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

FORM 10-Q

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

For the Quarterly Period Ended June 30, 2002

OR

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.

(209) 926-3300

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

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

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PAC-WEST TELECOMM, INC.
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PART I

ITEM 1.     FINANCIAL STATEMENTS

PAC-WEST TELECOMM, INC.
Condensed Consolidated Balance Sheets

ASSETS

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

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

See notes to these condensed consolidated financial statements.

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

See notes to these 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 SIX MONTH PERIODS ENDED JUNE 30, 2002

1.     Organization and Basis of Presentation:

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

         These accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation for the periods indicated, have been included. Operating results for the three and six month periods ended June 30, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. The condensed consolidated balance sheet at December 31, 2001 has been derived from the audited consolidated balance sheet at that date, but does not include all of the information and notes required by generally accepted accounting principles for complete financial statements. These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto of the Company as of and for the year ended December 31, 2001 included in the Company’s Annual Report on Form 10-K.

         These unaudited condensed consolidated financial statements include the results of operations of Installnet, Inc. and two other related companies (collectively referred to as Installnet) since its acquisition in February 2000.

2.      Restructuring Charges:

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

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

         In August 2001, the Company approved and announced a restructuring plan which included suspension of its expansion plans in certain states, exiting of certain lower margin products and services, including residential resale and customer owned and maintained (COAM) equipment, and undertaking certain cost reduction initiatives. In addition to restructuring certain product offerings, the Company closed its switch facility in Utah, consolidated six sales offices, and completed a workforce reduction of approximately 200 employees as part of the restructuring initiative. As of June 30, 2002 and December 31, 2001, a remaining restructuring liability of $2.0 million and $2.5 million, respectively, is included in other accrued liabilities in the accompanying unaudited condensed consolidated balance sheets.

         A summary of the Company’s activities during the first six months of 2002 related to the restructuring charge recorded in 2001 is outlined as follows:

3.     Impairment of Long-Lived Assets:

         In accordance with Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the Company periodically evaluates the carrying amount of its property and equipment when events or changes in business circumstances have occurred which indicate the carrying amount of such assets may not be fully recoverable. Determination of impairment is based on an estimate of undiscounted future cash flows resulting from the use of the assets and their eventual disposition. During the second quarter of fiscal year 2002, as a result of continued significant negative industry and economic trends in certain of our markets outside of California, the Company determined that certain of its leasehold improvements, which could not be redeployed to other locations, had been impaired. During the second quarter of 2002, in accordance with SFAS No. 144, the Company recorded an impairment charge for the specific assets of $7.2 million.

4.     Gain on Redemption of Bonds:

         During the first quarter of 2002, the Company purchased from holders of its Senior Notes an aggregate of approximately $21 million principal amount of Senior Notes at a substantial discount to face value. The difference between the amount the Company paid to the holders of the Senior Notes and the face value of the amount retired and costs paid to outside parties to complete the transaction, was recorded as an extraordinary gain on early retirement of debt of $7.2 million, net of tax provision of $4.8 million in the first quarter of 2002. In May 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections”. This Statement rescinds FASB Statement No. 4, “Reporting Gains and Losses from Extinguishment of Debt,” and an amendment of that Statement, FASB Statement No. 64, “Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements.” This

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

5.     Revenue Recognition:

         The Company recognizes revenue when there is persuasive evidence of an arrangement, delivery of the product or performance of the service has occurred, the selling price is fixed or determinable and collectibility is reasonably assured. Revenues from the sale of telecommunications products are recognized upon installation, or if no installation is required, upon shipment. Revenues for non-refundable up-front payments received for installation services are recognized as revenue ratably over the term of the service contracts, generally 36 months. Revenues from service access agreements are recognized as the service is provided, except for reciprocal compensation generated by calls placed to ISPs connected through the Company’s network. The right of competitive local exchange carriers (CLECs), such as the Company, to receive this type of compensation is the subject of numerous regulatory and legal challenges. Until this issue is ultimately resolved, the Company will continue to recognize reciprocal compensation as revenue when payment is received or when collectibility is reasonably assured.

6.      Short-Term Investments:

         All investments with an original maturity of greater than three months from the date of acquisition are accounted for in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” The Company classified these investments as available-for-sale and appropriately carried them at fair value. At June 30, 2002 and December 31, 2001, the Company had net unrealized losses on investments of $64,000 (unaudited) and $53,000, respectively, which are recorded as accumulated other comprehensive loss in the accompanying unaudited condensed consolidated balance sheets. Realized gains and losses are included in interest income in the accompanying condensed consolidated statements of operations.

7.      Property and Equipment:

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

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

8.     Other Assets:

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

         Deferred financing costs primarily consist of capitalized amounts for underwriter fees, professional fees and other expenses related to the issuance and subsequent registration of the Senior Notes. Amortization of deferred financing costs for the three month periods ended June 30, 2002 and 2001 was $206,000 and $213,000, respectively, and was $432,000 and $426,000 for the six month periods ended June 30, 2002 and 2001, respectively. Amortization expense is included within interest expense in the accompanying unaudited condensed consolidated statements of operations. During the first quarter of 2002, the Company purchased from holders of its Senior Notes an aggregate of approximately $21 million principal amount of Senior Notes at a substantial discount to face value. In connection with this transaction, the Company wrote-off a portion of deferred financing costs associated with the Notes redeemed.

         During 1999, the Company purchased lease rights for additional space in its facility located in Los Angeles, CA. Amortization expense for this facility was $54,000 for each of the three month periods ended June 30, 2002 and 2001, and was $108,000 and $120,000 for the six month periods ended June 30, 2002 and 2001, respectively. These amounts are included within depreciation and amortization expense in the accompanying unaudited condensed consolidated statements of operations.

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9.     Other Accrued Liabilities:

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

10.     Income Taxes:

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

11.      Other Comprehensive Income (Loss):

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

12.     Long-Term Debt and Capital Lease Obligations:

         On January 29, 1999, the Company issued $150,000,000 of Senior Notes at par. The Senior Notes bear interest at 13.5 percent per annum payable in semiannual installments due February 1st and August 1st, with all principal due in full on February 1, 2009. During the first quarter of 2002, the Company purchased from holders of its Senior Notes an aggregate of approximately $21 million principal amount of Senior Notes at a substantial discount to face value. As of June 30, 2002, the principal amount due on the Senior Notes is $129,274,000.

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

         In 2001 and 2000, the Company had a lease facility used exclusively for the acquisition of networking products and services manufactured by Cisco Systems, Inc. Equipment financed under this facility is leased for a term of 36 months at which time the Company may purchase the equipment at fair market value. Purchases of networking products under this facility of $23.3 million have been accounted for as a capital lease. During the three month periods ended June 30, 2002 and 2001, the Company made principal payments and recorded depreciation expense of approximately $2.0 million and $1.6 million, respectively under this lease facility. During the six month period ended June 30, 2002 and 2001, the Company made principal payments and recorded depreciation expense of approximately $3.9 million and $1.6 million, respectively, under this lease facility. As of June 30, 2002, the Company has future obligations, excluding interest, of $14.1 million that will be paid over the remaining term of this lease facility.

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13.     Commitments and Contingencies:

Purchase Commitments:

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

         On June 30, 2000, the Company entered into an Indefeasible Right of Use (IRU) agreement with Qwest Communications (Qwest) to acquire rights of use of dedicated fiber optics circuits of OC-48 capacity connecting major metropolitan areas in California. The IRU agreement is for a term of 20 years and includes bargain purchase options at the end of the term. The total cost of the IRU is approximately $23.0 million of which $5.8 million was paid on July 28, 2000. During the second quarter of 2002, the Company amended the IRU Agreement with Qwest and in accordance with the new agreement, paid Qwest $8.6 million on May 15, 2002. The balance of $8.6 million consists of two principal payments of $4.4 million and $4.2 million each, which are due and payable on December 15, 2002 and May 15, 2003, respectively. The payment due May 15, 2003 accrues interest at a variable rate equal to the Prime Rate plus 2% per annum. The IRU is included in network and other communications equipment as of June 30, 2002 and included in projects-in-progress as of December 31, 2001. The balance of $8.6 million and $17.2 million payable to Qwest as of June 30, 2002 and December 31, 2001, respectively, is classified as Fiber IRU liability in the accompanying unaudited condensed consolidated balance sheets.

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

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

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

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

         The Company is a party to various legal proceedings, including those with SBC Communications, Inc. (SBC), formerly known as Pacific Bell, and Verizon, formerly known as GTE, before the California Public Utilities Commission (CPUC) and those with Nevada Bell before the Public Utilities Commission of Nevada, relating to reciprocal compensation payment and other interconnection agreement issues. Any of these proceedings may change the rate the Company may charge an interconnecting carrier for the use of the Company’s network.

