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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

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)

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

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PART I

ITEM 1. FINANCIAL STATEMENTS

PAC-WEST TELECOMM, INC.

Condensed Consolidated Balance Sheets

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

See accompanying notes to unaudited condensed consolidated financial statements.

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

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

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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:

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

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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

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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:

11. Other Assets:

         As of September 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 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

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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:

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:

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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:

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: