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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-K

Commission file number 000-27743

1776 W. March Lane, Suite 250

(209) 926-3300

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.001 par value

    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 þ         No o

    Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K, or any amendment to this Form 10-K.    o

    Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Act).    Yes o         No þ

    At June 30, 2004 the aggregate market value of the common stock held by non-affiliates of the Registrant, based upon the closing sale price of the common stock on June 30, 2004 of $1.10 as reported on the Nasdaq National Market System, was approximately $26.2 million. Shares of common stock held by each executive officer and director and by each person who owns 5% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of March 16, 2005, the Registrant had outstanding 36,817,527 shares of common stock.

DOCUMENTS INCORPORATED BY REFERENCE

    Portions of Pac-West Telecomm, Inc.’s Proxy Statement, to be delivered to its shareholders in connection with its Annual Meeting of Shareholders to be held June 21, 2005, which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year, are incorporated by reference into Items 10 through 14 of Part III of this Annual Report on Form 10-K.

PAC-WEST TELECOMM, INC.

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PART I

      The terms “the Company,” “Pac-West,” “we,” “our,” “us,” and similar terms as used in this Form 10-K, refer to Pac-West Telecomm, Inc.

Our Company

      We were incorporated in May 1996 in the State of California. Our predecessor (also known as Pac-West Telecomm, Inc.), which transferred its telephone division to our Company effective September 30, 1996, began offering long distance service in 1982, and local service in 1996, in California. We have evolved into a high-value independent provider of integrated communication solutions that enable communication providers to use our network and services as an alternative to building and maintaining their own network. Our customers currently include Internet service providers (ISP), enhanced communication service providers (ESPs) and other direct providers of communication services to business or residential end-users, collectively referred to as service providers (SPs).

      We built our facilities-based network to capitalize on the significant growth in Internet usage and in the related demand for local telephone service by SPs, as well as the increasing demand of small and medium business enterprise market (Enterprise) for customized and integrated voice and data communication services. We believe the statewide footprint of our network, which encompasses all of the major metropolitan areas of California, provides us with a competitive advantage over incumbent local exchange carriers (ILECs), and competitive local exchange carriers (CLECs). Our ubiquitous network in California and our growing networks in Arizona, Nevada, Oregon and Washington, enable SPs to provide their end-users with access to Internet, paging and other data and voice services from almost any point in the state through a local call. We believe the breadth of our product offerings and the structure of our network enables us to generate high network utilization.

      In response to our evolving business model, which as described above, is focused on providing communication solutions to other communication providers, on March 11, 2005, we sold the majority of our enterprise customer base to U.S. TelePacific Corp.(TelePacific) while retaining our associated network assets. Under the terms of this transaction, TelePacific acquired certain assets and assumed certain liabilities associated with our enterprise customer base in exchange for $26.9 million in cash. In addition, we entered into a transition service agreement with TelePacific that, among other things, obligates us to provide certain transition services to TelePacific at our estimated cost, for up to a one-year period subject to extension for two additional three-month periods.

Markets

      We believe increased demand for access to the Internet, the desire for one-stop integrated communication services by end-users and new communications technologies such as voice over Internet protocol (VoIP) continue to present significant growth opportunities for us.

      Traditional dial-up access to the Internet, although a mature technology, remains a large target market for us. Major segments of this market may experience migration to broadband access technologies where available and competitively priced. While we remain focused on serving the needs of our customers who provide dial-up access to their end-users, with the evolution of new technologies, many new Internet protocol (IP) applications are now available, such as VoIP, which have presented us with new product development and sales opportunities. We are developing and overlaying new products and services that take advantage of these new technologies to further increase the utilization of our network.

      One of our first overlay products was our Dial Broadband solution. This product enables the end user to experience dial up speeds up to two to three times faster than traditional dial up. This higher speed alternative has helped our customers target end-user segments in rural locations which have difficulties obtaining high speed Internet access. In 2004 we launched a new partnership program to help our ISP customers select and

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      During 2004, we launched PSTN On Ramp as the first in a series of offerings that enables the rapid delivery of next generation services. PSTN On Ramp provides SPs and other communication companies, such as VoIP providers, local telephone numbers and call origination and termination by interconnecting through our network to the public switch telephone network (PSTN). In addition we offer other services to SPs, such as VoiceSource. VoiceSource provides a single source for the key components required to deliver IP-based local phone service, including local telephone numbers, access to the PSTN, and the ability to update end-user information in industry databases such as 911 and directory listing services so these providers do not have to invest in extensive internal infrastructure and systems. PSTN On Ramp is a component of VoiceSource.

      With the sale of our enterprise customer base to TelePacific in March 2005, we will no longer be focusing our efforts on directly serving the enterprise market, but rather on serving communication providers. Communication providers such as SPs, cable television companies, cellular carriers and other organizations, which desire access to the PSTN for their enterprise and residential end-users, will be able to use our network. This will enable communication providers to avoid the cost of building and maintaining their own network to meet their end-user needs. We believe that we provide a more comprehensive and cost-effective alternative to using the ILECs’ networks. In addition, we believe that this approach to serving the enterprise market is more efficient for us than serving the enterprise market directly.

Network

      We built our facilities-based network to capitalize on the significant growth in demand for Internet access and data and voice communications in addition to the increasing demands of enterprise businesses for customized, integrated communications services. We use a “smart-build” strategy, building and owning intelligent components of our network while leasing high capacity digital loops and transport lines from other carriers. We believe that this strategy provides us with significant cost and time-to-market advantages over competitors that own both their switches and access networks. By owning our switches, we can configure our network to provide high performance, high reliability and cost-effective solutions for our customers’ needs. By leasing our transport lines, we can reduce up-front capital expenditures, rapidly respond to increased demand, and provide low-cost redundancy. In addition to leasing our transport lines, we have an Indefeasible Right of Use (IRU) agreement, which expires in 2020 with a purchase option for dedicated fiber optics circuits of OC-48 capacity connecting the major metropolitan areas within California, which are high volume markets for us.

      Our ubiquitous network in California enables SPs to provide their enterprise and residential customers with access to Internet, paging and other data and voice services from almost any point in the state through a local call. In this way, our customers can achieve statewide coverage with significantly lower capital and operating expenses. We currently aggregate and concentrate all of our network traffic into our high volume switching sites, called SuperPOPs. Our switching sites offer SPs highly reliable, tandem switching and the option to build lower cost networks by collocating equipment at our switching sites rather than in each local access and transport area (LATA) from which they can originate and terminate local, long distance and international calls. Our network includes digital connections in all LATAs in California as well as in key LATAs in Nevada, Washington, Oregon and Arizona. In addition, our interconnection arrangements and statewide leased transport network allow SPs to obtain coverage throughout the West Coast at local calling rates, which reduces switching and transmission costs.

      We believe that our network’s broad market coverage results in:

	•	high volume of communications traffic both originating and terminating on our network, which supports strong operating margins;
	•	enhanced reliability at competitive prices;
	•	the ability to leverage our investment in high capacity switching equipment and electronics; and

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	•	the opportunity for our network to provide backhaul carriage for other telecommunications service providers, such as long distance and wireless carriers.

      As of December 31, 2004, we had an installed capacity of more than 1 million ports in California, Nevada, Washington and Arizona.

      Switching Platform. We currently own and operate eleven Alcatel digital tandem switches in or near Los Angeles (three switches), Oakland (three switches) and Stockton (two switches), California with one switch each in Las Vegas, Nevada, Phoenix, Arizona and Seattle, Washington and one Tekelec 9000 Digital Switching System tandem/end office (Next Gen Switch) in Los Angeles. Although the Alcatel switches we use are no longer in production, on-going maintenance and support for our switches is still provided to us by Alcatel. Our tandem switches have high call carrying capacity and multiple path call routing capabilities. Tandem switches are ideally suited for handling the high call volumes and long duration times involved in serving SP customers. Our switching platforms combined with the intelligence of our customized call processing software and adjunct processors enable us to:

	•	deploy features and functions quickly throughout our entire network;
	•	expand switch and transport capacity in a cost-effective, demand-based manner; and
	•	our Next Gen Switch supports leading edge products and interfaces, such as Session Initiation Protocal (SIP).

      Transmission Capacity. We currently lease our transmission facilities from inter-exchange carriers, ILECs and CLECs. We generally seek to lease fiber optic transmission facilities from multiple sources in each of our markets. In addition, as discussed above, we have purchased long-term rights of use and operate a high capacity fiber IRU connecting the major metropolitan areas within California.

      Interconnection. We have established interconnection agreements (ICAs) with certain ILECs. The Telecommunications Act of 1996 requires ILECs to enter into ICAs with CLECs and other competitors and requires state Public Utilities Commissions (PUCs) to arbitrate such agreements if the parties cannot reach agreement. The ICAs govern, among other items, intercarrier compensation agreements for the exchange of local and local toll calls between the parties. We presently have interconnection agreements with:

	•	Pacific Bell Telephone Co., d/b/a SBC California (SBC);
	•	Verizon California, Inc. (Verizon);
	•	Citizens Telecommunication Company of California, Inc.;
	•	Roseville Telephone Co. in California;
	•	Central Telephone Company (d/b/a Sprint of Nevada);
	•	Cox California Telcom, LLC;
	•	AT&T Wireless Services, Inc. in California;
	•	Nevada Bell in Nevada;
	•	U.S. West Communications, Inc. (Qwest) in Washington, Oregon, and Utah;
	•	GTE Northwest, Inc. (Verizon) in Washington and Oregon;
	•	U.S. West Communications, Inc. (Qwest) in Arizona; and
	•	Sprint Spectrum L.P (network-wide).

      As described below under “— Significant Relationships,” we derive a significant portion of our revenues from intercarrier compensation payments under ICAs. In addition, as described below under “— Regulation,” intercarrier compensation payments and the terms of the ICAs are regularly the subject of disputes among the parties to such agreements.

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Strategy

      We have positioned ourselves as a high-value, independent provider of integrated communications solutions that enable SPs to use our network and services as an alternative to building and maintaining their own network. We believe that providing superior levels of customer service and network reliability with a competitive cost structure, is key to continuing to attract and retain customers. In addition, we are committed to reducing our expenses and offering value-added support services that enable our customers to be more successful in serving their end-users. Our goal is to build on our momentum by pursuing the following initiatives:

      Continue to emphasize superior customer service. Our goal is to fully understand our customer needs and to be recognized as the industry leader for customer service. We believe our focus on superior customer service on a company-wide basis provides us with the ability to sustain high levels of customer loyalty and allows us to achieve benchmark industry levels of customer retention and contract renewal. We have internally branded this level of service as “Five Star.”

      Grow the SP base through sales and services. We are a leading provider of dial up Internet access in our target markets. In California, we believe we provide our SP customers with the underlying infrastructure utilized by over 20% of the state’s dial up Internet subscribers. While the demand for Internet access in our target markets continues to grow, migration to broadband Internet access where available and competitively priced has resulted in a slowing of dial-up Internet access growth in recent years. In spite of this market environment, we have continued to achieve significant growth in minutes of use primarily due to what we believe is our superior value proposition created by our coverage and service reliability. Furthermore, in order to inspire loyalty and to increase usage across our network, we provided new service options to assist our SP customers with identifying operational improvements. These new options provide new revenue opportunities to sell to their retail customers.

      Enable our customers to serve their end-users. We believe our customers need technologically advanced communications systems along with high quality bundled local, long distance, data and other enhanced services and/or innovative new services such as VoIP to meet the growing demand for advanced communication services by end-users. We believe our expertise in designing and implementing network infrastructure and support services allow our customers to avoid the cost of building and maintaining their own network to meet their end-user needs. Federal Communications Commission (FCC) annual reports indicate that the ILECs have a dominant share of the market in most telecommunication markets in California. We believe that we provide a more comprehensive and cost-effective alternative to using the ILECs’ networks. We intend to continue our efforts to become an enabler of integrated communications services so our customers may provide innovative and competitive offerings to their end-users.

      Develop or acquire the next market opportunity. We are constantly exploring methods of entering new markets and providing new services. An example, is our VoiceSource product offering, which provides a single source for the key components required to deliver IP-based local phone service, including local telephone numbers, access to the PSTN, and the ability to update end-user information in industry databases such as 911 and directory listing so these providers do not have to invest in extensive internal infrastructure and systems.

      Upgrade our infrastructure. We have built one of the most comprehensive and reliable networks in California. We carry over 120 million minutes of voice and data traffic per day and an estimated 20% of the dial-up Internet traffic in California. Through our SP customers, millions of people rely on us every day to access the Internet and other voice and data services through a local dial-up number. Network reliability is critical to our customers. In December 2004, we deployed our first Next Gen Switch. This marked the beginning of Pac-West’s multi-year transition to a packet-based switching platform. In addition to cost savings, capacity expansion and the ability to deliver new services with Class 4/5 functionality, the Next Gen Switch supports a “cap-and-grow” model, enabling us to quickly and easily add capacity as needed. Also during 2004 we added Lucent Technologies modems to our network infrastructure, which not only provides us with additional dial-up capacity, but further positions us to capitalize on various VoIP transport solutions. We continue to seek further ways to enhance our infrastructure during 2005 and beyond.

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Products and Services

      Our products and services are designed to appeal to targeted telecommunications needs of SPs. The following is a summary of certain of our key products and service offerings to our SP customers:

      Dial Access Services. Provides incoming call access lines, modems, routers, and authentication services. This product provides SP customers with a non-capital intensive means of quickly establishing local points of presence throughout our coverage area. This service can be delivered through a fixed monthly recurring charge, or as a pay as you go, usage based model. As a service option, we provide customer facing reporting tools that allow our customers to effectively manage their traffic patterns that traverse our network.

      Dial Broadband. A web acceleration service that more than doubles the speed of an end-user’s dial-up connection with no additional hardware or software required by end users.

      Collocation. Collocation enables our customers to install their equipment in any or all of our switch facilities and interconnect directly to our central office switching, transport and data equipment. Collocated equipment is protected by the same cooling power back-up and security systems protecting our switches. An SP’s ability to collocate equipment at a limited number of sites, rather than in each LATA, reduces their capital expenditures and maintenance requirements. We receive monthly rental revenue from the SP for the space and power used.

      High-Volume Multi-Rate Center Local Service. This service offers our customers the ability to establish local points of presence (POPs) throughout our network with minimal capital investment, which dramatically expands their coverage, while at the same time reduces their overall costs.

      Content Acceleration Marketplace Program (AMP). In 2004, we launched a new partnership program to help ISPs select and deploy the dial acceleration solution of their choice through our pre-screened network of industry leading acceleration providers.

      PSTN On Ramp. In 2004, we launched PSTN On Ramp as the first service in a series of offerings that will enable the rapid delivery of next generation services. These services expand our service offerings to the existing customer base, as well as reach new customer segments. Targeted at sub segments of the ESP market, this offering attracts carriers and providers of enhanced services such as unified messaging, calling cards, conferencing, Fax over IP, and VoIP. PSTN On Ramp provides local telephone numbers and call origination and termination between these service providers and the PSTN through cost effective interconnection to our network. PSTN On Ramp is a component of VoiceSource.

      VoiceSource. In 2005, we began to offer VoiceSource, which provides a single source for the key components required to deliver IP-based local phone service, including local telephone numbers, access to the PSTN, and the ability to update end-user information in industry databases such as 911 and directory listing services without investing in extensive internal infrastructure and systems.

      We no longer offer the following services as a result of the sale of our enterprise customer base to TelePacific:

      Direct Digital Telephone Service (DDTS). This service was an integrated solution for enterprise businesses consisting of system design, equipment installation and maintenance combined with voice and data communications services. For a monthly fee, we offered feature-rich digital telephone sets bundled together with local and long distance services, Centrex-type direct inward dialing, voice mail and maintenance. Additionally, our Data Advantage and Data Advantage Internet services were commonly added to this bundled service.

      Facilities Based Dial Tone (FBDT). This service was marketed toward enterprise businesses that already own their phone system. For a monthly fee, we provided these customers with an integrated solution of voice and data services, typically consisting of local and long distance services, data transport and Internet access services.

      Integrated Access Service (IAS). This service was targeted at enterprise businesses that currently had analog telephone service, such as a key system or Centrex service. IAS offered these customers a cost-effective

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Sales and Marketing

      Sales. We have an experienced direct sales force, focusing on consultative sales practices within the SP markets. Through their telecommunication backgrounds, they each have a strong sales foundation within our existing and target markets. We continue to attract and retain highly qualified salespeople by offering them an opportunity to work with an experienced management team in an entrepreneurial environment and to participate in the potential economic rewards made available through a results-oriented compensation program that emphasizes sales commissions. With the support of our account managers, our sales teams are able to focus their efforts on the revenue growth and retention of our customers.

      Marketing. We seek to position ourselves as a provider of superior customer service and a high-value independent broadband provider of integrated business communications solutions within our target markets by offering a high level of network reliability, superior customer service on a company wide basis, which we have branded as “Five Star” and bundled solutions for competitive value. We have built and intend to continue to build our reputation and brand identity by working closely with our customers to help them grow their businesses and develop services tailored to their particular needs.

      Customer and Technical Service. We believe that our ability to consistently deliver superior customer and technical service is a key factor in acquiring new customers and maximizing retention of existing customers. We have developed a customer service strategy designed to effectively meet the service requirements of our target customers. The assigned account managers for each customer provides the first line of customer service by identifying and resolving any customer concerns through real time problem identification and resolution. Our account managers are also supported by our experienced engineering and technical staff that are available to meet customer requests as needed.

Customers

      We focus on providing integrated communications services to SPs, many of which are communications-intensive users. SP customers offer Internet access, unified messaging platforms, pre-paid platforms, fax mail services, and voice mail services to their end-users. The characteristics of this market segment offer us the potential to increase our billed minutes of use and improve the utilization of our network resources.

      SP revenues do not include intercarrier compensation. Intercarrier compensation consists of revenues earned by terminating calls on our network sent to us by other telecommunication carriers and long distance services, dedicated transport services and transit traffic. Intercarrier compensation payments are a function of the number of calls we process, the minutes of use associated with such calls and the rates we are compensated at by the associated carriers. As described below under “— Significant Relationships,” intercarrier compensation payments have historically been a significant portion of our revenues .

      We operate in a single industry segment, telecommunications services. Based on criteria established by Statement of Financial Accounting Standards (SFAS) No. 131, “Disclosures about Segments of an Enterprise and Related Information,” we have determined that we have one reportable operating segment. While our chief decision-maker monitors the revenue streams of various services, the revenue streams share many expenses such as leased transport charges and circuits. In addition, operations are managed and financial performance is evaluated based upon the delivery of multiple services over common networks and facilities. This allows us to leverage our costs in an effort to maximize return. As a result, the revenue streams share almost all of the various operating expenses. Because we believe that any allocation of the expenses to multiple revenue streams would be impractical and arbitrary, we do not currently make such allocations internally. Our chief decision-maker does, however, monitor revenue streams at a more detailed level than those depicted in our consolidated financial statements.

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      There is no significant seasonality to any of our products or services although some of our customers do experience some seasonality in their business and related demand for telecommunications services. However, we believe that the seasonality effects of the businesses of individual customers do not have a significant impact on our consolidated revenues.

      During 2003 both Verizon Communications, Inc. (Verizon) and SBC Communications, Inc. (SBC) implemented the FCC’s plan covering termination charges for ISP-bound traffic. This rate plan originally contained a cap on the amount of terminating traffic for which we could receive compensation, but this cap was removed by the FCC in an Order released in October of 2004. Further details relating to the regulatory issues regarding Federal rate caps are further discussed in “— Regulation” below.

      Intercarrier compensation payments from ILECs accounted for 32.1%, 35.0%, and 48.7% of our total revenues for the years ended December 31, 2004, 2003, and 2002, respectively. Although the rate at which we believe we will be compensated by the ILECs in 2005 is expected to be consistent with 2004, the sale of our enterprise customer base to TelePacific may increase the percentage of total revenues represented by intercarrier compensation in 2005. Intercarrier compensation payments recorded as revenue in 2004 includes payments received for settlements in connection with disputes over previously withheld intercarrier compensation payments, which amounted to $10.7 million, or 8.6%, of our total 2004 revenue. The revenues from these ILECs are the result of ICAs we have entered into with them that provide for the transport and termination of local telecommunication traffic. Intercarrier compensation payments are currently an important source of revenue for us, and as a result, the failure, for any reason, of one or more ILECs from which we receive intercarrier compensation payments to make all or a significant portion of such payments in the future could adversely affect our financial condition. Intercarrier compensation payments are a function of the number of calls we terminate, the minutes of use associated with such calls and the rates we are compensated at by ILECs. Further details relating to the regulatory issues regarding Federal rate caps are further discussed in “— Regulation” below.

      Revenues from our three largest customers provided the following percentage of total revenues for the years ended December 31, 2004, 2003 and 2002.

      No other entities accounted for more than 10% of our total revenues for these periods.

      SBC, from whom we are paid the largest amount of intercarrier compensation, is also our largest source of operating costs, accounting for 40.3%, 37.3% and 32.4% of our network expenses for the years ended December 31, 2004, 2003 and 2002, respectively.

Competition

      The telecommunications industry is both highly price competitive and dominated by the ILECs who enjoy the benefit of significant market share earned over a time when there was no possibility of competition in the marketplace. Recently announced mergers and acquisitions and regulatory actions are factors tending to increase ILEC market influence. In this environment, we believe that the principal competitive factors differentiating our business from other vendors will be customer service, network reliability, billing accuracy, pricing levels and policies, and, a unique range of products and service offerings tailored to customer needs and rapidly changing market conditions. Our ability to compete effectively will depend upon our continued ability to rapidly respond to changing market requirements by delivery of high quality, value added, services at prices which are in accordance with accepted market rates. We believe that our ability to provide exceptional

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      Incumbent Local Exchange Carriers. We compete with the ILECs serving each of the markets we target, such as SBC and Verizon in California, and Qwest Communications International Inc. (Qwest) in Arizona, Oregon, and Washington. Some ILECs in our territory, including Verizon and SBC in California, and Qwest in Washington, are offering Internet access services to their local telephone customers. We believe ILECs will attempt to further entrench their market share by capitalizing on their strong regional brand names and through the use of extensive advertising campaigns, targeted primarily to the residential and enterprise segment. For more information, please refer to discussion below in “— Regulation.”

      In particular, the ILECs have:

	•	long-standing relationships with their customers;
	•	financial, technical and marketing resources substantially greater than ours;
	•	the potential to subsidize competitive services with revenues from a variety of businesses;
	•	long-standing relationships with regulatory authorities at the Federal and state levels; and
	•	currently benefit from certain existing regulations and regulated subsidies that favor the ILECs over their competitors in certain respects.

      While regulatory initiatives, which allow CLECs to interconnect with ILEC facilities, provide us with increased business opportunities, such interconnection opportunities have been, and likely will continue to be, accompanied by increased pricing flexibility for, and relaxation of regulatory oversight of the ILECs.

      Competitive Access Carriers/ Competitive Local Exchange Carriers/ Other Market Entrants. We also face, and expect to continue to face, competition from other current and potential market entrants, including CLECS, cable television companies, electric utilities, microwave carriers, wireless telephone system operators and private networks built by large end users. In addition, a renewed trend toward consolidation as a result of mergers, acquisitions and strategic alliances in the telecommunications industry could also affect the level of competition we face. Examples of consolidation that may put us at a greater competitive disadvantage include the following recent or pending type of consolidations:

	•	Mpower Holding Corporation and ICG Communications customer base
	•	XO Communications and Allegiance Telecom
	•	SBC Communications, Inc. and AT&T Corporation
	•	Verizon Communications Inc. and MCI, Inc.
	•	Cingular Wireless and AT&T Wireless

      • Level 3 Communications, Inc. and Sprint Corporation’s wholesale dial Internet access business

      The Telecommunications Act of 1996 imposes certain regulatory requirements on all local exchange carriers, including competitors such as ourselves, while granting the FCC expanded authority to reduce the level of regulation applicable to any or all telecommunications carriers, including ILECs. The manner in which these provisions of the Telecommunications Act of 1996 are interpreted, implemented and enforced could have a material adverse effect on our ability to successfully compete against ILECs and other telecommunications service providers. The Telecommunications Act of 1996 is subject to review by the FCC at any time and could change in the near future. Due to the readily available sources of capital during the 1990s, many CLECs and other incumbent carriers built their own networks, including fiber transport capacity, as a key component of their operating plans. This resulted in an excess of network capacity in many areas throughout the U.S. with insufficient traffic volumes to cover the corresponding cost of capital and debt loads

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      Competition from International Telecommunications Providers. Under the World Trade Organization agreement on basic telecommunications services, the United States and 68 other members of the World Trade Organization committed themselves to opening their respective telecommunications markets to foreign ownership and/or to adopting regulatory measures to protect competitors against anticompetitive behavior by dominant telecommunications companies, effective in some cases as early as January 1998. There can be no assurance that the pro-competitive effects of the World Trade Organization agreement will not have a material adverse effect on our business, financial condition and results of operations or that members of the World Trade Organization will implement the terms of the World Trade Organization agreement.

Regulation

      The following summary of regulatory developments and legislation does not purport to describe all present and proposed Federal, state and local regulations and legislation affecting the telecommunications industry or Pac-West, all of which are available in the public record. Other existing Federal and state legislation and regulations are currently the subject of judicial proceedings, legislative hearings and administrative proposals, which could change, in varying degrees, the manner in which this industry operates. Neither the outcome of these proceedings, nor their impact upon the telecommunications industry or Pac-West, can be predicted at this time. This section also includes a brief description of regulatory and tariff issues pertaining to the operation of our business, which is subject to varying degrees of Federal, state and local regulation.

      The FCC regulates interstate and international telecommunications services. We provide service on a common carrier basis. The FCC imposes certain regulations on common carriers such as the regional Bell operating companies that have some degree of market power. The FCC imposes less regulation on common carriers without market power including, to date, CLECs. Among other obligations, common carriers are generally subject to nondiscrimination requirements, as well as certain service reporting requirements. The FCC also requires common carriers to receive an authorization to construct and operate telecommunications facilities, and to provide or resell telecommunications services, between the United States and international points.

      To the extent we provide interexchange telecommunications service, we are required to pay access charges to ILECs and CLECs when we use the facilities of those companies to originate or terminate interexchange calls. Also, we provide access services to other interexchange service providers. The interstate access charges of ILECs are subject to extensive regulation by the FCC, while those of CLECs are subject to a lesser degree of FCC regulation.

      The manner in which the FCC continues to implement its approach to lowering access charge levels could have a material effect on our ability to compete in providing interstate access services.

      On April 27, 2001, the FCC released its Order on Remand regarding intercarrier compensation for Internet service provider-bound traffic. The FCC asserted exclusive jurisdiction over Internet service provider-bound traffic and established an interim intercarrier compensation regime for “presumed” Internet service provider-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 a rate of $.0007, or the applicable state-approved rate if lower. 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 was also subject to a growth ceiling with traffic in excess of the growth ceiling subject to “bill and keep,” an arrangement in which the originating carrier pays no compensation to the terminating carrier to complete calls. On May 3, 2002, the U.S. Court of Appeals for the District of Columbia Circuit (Court) issued a decision in which it found that the FCC had failed to provide an adequate legal basis for its decision. The

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      The FCC, on March 10, 2004, adopted a Notice of Proposed Rulemaking, which will address a variety of issues concerning the regulatory treatment of VoIP telephony. At the same time, the FCC ruled on a petition which dealt with a VoIP service that never used the PSTN, was offered free to members of the service, and did not involve the transport of the calls. The FCC determined the service was not a telecommunications service under the Act. We cannot predict the outcome of these proceedings or other FCC or state proceedings that may affect our operations or impose additional requirements, regulations or charges upon our provision of Internet access and related Internet Protocol-based telephony services.

      The FCC and many state public utilities commissions have implemented rules to prevent unauthorized changes in a customer’s pre-subscribed local and long distance carrier services (a practice commonly known as “slamming.”) Pursuant to the FCC’s slamming rules, a carrier found to have slammed a customer is subject to substantial fines. In addition, the FCC’s slamming rules allow state public utilities commissions to elect to administer and enforce the FCC’s slamming rules. These slamming liability rules substantially increase a carrier’s possible liability for unauthorized carrier changes, and may substantially increase a carrier’s administrative costs in connection with alleged unauthorized carrier changes. The Communications Assistance for Law Enforcement Act (CALEA) provides rules to ensure that law enforcement agencies would be able to properly conduct authorized electronic surveillance of digital and wireless telecommunication services. CALEA requires telecommunications carriers to modify their equipment, facilities, and services used to provide telecommunications services to ensure that they are able to comply with authorized surveillance requirements. Our switches are CALEA compliant.

      State regulatory agencies have regulatory jurisdiction when Pac-West facilities and services are used to provide intrastate services. A significant portion of our current traffic is classified as intrastate and therefore subject to state regulation. To provide intrastate services, we generally must obtain a certificate of public convenience and necessity from the state regulatory agency and comply with state requirements for telecommunications utilities, including state tariffing requirements. We currently have such certificates to provide local exchange and intrastate toll service in California, Nevada, Washington, Oregon and Arizona. Most states in which we operate also require us to seek approval for any transfers of control.

      The implementation of the Telecommunications Act of 1996 is subject to numerous state rulemaking proceedings on these issues. Thus, it is difficult to predict if full competition for local services, including local dial tone, will develop. Furthermore, the Telecommunications Act of 1996 provides that state public utilities commissions have significant roles in determining the content of interconnection agreements, including the responsibility to conduct the mandatory arbitration proceedings called for by the Telecommunications Act of 1996. The actions of the state public utilities commissions are subject to the Telecommunications Act of 1996 and, in several respects, the FCC’s interpretations thereof.

      SBC-California notified us of its election to implement the FCC’s interim rate plan for ISP-bounds calls beginning August 1, 2003. We disputed SBC’s implementation of the FCC plan, and on October 14, 2003 SBC-California filed a Complaint with the CPUC seeking resolution of this issue. Pac-West and SBC reached settlement of these disputes in July of 2004.

      On June 12, 2002, Verizon California (Verizon) filed a Petition for Arbitration with the CPUC with respect to unresolved issues in negotiations of a new ICA with us, that would replace the prior agreement, the terms and conditions of which continued in effect until replaced pursuant to an order of the CPUC. On May 22, 2003, the CPUC issued its decision establishing the provisions of the agreement, which resulted from the arbitration. The new three-year agreement establishes the rules under which Pac-West and Verizon can

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      In July 2003 Verizon appealed the arbitration decision of the CPUC to Federal District Court, arguing among other things that the FCC Plan intercarrier compensation rates, which are contained in the new agreement but lower than the comparable rates in the agreement being replaced, should have been made retroactive. We have opposed the relief sought by Verizon, and have challenged the legality of the new transport charges imposed on VNXX traffic. It is not possible to determine the outcome of this proceeding at this time.

      In September 1999, Nevada Bell filed suit in U.S. Federal District Court in Reno to overturn a Public Utilities Commission of Nevada decision requiring Nevada Bell to pay us intercarrier compensation for terminating traffic to Internet service providers. On March 21, 2001, in ruling on cross-motions for summary judgment, the district court vacated the Public Utilities Commission of Nevada decision and remanded the matter to the Public Utilities Commission of Nevada with instructions to redo its analysis regarding intercarrier compensation. We appealed this decision to the United States Court of Appeals for the Ninth Circuit. The Ninth Circuit upheld the district court and the matter have been remanded to the Public Utilities Commission of Nevada. It is not possible to determine the outcome of this proceeding at this time.

      Our network is subject to numerous local regulations such as building codes and licensing requirements. Such regulations vary on a city-by-city and county-by-county basis. To the extent we decide in the future to install our own fiber optic transmission facilities, we will need to obtain rights-of-way over private and publicly owned land and pole attachment authorizations. There can be no assurance that such rights-of-way or authorizations will be available to us on economically reasonable or advantageous terms. We could also be subject to unexpected franchise requirements and be required to pay license or franchise fees based on a percentage of gross revenues or some other formula.

Employees

      As of December 31, 2004, we had 373 employees. We believe that our future success will depend on our continued ability to attract and retain highly skilled and qualified employees. None of our employees are currently represented by a collective bargaining agreement. We also believe that we enjoy good relationships with our employees. As a result of the recent sale of our enterprise customer base to TelePacific, as of March 14, 2005 our employee base was reduced to approximately 250 employees. The reduction in force was due to terminations of our employees primarily responsible for enterprise customers.

Available Information

      Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge on our Investor Relations web site at www.pacwest.com as soon as

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Risk Factors

      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 in this report. These uncertainties and risks include, among other things, the uncertainties and risks identified below. You should be aware, however, that the uncertainties and risks described below are not the only uncertainties and risks we are facing or will face in the future. Additional uncertainties and risks not presently known to us or that we currently believe to be immaterial may also adversely affect our business.

      As of December 31, 2004, our long-term debt totaled $65.0 million. We may also incur additional indebtedness in the future to expand and develop our current business and services, make strategic acquisitions and enter new markets. Our substantial indebtedness could, among other things:

	•	increase our vulnerability to general adverse economic and industry conditions;
	•	limit our ability to fund future working capital, capital expenditures, marketing costs and other general corporate requirements;
	•	require us to dedicate a substantial portion of our cash flows from operations to payments on our indebtedness, thereby reducing the availability of our cash flows to fund working capital, capital expenditures, marketing efforts and other general corporate purposes;
	•	limit our flexibility in planning for or reacting to changes in our business and the industry in which we operate;
	•	place us at a competitive disadvantage compared to our less leveraged competitors; and
	•	limit our ability to borrow additional funds.

      On March 11, 2005 we utilized the proceeds from the sale of our enterprise customers to TelePacific, as well as cash on hand, to repay our outstanding $40.0 million Senior Secured Note to Deutsche Bank AG — London (Deutsche Bank), as well as retire the related warrants to purchase up to 26,666,667 shares of our common stock. See Note 18 in the accompanying consolidated financial statements.

      Failure to generate cash in the future either from operations or from additional financing will adversely affect our ability to make payments on and to refinance our indebtedness and to fund capital expenditures and marketing efforts. Our ability to generate cash from operations will be particularly dependent on our ability to expand our business and manage our growth, provide competitive services, comply with applicable governmental regulations, negotiate favorable agreements and to maintain or lower our current expenditure rate. In addition, we may need to refinance all or a portion of our indebtedness on or before maturity. We may not be able to refinance this indebtedness on commercially reasonable terms or at all.

      Traditional dial-up access to the Internet is a mature technology. Major segments of this market may experience migration to broadband access where available and competitively priced. With the evolution of new technologies many new IP applications are now available, such as VoIP, which may hasten the transition of end-users from dial-up to broadband access. While we remain focused on serving the needs of our customers who provide dial-up access to their end-users, if migration to broadband access occurs faster than we anticipate our revenue streams may be adversely affected.

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      Intercarrier compensation payments from ILECs accounted for approximately 32.1%, 35.0% and 48.7% of our total revenues for the years ended December 31, 2004, 2003 and 2002, respectively. Intercarrier compensation payments are a function of the number of calls we terminate, the minutes of use associated with such calls and the rates we are compensated at by the ILECs. We believe that under the Telecommunications Act of 1996, other ILECs should have to compensate us when their customers place calls to Internet service providers who are our customers. Our right, to receive this type of compensation is the subject of continual regulatory and legal challenges by the ILECs. Although the rate at which we believe we will be compensated by the ILECs in 2005 is expected to be consistent with 2004, the sale of our enterprise customer base to TelePacific may affect the percentage of total revenues represented by intercarrier compensation in 2005.

      We may need to make significant capital expenditures in order to expand and develop our current business and to support new product offerings. We expect to fund these expenditures through existing resources, through internally generated funds, or through future equity and debt financings. If we are unable to raise sufficient funds, we may have to delay or abandon some of our expenditures or plans for future growth. This could result in underutilization of our established infrastructure, reduced profitability and may negatively affect our ability to compete for and satisfy the demands resulting from the growth and expansion of our customer base.

      To be successful, we must develop and market products and services that are widely accepted by customers at profitable prices. Our success will depend upon the willingness of our target customers to accept us as a high-value independent provider of integrated communications solutions that are timely delivered to market.

      We believe that a critical component of our success will be the retention of our key executive officers. Henry R. Carabelli, our President and Chief Executive Officer has significant expertise in the telecommunications industry and has been instrumental in establishing and executing our business plan and strategy. The loss of the services of Mr. Carabelli or our other executive officers, including the following officers could adversely affect our business prospects, financial condition and results of operations:

	•	H. Ravi Brar, our Chief Financial Officer and Vice President of Human Resources;
	•	Todd M. Putnam, our Chief Information Officer;
	•	Michael B. Hawn, our Vice President Customer Network Services;
	•	Wayne Bell, our Vice President Marketing and Sales;
	•	Eric E. Jacobs, our Vice President, General Manager Service Provider Sales;
	•	Peggy Mc Gaw, our Vice President Finance;
	•	John F. Sumpter, our Vice President Regulatory ; and
	•	Robert C. Morrison, our Vice President and General Counsel.

      Our networks and the provision of telecommunications services are subject to significant regulation at the Federal, state and local levels. Delays in receiving required regulatory approvals or the enactment of new

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      On July 30, 2002, the Sarbanes-Oxley Act of 2002 was signed into law and became some of the most sweeping federal legislation addressing accounting, corporate governance and disclosure issues. The impact of the Sarbanes-Oxley Act is wide-ranging as it applies to all public companies and imposes significant new requirements for public company governance and disclosure requirements. Some of the provisions of the Sarbanes-Oxley Act became effective immediately while others are still being implemented.

      In general, the Sarbanes-Oxley Act mandates important new corporate governance and financial reporting requirements intended to enhance the accuracy and transparency of public companies’ reported financial results. It establishes new responsibilities for corporate chief executive officers, chief financial officers and audit committees in the financial reporting process and creates a new regulatory body to oversee auditors of public companies. It backs these requirements with new SEC enforcement tools, increases criminal penalties for federal mail, wire and securities fraud, and creates new criminal penalties for document and record destruction in connection with federal investigations. It also increases the opportunity for more private litigation by lengthening the statute of limitations for securities fraud claims and providing new federal corporate whistleblower protection.

      The economic and operational effects of this new legislation on public companies, including us, will be significant in terms of the time, resources and costs associated with complying with the new law. Because the Sarbanes-Oxley Act, for the most part, applies equally to larger and smaller public companies, we will be presented with additional challenges as a smaller, telecommunications company seeking to compete with larger telecommunications companies in our industry.

      We depend on many vendors and suppliers to conduct our business. For example, we purchase our network assets from equipment manufacturers and other suppliers and we lease fiber and other circuits from other carriers as well as from companies, which construct these network elements for resale. Many of these third parties have experienced substantial financial difficulties, in some cases leading to bankruptcies and liquidations. The financial difficulties of these companies could have a material adverse affect on our business and prospects.

      We have certain commitments and agreements with certain vendors associated with our circuits in which our network expenses could increase if the enterprise customers sold to TelePacific move off of our network sooner or later than what is contemplated in our Transition Service Agreement.

      Many new carriers, including us, have experienced difficulties in working with the ILECs with respect to initiating, interconnecting, and implementing the systems used by these new carriers to order and receive UNEs and wholesale services and locating the new carriers’ equipment in the offices of the ILECs. As a new

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      The regional Bell operating companies have been fined numerous times by both Federal and state authorities for their failure to comply with applicable telecommunications laws and regulations. We do not believe these fines have had any meaningful impact on the anticompetitive practices of many of these companies and in fact believe that these practices are increasing in most of our markets. We attempt to enforce our rights against these incumbent monopolies but often times the remedies are inadequate to change their anticompetitive practices and in any event provide us with little or no recovery of the damages we have suffered as a result of these practices. Moreover, efforts by us to enforce our rights against these companies may further diminish the level of cooperation we receive from them. If we cannot obtain the cooperation of a regional Bell operating company in a region, or a regional Bell operating company otherwise fails to meet our requirements, for example, because of labor shortages, work stoppages or disruption caused by mergers or other organizational changes or terrorist attacks, our ability to offer services in such region on a timely and cost-effective basis will be adversely affected.

      The telecommunications industry is both highly competitive and dominated by the ILECs who enjoy the benefit of significant market share earned over a time when there was little to no competition in the marketplace. Many of our current and potential competitors in the local market have financial, technical, marketing, personnel and other resources, including brand name recognition, substantially greater than ours, as well as other competitive advantages over us. In each of the markets targeted by us, we compete with the ILEC serving that area. ILECs are established providers of local telephone services to all or virtually all telephone subscribers within their respective service areas. ILECs also have long-standing relationships with Federal and state regulatory authorities. FCC and state administrative decisions and initiatives provide the ILECs with pricing flexibility for their products and services.

      We also face, and expect to continue to face, competition from other current and potential market entrants, including CLECS, cable television companies, electric utilities, microwave carriers, wireless telephone system operators and private networks built by large end users. In addition, a renewed trend toward consolidation as a result of mergers, acquisitions and strategic alliances in the telecommunications industry could also affect the level of competition we face. Furthermore, the development of new technologies could give rise to significant new competitors in the local market. These competitive forces could adversely affect our business.

      Due to the readily available sources of capital during the 1990s, many CLECs and other incumbent carriers included building their own networks, including fiber transport capacity, as a key component of their operating plans. This resulted in an excess of network capacity in many areas throughout the U.S. with insufficient traffic volumes to cover the corresponding cost of capital and debt loads that were necessary to build the network infrastructures. Accordingly, some of the companies have not survived or have been forced to restructure, often through bankruptcy. When these companies restructure they generally have new, lower cost structures, which often allow them to aggressively price their products and services, effectively driving down the market rates in a way that could adversely affect our business.

      Our operations are dependant upon our ability to support our network infrastructure. Many of our customers are particularly dependent on an uninterrupted supply of services. Any damage or failure that

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      Competition in the communication services market has resulted in the consolidation of companies in our industry, a trend we expect to continue. In order to grow our business and better serve our customers, we continue to consider new business strategies, including potential acquisitions or new business lines. We believe that the statewide footprint of our network, which encompasses all of the major metropolitan areas of California, provides us with a significant competitive advantage that will enable us to successfully compete in the future, but we cannot guarantee that we will be able to sustain continued growth.

      The developing practice by the ILECs of bundling services including long distance over their comprehensive networks could make it difficult for us to retain customers or attract new ones. In addition, technology continues to evolve with the corresponding development of new products and services. There is no guarantee we will retain our customers with our existing product and service offerings or with any new products or services we may develop in the future.

      Market prices for our services face competitive pressures, a trend which may continue. Accordingly, we cannot predict to what extent we may need to further reduce our prices to remain competitive or whether we will be able to sustain future pricing levels as our competitors introduce competing services or similar services at lower prices. Our ability to meet price competition may depend on our ability to operate at costs equal to or lower than our competitors or potential competitors. There is a risk that competitors, perceiving us to lack capital resources, may undercut our rates, increase their services or take other actions that could be detrimental to us.

      We cannot guarantee that our network will be able to connect and manage a substantial number of customers at high transmission speeds. If we cannot achieve and maintain digital transmission speeds that are otherwise available in a particular market, we may lose customers to competitors with higher transmission speeds and we may not be able to attract new customers. Actual transmission speeds on our network will depend on a variety of factors many of which are beyond our control, including the distance an end user is located from a central office, the quality of the telephone lines, the presence of interfering transmissions on nearby lines and other factors.

      Our ability to provide certain services to potential customers depends on the quality, physical condition, availability and maintenance of telephone lines within the control of the ILECs. If the telephone lines are not adequate, we may not be able to provide certain services to many of our target customers and our expected revenues will be diminished. In addition, the ILECs may not maintain the telephone lines in a condition that will allow us to implement certain services effectively or may claim they are not of sufficient quality to allow us to fully implement or operate certain services.

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      United States law relating to the liability of on-line service providers and Internet service providers for information carried on, disseminated through, or hosted on their systems is currently unsettled. If liability is imposed on Internet service providers, we would likely implement measures to minimize our liability exposure. These measures could require us to expend substantial resources or discontinue some of our product or service offerings. In addition, increased attention to liability issues, as a result of litigation, legislation or legislative proposals could adversely affect the growth and use of Internet services.

      Our stock has experienced significant price and volume fluctuations, often times due to factors beyond our control. Given that our stock is thinly traded, sales by even a single large stockholder can materially decrease our market price. The market price for our common stock may continue to be subject to wide fluctuations in response to a variety of other factors, including but not limited to the following, some of which are beyond our control: revenues and operating results of our company or other emerging communications companies failing to meet the expectations of securities analysts or investors in any period; failure to successfully implement our business strategy; announcements of operating results and business conditions by our customers and competitors; technological innovations by competitors or in competing technologies; announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments; announcements by third parties of significant claims or proceedings against us; investor perception of our industry or our prospects; economic developments in the telecommunications industry or general market conditions; or major geopolitical events such as war, terrorism or political change around the world.

