall not have been terminated in accordance with the terms hereof,
the Company shall pay in cash any Retainer accruing on or after such date.

         (b)      Upon the consummation of each Financing, other than a
Financing led by Columbia Capital or MC Partners (a "Pending Transaction"), the
Company shall pay to Pacific Alliance an additional cash fee (the "Advisory
Fee") equal to 5% of the gross equity or debt proceeds raised for or made
available to the Company, less any Retainer paid or to be paid, regardless
whether such proceeds are in the form of cash or other valuable consideration;
provided, that:

                  (i)      To the extent that a fee is payable to another
                           placement agent in respect of such placement agent or
                           financial advisor introducing the source of any
                           Financing, the cash fee due to Pacific Alliance shall
                           be reduced pro rata, subject to the limitation that
                           the Advisory Fee shall in no event be less than 2.5%;
                           and

                  (ii)     To the extent that a Financing is consummated with
                           any of the potential Financing sources that are
                           currently in preliminary discussions with the Company
                           and that are identified on Schedule I, then the
                           Advisory Fee shall be 2.5% with respect to such
                           portion of the Financing; and

                  (iii)    Each payment to be made pursuant to this paragraph
                           shall be made at the time of the closing of each
                           portion of the Financing.

         (c)      Any accrued but unpaid portion of the Retainer shall become
immediately due and payable on the earlier to occur of (i) the consummation of
any Pending Transaction or another change of control of the Company and (ii) the
later to occur of (x) May 19, 2003 and (y) Pacific Alliance obtaining a bona
fide term sheet, subject only to customary conditions, providing for an
investment in the Company of not less than $5 million.

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         (d)      Pacific Alliance shall be entitled to the fees enumerated in
any proceeding subparagraph of this paragraph 3 upon the occurrence during the
term, or within 12 months after the date of termination, of this Agreement, of
any event specified in any such subparagraph so long as such event resulted,
directly or indirectly, from negotiations or contact initiated during the term
of this Agreement. Notwithstanding anything herein to the contrary, Pacific
Alliance shall not be entitled to any fee in connection with any transaction not
specifically referenced in a subparagraph of this paragraph 3.

         4.       The fees set forth in paragraph 3 above shall be in addition
to any other fees that the Company may be required to pay to any Financing
source to secure its financing commitment (e.g. commitment fees, etc.). This
Agreement does not constitute a commitment or undertaking on the part of Pacific
Alliance to provide any part of the Financing and does not ensure the successful
arrangement or completion of the Financing or any portion thereof.

         5.       In addition to the fees described in paragraph 3 above, the
Company agrees to promptly reimburse Pacific Alliance, upon request from time to
time, for all out-of pocket expenses reasonably incurred by Pacific Alliance
(including, without limitation, reasonable fees and disbursements of counsel,
and of other consultants and advisors retained by Pacific Alliance, whose
services are normally used in transactions similar to the Financing) in
connection with the matters contemplated by this Agreement.

         6.       The Company agrees to indemnify Pacific Alliance in accordance
with the indemnification provisions (the "Indemnification Provisions") attached
to this Agreement, which Indemnification Provisions are incorporated herein and
made a part hereof. In no circumstance shall Pacific Alliance have any liability
to the Company or any other person in respect of its activities under this
Agreement in excess of the amount of fees actually paid to it hereunder.

         7.       Either party hereto may terminate this Agreement at any time
upon written notice, without liability or continuing obligation except as set
forth in the following sentence. Neither termination of this Agreement nor
completion of the assignment contemplated hereby shall affect: (i) any
compensation earned by Pacific Alliance up to the date of termination or
completion, as the case may be, (ii) any compensation to be earned by Pacific
Alliance after termination pursuant to paragraph 3 hereof, (iii) the
reimbursement of expenses incurred by Pacific Alliance in accordance with
paragraph 5 hereof up to the date of termination or completion, as the case may
be, and (iv) the provisions of paragraphs 3-9, inclusive, of this Agreement

         8.       This Agreement and any claim or dispute of any kind or nature
arising out of, or relating to, this Agreement, shall be governed by and
construed in accordance with the laws of the State of New York.

         9.       This Agreement and the Indemnification Provisions and any
rights, duties or obligations hereunder may not be waived, amended, modified or
assigned, in any way, in whole or in part, including by operation of law,
without the prior written consent of, and shall inure to the benefit of and be
binding upon the successors, assigns and personal representatives of, each of
the parties hereto.

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         10.      In case any provision of this Agreement shall be invalid,
illegal, or unenforceable, the validity, legality and enforceability of the
remaining provisions of this Agreement shall not in any way be affected or
impaired thereby.

         11.      For the convenience of the parties, any number of counterparts
of this Agreement may be executed by the parties hereto. Each such counterpart
shall be, and shall be deemed to be, an original instrument, but all such
counterparts taken together shall constitute one and the same Agreement. Other
than the confidentiality agreement dated [ ], 2003, this Agreement constitutes
the entire agreement of the parties with respect to the subject matter hereof
and all prior agreements, written or oral, are superceded hereby. This Agreement
may not be modified or amended except in writing signed by the parties hereto.

         If the foregoing correctly sets forth our Agreement, please sign the
enclosed copy of this letter in the space provided and return it to us.

                                             Very truly yours,

                                             PACIFIC ALLIANCE LIMITED, LLC

                                             By:   /s/ Richard Shorten, Jr.
                                                   -----------------------------
                                                   Richard Shorten, Jr.