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

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

         On April 27, 2001, the FCC released its Order on Remand regarding intercarrier compensation for ISP-bound traffic. The FCC asserted exclusive jurisdiction over ISP-bound traffic and established a new interim intercarrier compensation regime for ISP-bound traffic with capped rates above a fixed traffic exchange ratio. Traffic in excess of a ratio of 3:1 (terminating minutes to originating minutes) is presumed to be ISP-bound traffic, and is to be compensated at rates that decrease from $.0015 to $.0007, or the applicable state-approved rate if lower, over three years. Traffic below the 3:1 threshold is to be compensated at the rates in existing and future interconnection agreements. Traffic above the 3:1 ratio is also subject to a growth ceiling, such that traffic in excess of the growth ceiling is subject to “bill and keep,” an arrangement in which the originating

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

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

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

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

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

         Similar negotiations with Verizon California concerning its interconnection agreement with the Company are ongoing, and the Company expects that a similar CPUC arbitration process will ensue. Verizon has also proposed the imposition of new handling charges similar to those proposed by SBC. Verizon has proposed that when a replacing agreement is approved by the CPUC, the FCC’s rates for ISP bound traffic should apply

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retroactive to April 13, 2002. The eventual outcome of this expected proceeding cannot be determined at this time.

Other Legal Proceedings

         On December 6, 2001, a complaint captioned Krim v Pac-West Telecomm, Inc., et. al., Civil Action No. 01-CV-11217, was filed in United States District Court for the Southern District of New York against the Company, and certain executive officers, and various underwriters in connection with our initial public offering. An amended complaint was filed on April 19, 2002. The plaintiffs allege undisclosed improper underwriting practices concerning the allocation of shares of the Company’s common stock in exchange for excessive brokerage commissions or agreements to purchase shares at higher prices in the aftermarket, in violation of Section 11 of the Securities Act of 1933. The complaint also includes a claim for securities fraud under Section 10(b) of the Securities Exchange Act of 1934 against underwriters only. Substantially similar actions have been filed concerning the initial public offerings for more than 300 different issuers, and the cases have been coordinated as In re Initial Public Offering Securities Litigation, 21 MC 92. The complaint against the Company seeks unspecified damages on behalf of a purported class of purchasers of its common stock. Management believes that the plaintiff’s claims against the Company are without merit and is defending the case vigorously utilizing experienced counsel retained by a number of issuers and individual defendants in the cases in order to syndicate cost of defense as to common issues. The cost of defense is bourn by insurance. Motions to dismiss have been filed, briefed and are pending on behalf of Issuers, including the Company. Insurance coverage exists for most of the claims against the Company asserted to date against the Company and the Company may have indemnification rights against its underwriters depending on the outcome of the case as against those underwriters.

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

14.     Loss Per Share:

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

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

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15.     Other Recent Pronouncements:

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

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

16.      Segment Reporting

         As an integrated telecommunications provider, the Company has one reportable operating segment. While the Company’s chief decision-maker monitors the revenue streams of various services, operations are managed and financial performance is evaluated based upon the delivery of multiple services over common networks and facilities. This allows the Company to leverage its costs in an effort to maximize return. As a result, there are many shared expenses generated by the various revenue streams. Because management believes that any allocation of the expenses to multiple revenue streams would be impractical and arbitrary, management does not currently make such allocations. The chief decision-maker does, however, monitor revenue streams at a more detailed level than those depicted in the Company’s consolidated financial statements.

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         The following tables present consolidated revenues by service type:

17.    Related Party Transactions:

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

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

         Except for the historical information contained herein, this report contains forward-looking statements, subject to uncertainties and risks, and as a result, our actual results may differ materially from those discussed here. These uncertainties and risks include among others, that our restructuring plans, which were approved in the third quarter of 2001 and in the second quarter of 2002, are adequate to provide positive cash flows; our ability to raise sufficient additional capital, if required, on acceptable terms and on a timely basis; receipt of full and timely payments from our customers; the successful execution of our expansion activities into new geographic markets on a timely and cost-effective basis; the pace at which new competitors enter our existing and planned markets; competitive responses of the Incumbent Local Exchange Carriers; execution of interconnection agreements with Incumbent Local Exchange Carriers on terms satisfactory to us; maintenance of our supply agreements for transmission facilities; continued acceptance of our services by new and existing customers; the outcome of legal and regulatory proceedings regarding reciprocal compensation for Internet-related calls and certain of our product offerings; the ability to attract and retain talented employees; the effective management of our working capital including investments, accounts receivables and inventory; replacements or upgrades of our technology and equipment that becomes obsolete; prevention of interruption of services from system failures or power outages; and our ability to successfully access markets, install switching electronics, and obtain the use of leased fiber transport facilities and any required governmental authorizations, franchises and permits, all in a timely manner, at reasonable costs and on satisfactory terms and conditions, as well as regulatory, legislative and judicial developments that could cause actual results to differ materially from the future results indicated, expressed, or implied, in such forward-looking statements. These and other factors are discussed in our Prospectus dated November 3, 1999, and in our Annual Report on Form 10-K for the year ended December 31, 2001 as filed with the Securities and Exchange Commission (SEC).

Overview

         Pac-West Telecomm, Inc. (the Company) is a provider of integrated communications services in the western United States. Our customers include Internet service providers (ISPs), small and medium-sized businesses and enhanced communications service providers, many of which are communications intensive users. Our predecessor, also known as Pac-West Telecomm, Inc., began selling office phone systems in 1980 and reselling long distance service to small and medium-sized businesses and residential customers in 1982. Effective September 30, 1996, our predecessor transferred its telephone division to us. Prior to September 30, 1996, we did not conduct any operations and, since that time, we have focused our business strategy on operating as a provider of integrated communications services. In February 2000, the Company acquired all of the outstanding stock of Installnet, Inc. and two related companies (collectively, Installnet), which was headquartered in Southern California. Installnet was primarily engaged in the business of selling, installing and maintaining telecommunications equipment.

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

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         As of June 30, 2002, we had 320,042 total DS0 equivalent lines in service, a 36% increase from lines in service as of June 30, 2001. Total DS0 equivalent lines in service include wholesale and on-network retail DS0 line equivalents. In response to technology and network design evolution toward increased data and VoIP standards, in the fourth quarter of 2001 the Company retroactively adjusted its line counting methodology to adopt industry standard bandwidth based measurement of lines in DS0 equivalents. The Company has also segregated small to medium-size lines into on-network and off-network components as related to the Company’s decision to exit a number of off-network lines of business. For the quarter ended June 30, 2002, our minutes of use were 7.7 billion, an increase of 22% over the second quarter of 2001. For the six month period ended June 30, 2002, our minutes of use were 15.4 billion, an increase of 19% over the six month period ended June 30, 2001.

         During the third quarter of 2001 the Company evaluated the carrying amount of its enterprise-level costs in excess of net assets of acquired businesses (goodwill) as a result of the Company’s modified business plan, which was approved and announced during this time. The Company’s evaluation of goodwill was based on an estimate of its fair value using estimated discounted future cash flows. This evaluation indicated that the carrying amount of the goodwill was impaired, and as a result, the Company recorded an impairment charge of $16.8 million in the third quarter of 2001. As of August 1, 2001, when the Company determined the goodwill was impaired, the Company discontinued amortizing the related goodwill and wrote-off the remaining unamortized amount. The Company recorded $0.8 million and $1.7 million of goodwill amortization for the three and six month periods ended June 30, 2001, respectively.

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

         In accordance with Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the Company periodically evaluates the carrying amount of its property and equipment when events or changes in business circumstances have occurred which indicate the carrying amount of such assets may not be fully recoverable. Determination of impairment is based on an estimate of undiscounted future cash flows resulting from the use of the assets and their eventual disposition. During the second quarter of fiscal year 2002, as a result of continued significant negative industry and economic trends in certain of our markets outside of California, the Company determined that certain of its leasehold improvements, which could not be redeployed to other locations had been impaired. During the second quarter of 2002, in accordance with SFAS No. 144, the Company recorded an impairment charge for the specific assets of $7.2 million.

         During the first quarter of 2002, we purchased from holders of our Senior Notes an aggregate of approximately $21 million principal amount of Senior Notes at a substantial discount to face value. The difference between the amount we paid to the holders of our Senior Notes and the face value of the amount retired, net of income taxes of $4.8 million and costs paid to outside parties to complete the transaction, was recorded as an extraordinary item - gain on early retirement of debt of $7.2 million. In April 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” This Statement rescinds FASB Statement No. 4, “Reporting Gains and Losses from Extinguishment of Debt,” and an amendment of that Statement, FASB Statement No. 64, “Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements.” This Statement amends FASB Statement No. 13, “Accounting for Leases”, to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. This Statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The provisions of SFAS No. 145 are effective in fiscal years beginning after May 15, 2002, with early adoption permitted and, in general, are to be applied prospectively. Accordingly, the Company has reclassified the extraordinary gain on early retirement of debt to gain on redemption of bonds for the six month period ended June 30, 2002. We are reviewing all of our debt obligations and are considering various alternatives to continue to reduce such obligations, including, among other things, the purchase of additional

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

         On May 28, 2002, our common stock ceased being quoted on the Nasdaq National Market and began being quoted on the Nasdaq SmallCap Market. We applied for listing on the Nasdaq SmallCap Market in connection with the probable delisting of our common stock from the Nasdaq National Market system as a result of our common stock not meeting the Nasdaq’s minimum bid price requirement. To regain compliance with this requirement, the minimum closing bid price of our stock must have closed at $1.00 or above per share for a period of 10 consecutive business days. The bid price for our common stock has not closed above $1.00 per share since August 6, 2001. As a result of our listing on the Nasdaq SmallCap Market, we have been afforded an additional 180 calendar days from May 15, 2002 to regain compliance with the Nasdaq’s minimum closing bid price requirement. At the end of this 180 day calendar period, if we are still not in compliance with the Nasdaq’s minimum bid price requirements, we may be afforded another 180 calendar days provided that we meet other listing requirements, before we are delisted from the Nasdaq SmallCap Market.

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

Factors Affecting Operations:

         Revenues. We derive our revenues from monthly recurring charges, usage charges, amortization of initial non-recurring charges and telephone equipment sales and service. Monthly recurring charges include the fees paid by customers for lines in service and additional features on those lines, as well as equipment collocation services. Usage charges consist of fees paid by end users for each call made, fees paid by incumbent local exchange carriers as reciprocal compensation for completion of their customers’ calls through Pac-West, and access charges paid by carriers for long distance traffic terminated by Pac-West. Initial non-recurring charges are paid by end users, if applicable, for the initiation of our service. Initial non-recurring charges include payments received for installation services. These payments, and related costs up to the amount of revenues, are recognized as revenue and expense ratably over the term of the service contracts, generally 36 months.

         A substantial portion of our revenues is derived from reciprocal compensation paid by incumbent local exchange carriers with which we have interconnection agreements. For the quarters ended June 30, 2002 and 2001, recorded reciprocal compensation accounted for approximately 42% and 41%, respectively, of our revenues. For the six month periods ended June 30, 2002 and 2001, recorded reciprocal compensation accounted for approximately 48% and 40%, respectively, of our revenues. Reciprocal compensation revenue recorded in the first six months of 2002 includes a payment of $4.8 million received from Verizon, formerly known as GTE.

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

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

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

         We expect that reciprocal compensation will continue to represent a significant portion of our revenues in the future, however, recorded reciprocal compensation as a percentage of revenues is expected to decline. We are currently negotiating and implementing new interconnection agreements and the terms including reciprocal compensation. The per minute reciprocal compensation rate we receive from SBC Communications, Inc. (SBC), formerly known as Pacific Bell, under our current agreement is significantly lower than it was under our previous agreement. Based on current market conditions, we expect the per minute reciprocal compensation rate could decline from historic rates under interconnection agreements in the future. Further, as discussed in Note 13 to the accompanying unaudited condensed consolidated financial statements, to the extent that the April 27, 2001 Federal regime for intercarrier compensation for ISP-bound traffic applies to the Company and is adopted by incumbent local exchange carriers exchanging traffic with the Company, reciprocal compensation or intercarrier compensation rates will decline. It is not possible to estimate the impact of the April 27, 2001 FCC regime at this time because the Federal regime does not alter existing contracts except to the extent that they incorporate changes of federal law, and because adoption of the Federal regime is within the discretion of the incumbent local exchange carrier exchanging traffic with competitive local exchange carriers on a state-by-state basis. In addition, the rules are the subject of petitions for reconsideration before the FCC and appeals to the U.S. Court of Appeals for the District of Columbia Circuit. In the event an incumbent local exchange carrier determines not to adopt the Federal regime, the incumbent local exchange carrier must pay the same rate for Internet service provider-bound traffic as for calls subject to reciprocal compensation. We cannot predict the impact of the FCC’s and the Court’s ruling on existing state decisions, the outcome of pending appeals or future litigation on this issue.

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

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

Quarterly Operating and Statistical Data:

         The following tables summarize the results of operations as a percentage of revenues for the three and six month periods ended June 30, 2002 and 2001. Revenues for the six month period ended 2002 include a payment received in the first quarter in connection with previously withheld reciprocal compensation of $4.8 million. The following data should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included elsewhere in this report:

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