      There has been consolidation in the telecommunications industry with several mergers and acquisitions and this trend may continue. In addition, some telecommunication companies have filed for bankruptcy protection and enjoy court protection from creditors and lower their cost structures. These events could lead to the creation of substantially larger competitors, which may have greater resources and lower cost structures than us.

      We are headquartered in Stockton, California and lease offices and space in a number of locations primarily for sales offices and network equipment installations. As of December 31, 2004, we had 22 premise leases. The table below lists our material active facilities as of December 31, 2004:

      We believe that our leased facilities are suitable and adequate to meet our current needs in the markets in which we currently operate. Additional facilities may be required as business in our existing markets grows or facilities may be closed down if they are no longer needed. Each of the leases associated with our material facilities is extendable at our option. Our Stockton, California switching facility lease is extendable for three two-year periods, our Oakland switching facility is extendable for one five year period and all other leases in the table above are extendable for two five-year periods.

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      On December 6, 2001, a complaint captioned Krim vs 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 that the Company and its officers failed to disclose alleged allocations 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 and Section 10(b) of the Securities Exchange Act of 1934. 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. In October 2002, the executive officers of the Company were dismissed from the action without prejudice by agreement with the plaintiffs, which also resulted in tolling of the statute of limitations. The court dismissed the Section 10(b) claim against the Company in 2002.

      On July 10, 2003, a committee of the Company’s board of directors conditionally approved a proposed settlement with the plaintiffs in this matter. The settlement would provide, among other things, a release of the Company and of the individual defendants for the conduct alleged in the action to be wrongful in the plaintiff’s complaint. The Company would agree to undertake other responsibilities under the settlement, including agreeing to assign away, not assert, or release certain potential claims the Company may have against its underwriters. Any direct financial impact of the proposed settlement is expected to be borne by the Company’s insurers who participated in the negotiation of the settlement together with insurers representing other issuers in the class action case. The committee agreed to approve the settlement subject to a number of conditions, including the participation of a substantial number of other issuer defendants in the proposed settlement, the consent of the Company’s insurers to the settlement, and the completion of acceptable final settlement documentation. Furthermore, the settlement is subject to a hearing on fairness and approval by the court overseeing the litigation.

      From time to time, the Company 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.

      In addition the Company is also a party to various legal proceedings relating to intercarrier compensation payment and other interconnection agreement issues. These are discussed in more detail in “Business — Regulation” in item 1 to this form 10-K.

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      None

      The table below sets forth certain information with respect to Pac-West’s current directors and executive officers:

      The present principal occupations and recent employment history of each of our executive officers and directors listed above are set forth below.

Executive Officers

      Henry R. Carabelli joined Pac-West as President and COO in June 2001. Effective January 1, 2003, Mr. Carabelli became a Director of Pac-West. In July 2003 he also became CEO. Mr. Carabelli has overall responsibility for the operations of the Company. Formerly the COO of ICG, a Colorado-based CLEC, and President of @Link Networks, a broadband service provider, Mr. Carabelli brings over 28 years of telecom experience to Pac-West. He joined ICG in 1996 as Executive Vice President of network operations, and served as COO from 1998 to 1999 with responsibility over network engineering, customer care, sales, and installation. Prior to ICG, Mr. Carabelli spent 19 years in management with Ameritech and Michigan Bell. He is also a Director on the San Joaquin Business Council as well as the University of San Francisco Telecommunications Advisory Board.

      H. Ravi Brar joined Pac-West in July 1999 as Vice President of Business Development. He was appointed Vice President of Customer Operations in October 2000, Vice President of Finance and Treasurer in August of 2001, Acting Chief Financial Officer in February of 2002, Chief Financial Officer in September 2002 and Vice President of Human Resources in 2004. Mr. Brar has responsibility for the Company’s financial and accounting operations, evaluating strategic growth opportunities, and human resources. Prior to joining

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      Todd M. Putnam joined Pac-West in October 2003 as Chief Information Officer. Mr. Putnam has responsibility over the Company’s information systems including its Information Technology strategic plan and infrastructure, including operating support systems, software development, database administration, security, system integration, internal and external web sites, and supplier partnerships. Prior to joining Pac-West, he completed a consulting assignment with TechNexxus, LLC (a subsidiary of Mintz Levin Cohn Ferris Glovsky and Popeo PC) in Washington D.C. From 1989 to 2002, he was employed with Global Crossing LTD (Frontier Communications, ConferTech International, and T1 Systems), where he was responsible for building, operating, and maintaining the global information systems infrastructure for the entire company. He held a variety of senior level IT positions, including Vice President of Global IS Operations, Vice President of North American Systems and Infrastructure, Vice President of Systems Development, and CIO of the ConferTech division.

      Michael B. Hawn joined Pac-West as Vice President of Customer Network Services in August 2001. Mr. Hawn has end-to-end responsibility over service delivery, maintenance, planning, engineering, billing operations and reliability. He has over 18 years of telecommunications management experience, including network planning, engineering, service delivery, provisioning, and software development. His former positions include Vice President of National Operations and Vice President of Program Management for @Link Networks, Inc. in Louisville, CO, Vice President of Planning and Engineering for ICG Communications, Inc. in Englewood, CO, and Technical Manager for Lucent Technologies’ Regional Technical Assistance Center (RTAC) in Lisle, IL and Cockeysville, MD.

      Wayne Bell joined Pac-West as Vice President of Marketing in August 2001. He assumed additional responsibility as Vice President of Service Provider Markets in February 2003, and SME Markets in October 2003. In January 2005, after Pac-West entered into an agreement with TelePacific to sell its SME line of business, Mr. Bell retained responsibility over Marketing and assumed additional responsibility over Business Development. Mr. Bell currently has responsibility for product marketing and development, business analysis, corporate communications, business development, corporate development, and partnerships. Mr. Bell has over 12 years of telecommunications management experience, including product marketing, product and process development, network planning, engineering, sales, customer service, and operations. His former positions include Vice President of Marketing and Channel Development for @Link Networks, Inc. in Louisville, CO and Senior Director of Product and Process Development for ICG Communications, Inc. in Englewood, CO. He also served in a Director capacity in the Program Office for U S WEST Communications, Inc. in Englewood, CO.

      Mr. Jacobs joined Pac-West in March of 2003 and was promoted to Vice President, General Manager of Service Provider Markets in December 2003. He has over ten years of sales management experience in the communications industry. Prior to joining Pac-West, he held positions as Director of Sales for Metromedia Fiber Network and Manager of Corporate Accounts for Nextel Communications, Inc. Mr. Jacobs has leadership over the company’s sales, channel marketing and customer relations teams.

      Peggy Mc Gaw joined Pac-West in June 2002 as Executive Director of Accounting and Finance and was promoted to Vice President Finance in December 2003. Ms. Mc Gaw has responsibility over accounting, risk management, financial reporting and compliance, and tax and treasury activities. Prior to joining Pac-West she has served as CFO of the Dial.com from 1999 to 2002. Prior positions included in her 20 years of finance experience are Vice President of Finance and Acting CFO of Intracel Corporation and Business Assurance Manager for PricewaterhouseCoopers, LLP. Her extensive experience with technology-based companies includes numerous capital raising and M&A transactions. Ms. Mc Gaw is a member of the American Institute of Certified Public Accountants, Financial Executives International and the Forum for Women Entrepreneurs.

      John F. Sumpter joined Pac-West as Vice President of Regulatory in July 1999. He is responsible for Pac-West’s relations with government regulatory agencies, regulatory compliance, and intercarrier relations.

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      Robert C. Morrison joined Pac-West as Vice President and General Counsel in January 2003. He served on Pac-West’s Board of Directors from 2001 through December 31, 2002. He has served as our Corporate Secretary since February 2001. Mr. Morrison has responsibility over corporate governance, record keeping, documentation and legal administration of contractual relationships, and managing the Company’s relationships with outside law firms. Prior to joining Pac-West, Mr. Morrison was an attorney with Neumiller and Beardslee, P.C. in Stockton, California from 1972 to 2002. He served as Managing Director from 1983 to 1990. In July 2002, he completed a term on the Board of Regents of the University of California. He is a past president of the Greater Stockton Chamber of Commerce, the San Joaquin County Economic Development Association, and the alumni association for UC Davis, and is a former member of the Board of Directors and Executive Committee of the Lassen Volcanic National Park Foundation.

Directors

      Wallace W. Griffin was appointed President, CEO, and a Director of Pac-West in September 1998 when an investor group he was part of purchased and recapitalized the Company. As part of a succession plan, in June 2001 he transferred the title of president to Mr. Carabelli and in July 2003 he transferred the title of CEO to Mr. Carabelli and transitioned to a non-executive Chairman role. Mr. Griffin has over 40 years experience in telecommunications, cable television, publishing and advertising. Prior to joining Pac-West, Mr. Griffin served as a Group President for a number of Jones International companies from 1994 to 1997, including Jones Lightwave, Ltd., a CLEC, and Jones Education Company, a leader in using technology to deliver education. Concurrently, he was co-owner of a consulting and business development company, Griffin Enterprises, Inc. From 1987 through 1992, he served as the President and CEO of U S West Marketing Resources Group, where he managed the $1 billion publishing, media software and advertising services division. Mr. Griffin currently serves on the Board of Directors of DDx, Inc. in Denver, the Advisory Board for the University of the Pacific Eberhardt School of Business, the Board of Trustees for the University of California, Merced and the Board of Trustees for the Delta College Foundation in Stockton.