                                                   and

                                                   /s/ James Haft
                                                   -----------------------------
                                                   James Haft

Confirmed and Agreed to
this 20th day of February:
MPOWER HOLDING CORPORATION

By: /s/ Russell. I Zuckerman
    --------------------------------
Name: Russell I. Zuckerman
Title: Senior Vice President, General Counsel and Secretary

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                           INDEMNIFICATION PROVISIONS

         The Company (as such term is defined in the Agreement (as such term is
defined below)) agrees to indemnify and hold harmless Pacific Alliance and its
affiliates, members, employees, directors, agents and representatives (each, an
"Indemnitee") against any and all losses, claims, damages, liabilities,
obligations, penalties, judgments, awards, costs, expenses and disbursements
(and any and all actions, suits, proceedings and investigations in respect
thereof and any and all legal and other costs, expenses or disbursements in
giving testimony or furnishing documents in response to a subpoena or
otherwise), including, without limitation, the costs, expenses and
disbursements, as and when incurred, of investigating, preparing or defending
any such action, suit, proceeding or investigation (whether or not in connection
with litigation in which Pacific Alliance or an Indemnitee is a party), directly
or indirectly, caused by, relating to, based upon, arising out of or in
connection with (a) Pacific Alliance acting for the Company, including, without
limitation, any act or omission by Pacific Alliance in connection with its
acceptance of or the performance or non-performance of its obligations under the
engagement agreement dated February [ ], 2003 between Pacific Alliance and the
Company as it may be amended from time to time (the "Agreement"), (b) any untrue
statement or alleged untrue statement of a material fact contained in, or
omissions or alleged omissions from, the Memorandum (as such term is defined in
the Agreement) or similar statements or omissions in or from any other
information furnished by the Company to Pacific Alliance or any financing source
or (c) any Financing (as such term is defined in the Agreement); provided,
however, such indemnity agreement shall not apply to any portion of any such
loss, claim, damage, obligation, penalty, judgment, award, liability, cost,
expense or disbursement to the extent it is found in a final judgment by a court
of competent jurisdiction (not subject to further appeal) to have resulted
primarily and directly from the gross negligence or willful misconduct of
Pacific Alliance. The Company also agrees that neither Pacific Alliance nor any
Indemnitee shall have any liability (whether direct or indirect, in contract or
tort or otherwise) to the Company or to any person (including, without
limitation, Company shareholders) claiming through the Company for or in
connection with the engagement of Pacific Alliance, except to the extent that ny
such liability that is found in a final judgment by a court of competent
jurisdiction (not subject to further appeal) to have resulted primarily and
directly from Pacific Alliance's gross negligence or willful misconduct. These
Indemnification Provisions shall be in addition to any liability which the
Company may otherwise have to Pacific Alliance or any Indemnitee.

         If any action, suit, proceeding or investigation is commenced, as to
which Pacific Alliance proposes to demand indemnification, it shall notify the
Company with reasonable promptness; provided, however, that any failure by
Pacific Alliance to notify the Company shall not relieve the Company from its
obligations hereunder, except to the extent that such failure results in
material prejudice to the Company. Pacific Alliance (or any Indemnitee) shall
have the right to retain one counsel (except for local counsel) of its own
choice to represent it, and the Company shall pay the reasonable fees, expenses
and disbursements of such counsel; and such counsel shall, to the extent
consistent with its professional responsibilities, cooperate with the Company
and any counsel designated by the Company. The Company shall be liable for any
settlement of any claim against Pacific Alliance (or any Indemnitee) made with
the Company's written consent, which consent shall not be unreasonably withheld.
The Company shall not, without the prior written consent of Pacific Alliance and
any other applicable Indemnitee, settle

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or compromise any claim, or permit a default or consent to the entry of any
judgment in respect thereof, unless such settlement, compromise or consent
includes, as an unconditional term thereof, the giving by the claimant to
Pacific Alliance of an unconditional release from all liability in respect of
such claim.

         In order to provide for just and equitable contribution, if a claim for
indemnification pursuant to these Indemnification Provisions is made but it is
found in a final judgment by a court of competent jurisdiction (not subject to
further appeal) that such indemnification may not be enforced in such case, even
though the express provisions hereof provide for indemnification in such case,
then the Company, on the one hand, and Pacific Alliance, on the other hand,
shall contribute to the losses, claims, damages, obligations, penalties,
judgments, awards, liabilities, costs, expenses and disbursements to which the
indemnified persons may be subject in accordance with the relative benefits
received by the Company, on the one hand, and Pacific Alliance, on the other
hand, and also the relative fault of the Company, on the one hand, and Pacific
Alliance on the other hand, in connection with the statements, acts or omissions
which resulted in such losses, claims, damages, obligations, penalties,
judgments, awards, liabilities, costs, expenses and disbursements and the
relevant equitable considerations shall also be considered. No person found
liable for a fraudulent misrepresentation shall be entitled to contribution from
any person who is not also found liable for such fraudulent misrepresentation.
Notwithstanding the foregoing, Pacific Alliance and all Indemnitees shall not be
obligated to contribute any total amount hereunder that exceeds the amount of
fees previously received by Pacific Alliance pursuant to the Agreement.

         Neither termination nor completion of the engagement of Pacific
Alliance referred to above shall affect these Indemnifications Provisions which
shall then remain operative and in full force and effect.

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                                                                      Schedule I

            Financing Sources Currently in Dialogue with the Company

Foothill Capital
Kleinheinz Capital
Eagle Rock Capital
Flynn Gallagher
Fleming Securities
JK&B Capital
Thermo Companies
RFC Capital (Textron Financial)
West Highland Capital
Sprout Investments

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