      David G. Chandler has served as a Director of Pac-West since September 1998. Mr. Chandler has served as a Managing Director of William Blair Capital Partners (and predecessor entities), a private equity firm, since December 1988. Mr. Chandler also serves as a Managing Director of Chicago Growth Partners, a private equity investment firm recently co-founded by Mr. Chandler. Mr. Chandler serves as a director of a number of privately held companies. Mr. Chandler holds an M.B.A. from The Amos Tuck School at Dartmouth College and a B.A. from Princeton University.

      Jerry L. Johnson served as Chairman of Pac-West’s Board of Directors from September 1998 to June 2001. From 2002 until present, Mr. Johnson has served as President of eMoney Advisor, Inc. From 1995 until December 2001, Mr. Johnson was employed by Safeguard Scientifics Inc., where he was the Executive Vice President overseeing the partner companies in the E-Communications group. From 1985 to 1995, he worked at U S West in various positions, including Vice President, Network and Technology Services, which included managing U S West’s largest division, and supervising 21,000 management, engineering, technical and clerical employees. From 1983 to 1985, Mr. Johnson was President and CEO of Northwestern Bell Information Technologies. Mr. Johnson holds a Masters in Management from the Sloan School at MIT, a Masters in Psychology from Northern Illinois University and a B.S. in Psychology from Northeastern Missouri. He serves on the boards of Axum Financial LLC, Decis, Inc. and Pac-West Telecomm, as well as the boards of the Philadelphia Orchestra and the Episcopal Academy.

      John K. La Rue founded the Company’s predecessor (also known as Pac-West Telecomm, Inc.) in 1980 and served as its President until September 1998. From September 1998 until July 2001, Mr. La Rue served

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      Thomas A. Munro has served as a director since April 2003 and has over 22 years of financial and technology experience. In January 2003, he retired from Wireless Facilities, Inc. (Nasdaq: WFII), a global leader in the design, deployment, and management of wireless mobility and broadband wireless networks. He served as CFO from 1997 to 2000, and President from September 2000 until his retirement. Prior to WFI, he was founder and CEO of @Market, a retail sporting goods website. From 1994 to 1995, he served as CFO for Precision Digital Images, Inc. From 1981 to 1994, he was employed with MetLife Capital Corporation, where he served as CFO and a Director on the company’s Board from 1992 to 1994. He holds a bachelor’s degree in business administration and an MBA from the University of Washington and has co-authored two college level text books on computer programming. Mr. Munro also serves as a director of Airgain, Inc, BioFortis, Inc., Concerto Networks, Inc., Kineticom, Inc., Renaissance Golf Group and the San Diego Telecom Council.

      Samuel A. Plum has served as a Director of Pac-West since September 1998. Mr. Plum has been a Managing General Partner of the general partner of SCP Private Equity Partners, L.P. since its commencement in August 1996, and was employed by Safeguard Scientifics from 1993 to 1996. From February 1989 to January 1993, Mr. Plum served as President of Charterhouse, Inc. and Charterhouse North American Securities, Inc., the U.S. investment banking and broker-dealer divisions of Charterhouse PLC, a merchant bank located in the United Kingdom. From 1973 to 1989, Mr. Plum served in various capacities at the investment banking divisions of PaineWebber, Inc. and Blyth Eastman Dillon & Co., Inc. Mr. Plum has 22 years of investment banking, mergers and acquisitions, and private equity investment experience. Mr. Plum also serves as a director of Index Stock Imagery, Inc., Metallurg Holdings, Inc., Mobility Technologies, Inc. and Pentech Financial Services Inc.

      Melinda Guzman Moore has served as a Director of Pac-West since June 2004. Ms. Guzman Moore is a partner at the law firm of Goldsberry Freeman Guzman & Ditora, LLP in Sacramento, California. From 1994 to 1998, Ms. Guzman Moore was a partner of Diepenbrock, Wulff, Plant & Hannegan, LLP. Ms. Guzman Moore currently serves as a member of the Board of Trustees for the California State University system, is the General Counsel of the United States Hispanic Chamber of Commerce, and Chairwoman of the California Hispanic Chamber of Commerce and the Nehemiah Corporation of America.

      Timothy A. Samples has served as a Director of Pac-West since January 2005. Mr. Samples has over 20 years experience in the communications industry. Since January of 2003, he has been the Principal in Sapience LLC, in Scottsdale, Arizona, where he does consulting work and serves as a non-executive Director for two telecommunications companies. From February 2001 to June 2002, he served as CEO, President, and Chairman of the Board of Management for Completel N.V. in London, England and Paris, France, a Dutch registered CLEC. From February 2000 to February 2001, Mr. Samples served as CEO and President of Firstmark Communications, a Pan-European broadband company with operations in seven Western European countries. From September 1997 to February 2000, he was CEO of One2One, a GSM service operator created through a joint venture between MediaOne group and Cable and Wireless. From July 1995 to May 1996, Mr. Samples served as Vice President and General Manager for US West Cellular/ Airtouch in Phoenix, Arizona. Prior to 1995, Mr. Samples held various management, sales, and marketing positions with US West/ MediaOne Group.

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PART II

Market Information

      The Company’s common stock trades under the symbol “PACW.” The following table represents the quarterly high and low closing sale prices of the Company’s common stock for the years ended December 31, 2004 and 2003 as reported by the Nasdaq Stock Market.

      As of March 16, 2005, the number of shareholders of record of the Company’s common stock was 15,625. On September 10, 2004, the Company received notification from The Nasdaq Stock Market indicating that for the last 30 consecutive business days, the bid price of its common stock had closed below the minimum $1.00 per share requirement for continued inclusion. The Nasdaq notice indicated that the Company would be provided 180 calendar days, or until March 9, 2005, to regain compliance by having its shares close above $1.00 for a minimum of 10 consecutive trading days. On December 2, 2004, the Company received notification from the Nasdaq Listing Qualifications Department that it had regained compliance with all requirements for continued listing on the Nasdaq SmallCap Market.

      The Company has not declared any cash dividends on its commo n stock during the fiscal years 2004, 2003 and 2002, and does not anticipate declaring or paying any cash dividends in the foreseeable future. The Company currently intends to retain future earnings, if any, to fund the development and growth of its business. Declaration or payment of future dividends, if any, will be at the discretion of the Company’s Board of Directors after taking into account various factors, including its financial condition, operating results, current and anticipated cash needs and plans for expansion. In addition, the Company’s ability to pay dividends on the common stock is restricted by the provisions of its outstanding debt agreements.

Securities Issuance Under Equity Compensation Plans

      The information required to be set forth herein will be included in the section entitled “Securities Issuance Under Equity Compensation Plans” in Item 10 of the Company’s Proxy Statement, which section is incorporated herein by reference.

      This section presents selected historical financial data of the Company. You should read carefully the consolidated financial statements, related notes thereto, and the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Annual Report on Form 10-K. The selected data in this section is not intended to replace the consolidated financial statements.

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      The following table highlights our financial performance for the last five years:

(1)	Restructuring charges relate to our restructuring plans approved and announced in June 2002 and August 2001. See Note 6 to the accompanying consolidated financial statements.
(2)	We determined some of our assets were impaired and recorded impairment charges. See Note 4 to the companying consolidated financial statements.
(3)	During 2003 and 2002, we repurchased some of our Senior Notes. See Note 8 to the accompanying consolidated financial statements.
(4)	Adjusted EBITDA represents earnings before interest expense, net, income taxes, depreciation and amortization and is adjusted for restructuring charges, impairment charges, gain/loss from asset dispositions and gain/loss on extinguishment of debt. Adjusted EBITDA for the years ended December 31, 2004, 2003, and 2002 was $26.1 million, $39.1 million and $50.5 million, respectively. Although Adjusted EBITDA is not a measure of financial performance under generally accepted accounting principles, we believe Adjusted EBITDA is a common measure used by analysts and investors to evaluate

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	our capacity to meet our obligations. We also use Adjusted EBITDA as an internal measurement tool and accordingly, we believe that the presentation of Adjusted EBITDA provides useful and relevant information. The following table reconciles net (loss) income to Adjusted EBITDA to net cash provided by operating activities.

      We encourage you to read the following discussion and analysis in conjunction with the “Selected Consolidated Financial Data” and our consolidated financial statements and related notes, which are included in this Annual Report. Our discussion of results of operations and financial condition includes various forward-looking statements about our markets, the demand for our products and services and our future results. We based these statements on assumptions that we consider reasonable. Actual results may differ materially from those suggested by our forward-looking statements for various reasons, including those discussed under “Risk Factors” and elsewhere.

Introduction

      As described more fully under “Business,” we evolved into a high-value, independent provider of integrated communication solutions that enable communication providers to use our network and services as an alternative to building and maintaining their own network. Our customers include Internet service providers (ISP), enhanced communications service providers (ESPs) and other direct providers of communication services to business or residential end-users, collectively referred to as service providers, or SPs.

      In response to our changing business model, which as described above, is focused on providing communication solutions to other communication providers, on March 11, 2005, we sold the majority of our enterprise customer base to U.S. TelePacific Corp. (TelePacific) while retaining our associated network assets. Under the terms of this transaction, TelePacific acquired certain assets and assumed certain liabilities associated with our enterprise customer base in exchange for $26.9 million in cash. In addition, we entered into a transition service agreement with TelePacific that, among other things, obligates us to provide certain

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      We achieved record minutes of use on our network while our consolidated revenues for the year ended December 31, 2004 decreased by $10.6 million, or 7.9%, to $124.0 million from $134.6 million for the year ended December 31, 2003 primarily due to a lower average rate per minute of use in 2004, partially offset by higher settlements received in 2004 than in 2003. Our billable minutes of use were up 7.2% from 2003 to 44.7 billion for the year ended December 31, 2004.

      The following table shows financial performance and noteworthy items:

      Adjusted EBITDA represents earnings before interest expense, net, income taxes, depreciation and amortization and is adjusted for restructuring charges, impairment charges, gain/loss from asset dispositions and gain/loss on extinguishment of debt. For the years ended December 31, 2004, 2003 and 2002 Adjusted EBITDA was $26.1 million, $39.1 million and $50.5 million, respectively. Although Adjusted EBITDA is not a measure of financial performance under generally accepted accounting principles, we believe Adjusted EBITDA is a common measure used by analysts and investors to evaluate our capacity to meet our obligations. We also use Adjusted EBITDA as an internal measurement tool and accordingly, we believe that the presentation of Adjusted EBITDA provides useful and relevant information. The table included in item 6 above reconciles net loss/income income to Adjusted EBITDA to net cash provided by operating activities.

      We derive our revenues from monthly recurring charges, usage charges and amortization of initial non-recurring charges. We provided services to both retail and wholesale customers. Monthly recurring charges included 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 our intercarrier customers as intercarrier compensation for completion of their customers’ calls through our network, and access charges paid by carriers for long distance traffic terminated on our network. Initial non-recurring charges consist of fees paid by end users for the installation of our service. These payments and related costs up to the amount of revenues were recognized as revenue and expensed ratably over the term of the service contracts, which is generally 24 to 36 months. We recognize 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.

      We also have carrier customers who pay us to terminate their originating call traffic on our network. These payments consist of meet point, transit traffic and intercarrier compensation payments, collectively referred to as intercarrier compensation. Intercarrier compensation payments are a function of the number of

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      Our right to receive intercarrier compensation payments from ILECs, as well as the right of CLECs and other competitors to receive such payments is the subject of numerous regulatory and legal challenges. For example, in 2003, Verizon and SBC adopted the Federal Communications Commission’s, or FCC’s, Intercarrier ISP Comp ensation Order. The FCC ISP order introduced a series of declining intercarrier compensation pricing tiers for minutes of use, at rates starting below the rates previously negotiated in our interconnection agreements (ICAs) with both carriers. The lowest pricing tier specified by the FCC ISP order was reached on June 15, 2003 and will remain in effect until such time that a replacement FCC ISP order, may become effective. Additionally, the FCC ISP order introduced artificial annual growth limits on compensable minutes of use subject to intercarrier compensation based on the composition and balance of traffic between carriers. The FCC ceased enforcing the growth cap in October 2004. The impacts of the FCC’s ISP order affected our intercarrier compensation payments for the years ended December 31, 2004, 2003 and 2002 as noted above.

      As technology continues to evolve with the corresponding development of new products and services, there is no guarantee we will retain our customers with our existing product and service offerings or with any new products or services we may develop in the future. Traditional dial-up access to the Internet, although a mature technology, remains a large target market for us. Major segments of this market may experience migration to broadband access technologies where available and competitively priced. While we remain focused on serving the needs of our customers who provide dial-up access to their end-users, with the evolution of new technologies many new Internet protocol (IP) applications are now available, such as VoIP, which have presented us with new product development and sales opportunities. We are developing and overlaying new products and services that take advantage of these new technologies to further increase the utilization of our network.

      Competition in the communication services market has resulted in the consolidation of companies in our industry, a trend we expect to continue. In order to grow our business and better serve our customers, we continue to consider new business strategies, including potential acquisitions or new business lines. We believe that the statewide footprint of our network, which encompasses all of the major metropolitan areas of California, provides us with a significant competitive advantage that will enable us to successfully compete in the future, but we cannot guarantee that we will be able to sustain continued growth.

      In accordance with generally accepted accounting principles, in connection with the 2004 audit of our year-end financial statements, we tested our long-lived tangible and intangible assets to determine whether the carrying amounts of such assets were recoverable from future undiscounted cash flows. Primarily as a result of ongoing price compression and recent industry trends in the dial-up Internet access market, we recorded non-cash asset impairment charges of $54.6 million for our tangible assets. In performing the test, we determined that the total of the expected future undiscounted cash flows directly related to the existing service potential of the assets were less than the carrying value of the assets; therefore, an impairment charge was required. We engaged a third party valuation specialist to assist us in evaluating the fair value of our assets using a sales comp arison approach, as well as a replacement cost approach. The impairment charges represented the difference between the fair value of the property and equipment and its carrying value and are included within impairment of assets in the consolidated statements of operations. As a result of the asset impairments, a new cost basis was established for those assets that were impaired. The new cost basis resulted in a reduction of gross property and equipment and did not change the remaining estimated useful lives. As a result of this impairment charge, future depreciation expense is expected to be less for the affected assets than in prior years.

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      In connection with the completion of the sale of our enterprise customer base to TelePacific on March 11, 2005, we recorded during the first quarter of 2005 net restructuring and other charges of approximately $750,000, primarily consisting of employee separation costs for employees previously associated with the enterprise customer base. Out of this amount, we anticipate that future cash expenditures associated with the separation plan will be approximately $300,000. This separation plan will impact approximately 150 employees, the majority of which were involuntary terminations. We anticipate that the majority of the employees associated with this separation plan will leave their positions by the end of 2005. See Note 18 in the accompanying consolidated financial statements.

Results of Operations

      The following table summarizes the results of operations as a percentage of our revenues for the years ended December 31, 2004, 2003 and 2002. Loss from operations for 2004, 2003 and 2002 includes restructuring and impairment charges totaling $55.4 million, $0.1 million and $25.2 million, respectively.

      The significant revenue components and operational metrics of the Company for the years ended December 31, 2004 and 2003 are as follows:

      Consolidated revenues for the year ended December 31, 2004 decreased by $10.6 million, or 7.9%, to $124.0 million from $134.6 million for the year ended December 31, 2003. The decrease in revenues was mainly the result of a $7.3 million decrease in intercarrier compensation, primarily due to a lower average rate per minute of use resulting from the implementation of the FCC Intercarrier ISP Order in mid-2003. This decrease was partially offset by negotiated settlements of previously withheld intercarrier compensation payments in 2004 of $10.7 million compared to $5.7 million in 2003.

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      Billable minutes of use were 44.7 billion for the year ended December 31, 2004, up 7.2% from 41.7 billion. Of these minutes, 43.8 billion and 40.9 billion were subject to intercarrier compensation in 2004 and 2003, respectively.

      The following table describes the main components of our intercarrier compensation revenues:

      Intercarrier compensation decreased by $7.3 million or 15.5% to $39.8 million from $47.1 million in 2003. The main reason for the decrease was a decrease of 30.0% in the average rate per minute of use due to 2004 being the first full year at the lowest pricing tier specified by the FCC Intercarrier ISP order.

      Direct billings to SP customers decreased during the year ended December 31, 2004 from the same period in 2003 by $2.1 million, or 4.7%, to $42.9 million from $45.0 million during the year ended December 31, 2003 primarily due to customers disconnecting lines not in use and a reduction in the average rate for which we are compensated in our SP contracts in 2004 compared to 2003 due to the highly competitive nature of this market.

      Direct billings to enterprise business customers increased in the year ended December 31, 2004 from the same period in 2003 by $2.2 million, or 12.7%, to $19.5 million from $17.3 million during the same period in 2003 primarily due to increased lines in service. This increase was partially offset by lower average revenue per line in 2004 as compared to 2003 due to the highly competitive nature of this market. Due to the sale of our enterprise customer base to TelePacific on March 11, 2005, we are no longer directly serving the enterprise market. Accordingly, we do not expect to record revenues from enterprise customers after the date of the transaction.

      Outbound local and long distance revenues, including 800, 888, and 877 numbers and travel card calls, decreased during the year ended December 31, 2004 by $1.3 million or 10.2% to $11.4 million from $12.7 million during the year ended December 31, 2003. The decline in revenue was principally due to the highly competitive nature of this market.

      The $1.3 million, or 23.2%, decrease in dedicated transport revenues to $4.3 million during the year ended December 31, 2004 from $5.6 million during the same period in 2003 primarily related to a decline in the average revenue per unit. Switched access revenues decreased in the year ended December 31, 2004 from the same period in 2003 by $0.7 million, or 11.7%, to $5.3 million from $6.0 million in the year ended December 31, 2003 primarily due to lower rates despite an increase in minutes per use.

      Our significant costs and expenses for the years ended December 31, are as follows: