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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-K

Commission File Number: 333-102395

Dex Media East LLC

(303) 784-2900

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

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

      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 the 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.     þ

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

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PART I.

Cautionary Note Regarding Forward-Looking Statements

      This annual report contains forward-looking statements. These statements relate to future events or our future financial performance, and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. These risks and other factors include, among other things, those listed in Item 1 — “Business — Risk Factors,” Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Stand-Alone Company” and elsewhere in this annual report. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue,” “assumption” or the negative of these terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially. In evaluating these statements, you should specifically consider various factors, including the risks outlined in Item 1 — “Business — Risk Factors.” These factors may cause our actual results to differ materially from any forward-looking statement.

      Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. These forward-looking statements are made as of the date of this annual report and, except as required under the federal securities laws and the rules and regulations of the Securities and Exchange Commission (“SEC”), we assume no obligation to update or revise them or to provide reasons why actual results may differ.

      We do not undertake any responsibility to release publicly any revisions to these forward-looking statements to take into account events or circumstances that occur after the date of this annual report. Additionally, we do not undertake any responsibility to update you on the occurrence of any unanticipated events which may cause actual results to differ from those expressed or implied by the forward-looking statements contained in this annual report.

Market and Industry Data

      Unless otherwise indicated, information contained in this annual report concerning the U.S. directory advertising industry, the U.S. advertising industry and their respective segments, our general expectations concerning such industries and their segments and our market position and market share within such industries and their segments are derived from data from various third party sources. We have not independently verified any of such information and cannot assure you of its accuracy or completeness. In addition, this annual report presents similar information based on management estimates. Such estimates are derived from third party sources as well as data from our internal research and on assumptions made by us, based on such data and our knowledge of the U.S. directory advertising industry, which we believe to be reasonable. Our internal research has not been verified by any independent source. While we are not aware of any misstatements regarding any industry or similar data presented herein, such data involves risks and uncertainties and is subject to change based on various factors, including those discussed under the caption Item 1 — “Business — Risk Factors,” in this annual report.

      Data on our market position and market share within our industry is based on U.S. directory advertising sales. A few of our competitors utilize the point of publication accounting method of recognizing revenue and expenses under which revenue and expenses are recognized when a directory is published. We utilize the deferral and amortization accounting method under which revenue and expenses are recognized over the lives of the directories. As a result, while we believe that the information presented herein with respect to ourselves and our competitors is comparable, comparisons made beyond the scope of those made in this annual report may be impacted by the differing accounting methods. Except where otherwise noted, the calculation of advertiser renewal and retention rates is based on local advertisers and excludes the loss of advertisers as a result of business failures, which we believe is the customary calculation method in our industry. Our revenue per advertiser (local) for a given period is calculated by dividing the total local advertising revenue in a given

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      The DEX® trademark referred to in this annual report is a registered trademark of Dex Media, Inc. (“Dex Media”). The QWEST DEX® and QWEST DEX ADVANTAGE® trademarks referred to in this annual report are registered trademarks of Qwest and are used by us under license.

	•	“We,” “our,” and “us” refers to our predecessor, Dex East, as defined below, for periods prior to November 8, 2002, and refers to Dex Media East LLC (formerly known as SGN LLC) (“Dex Media East”), a co-issuer of the East Notes, as defined below, for periods after November 8, 2002. In addition, where the context so requires, “we,” “our,” and “us” refers to Dex Media East and Dex East collectively;
	•	“Dex East” and “Predecessor” refer to the historical operations of Qwest Dex Holdings, Inc. and its subsidiary in Colorado, Iowa, Minnesota, Nebraska, New Mexico, North Dakota and South Dakota prior to November 8, 2002, the date that Dex Media East acquired Dex East;
	•	“Dex West” refers to the historical operations of Qwest Dex Holdings, Inc. and its subsidiary in Arizona, Idaho, Montana, Oregon, Utah, Washington and Wyoming;
	•	“Dex Media West” refers to Dex Media West LLC, the successor to Dex West following the acquisition of Dex West by Dex Media West LLC, an indirect, wholly-owned subsidiary of Dex Media;
	•	“Dex Media International” refers to Dex Media International, Inc. (known as LCI International, Inc. until January 2003), currently the only guarantor of the East Notes;
	•	“Qwest” refers to Qwest Communications International Inc. and its subsidiaries, other than Qwest Corporation;
	•	“Qwest LEC” refers to Qwest Corporation, the local exchange carrier subsidiary of Qwest;
	•	“Predecessor Period” refers to the period from January 1, 2002 through November 8, 2002;
	•	“Successor Period” refers to the period from November 9, 2002 through December 31, 2002;
	•	“East Notes” refers collectively to the 9 7/8% Senior Notes due 2009 and the 12 1/8% Senior Subordinated Notes due 2012 that were issued by Dex Media East and Dex Media East Finance Co. on November 8, 2002.
	•	“West Notes” refers collectively to the 8 1/2% Senior Notes due 2010 and the 9 7/8% Senior Subordinated Notes due 2013 that were issued by Dex Media West and Dex Media West Finance Co. on August 29, 2003.

Background Information

      On August 19, 2002, Dex Holdings LLC (“Dex Holdings”), the parent of Dex Media, entered into two purchase agreements with Qwest to acquire the directory business of Qwest Dex, Inc. (together with its parent, Qwest Dex Holdings, Inc., “Qwest Dex”), the directory services subsidiary of Qwest, in two separate phases. Pursuant to the purchase agreement relating to the first phase, Dex Holdings agreed to purchase Qwest Dex’s directory business in Colorado, Iowa, Minnesota, Nebraska, New Mexico, North Dakota and South Dakota, which we refer to as the Dex East States. Dex Holdings assigned its right to purchase these businesses to us and we consummated the first phase on November 8, 2002. The historical information, including the historical financial data, included in this annual report for periods prior to November 8, 2002 is that of our predecessor, Dex East.

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      Pursuant to the purchase agreement relating to the second phase, Dex Holdings agreed to purchase Qwest Dex’s directory business in Arizona, Idaho, Montana, Oregon, Utah, Washington and Wyoming, which we refer to as the Dex West States. The second phase was consummated on September 9, 2003. Dex Media West, a separate indirect subsidiary of Dex Media, operates the directory business in the Dex West States.

      We have operated as a stand-alone company since the acquisition of Dex East on November 8, 2002. The acquisition was accounted for under the purchase method of accounting. Under this method, the pre-acquisition deferred revenue and related deferred costs associated with directories that were published prior to the acquisition date were not carried over to Dex Media East’s balance sheet. The effect of this accounting treatment was to reduce revenue and related costs that would otherwise have been recognized during the twelve months subsequent to the acquisition date. For purposes of prior year comparisons in this annual report, we have provided the combined results of the Successor Period and Predecessor Period to provide additional information about our results.

The Business

      We are the largest print directory publisher in the Dex East States and the sixth largest print directory publisher in the United States. We are the exclusive official directory publisher for Qwest LEC in the Dex East States. We have been publishing print directories for over 100 years. In 2003, we had at least a 77% aggregate market share in our top 10 geographic markets, which accounted for approximately 71% of our directory services revenue in that year. In 2003, we published 147 directories and distributed approximately 20 million copies of these directories to business and residential consumers in the Dex East States. We introduced two new books in 2003, and extended the publishing dates of five books which were published in January 2004. As of December 31, 2003, we had a total of approximately 197,000 local advertising customer accounts consisting primarily of small and medium-sized businesses and approximately 4,100 national advertisers. We also provide related services, including an Internet-based directory and direct marketing services. For the year ended December 31, 2003, the combined Successor Period and Predecessor Period, and the year ended December 31, 2001, we generated $668.8 million, $648.0 million and $666.2 million in revenue, respectively. Excluding the effects of purchase accounting, as described in Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” we generated $713.2 million and $689.5 million in revenue for the year ended December 31, 2003 and the combined Successor Period and Predecessor Period, respectively.

      We believe that the U.S. directory advertising industry is attractive due to its stable and consistent revenue growth. Industry revenue has increased each year since 1985. In addition, during the last two recessions in 1991 and 2001, the U.S. directory advertising industry experienced positive growth, while other major advertising media, including radio, television and newspaper, experienced revenue declines. We believe that this is driven in large part by the fact that print directories are, in many cases, the primary form of paid advertising used by small and medium-sized businesses. In addition, we believe that the once-yearly publication cycle and the priority placement given to renewal advertisements result in a high customer renewal rate even during weak economic times.

Markets

      In 2003, we published 147 directories, including white pages, yellow pages and other specialty directories, and distributed approximately 20 million copies of these directories to business and residential consumers in metropolitan areas and local communities in the Dex East States. Our directories are generally well-established in their communities and cover contiguous geographic areas to create a strong local market presence and achieve selling efficiencies. The following table shows the percentage of directory services

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(1)	Excludes non-print related directory services.

      We derive a significant portion of our directory services revenue from the sale of directory advertising to businesses in large metropolitan areas. For the year ended December 31, 2003, 61.2% and 71.3% of our directory services revenue was from the sale of directory advertising in our 5 and 10 largest geographic markets, respectively.

Products

      Our main product is printed telephone directories, which generated approximately 97% of our total revenue, excluding the effects of purchase accounting, for the year ended December 31, 2003. We also operate an Internet-based telephone directory and provide direct and database marketing services.

      In 2003, we published 147 printed directories, consisting of:

	•	135 directories that contained both white and yellow pages;
	•	Five directories that contained only yellow pages, which contains a listing of businesses by various directory headings as well as display and other paid advertisements;
	•	Five directories that contained only white pages, which contains a listing of the names, addresses and phone numbers of residences and businesses in the area served, as well as display and other paid advertisements; and
	•	Two specialty “On the Go” directories, which are yellow pages directory editions that are designed for use in the car.

      Whenever practicable, we combine the white and yellow pages sections into one volume.

      Our directories are designed to meet the advertising needs of local and national businesses and the informational needs of consumers. The diversity of our advertising options enables us to create customized advertising programs that are responsive to specific customer needs and financial resources. Our yellow pages and white pages directories are also efficient sources of information for consumers, featuring a comprehensive list of businesses in the local market that are conveniently organized under approximately 4,400 directory headings.

      Yellow pages directories. We offer businesses a basic listing at no charge in the relevant edition of our yellow pages directories. This listing includes the name, address and telephone number of the business and is included in alphabetical order in the relevant heading.

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      For the year ended December 31, 2003, we derived approximately 96% of our directory services revenue, excluding the effects of purchase accounting, from the sale of advertising in our yellow pages directories. A range of paid advertising options is available in our yellow pages directories, as set forth below:

	•	Listing options. An advertiser may enhance its complimentary listing in several ways. It may pay to have its listing highlighted or printed in bold or superbold text, which increases the visibility of the listing. An advertiser may also purchase extra lines of text to convey information such as hours of operation or a more detailed description of its business.
	•	In-column advertising options. For greater prominence on a page, an advertiser may expand its basic alphabetical listing by purchasing advertising space in the column in which the listing appears. The cost of in-column advertising depends on the size and type of the advertisement purchased. In-column advertisements may include such features as bolding, special fonts, color and graphics.
	•	Display advertising options. A display advertisement allows businesses to include a wide range of information, illustrations, photographs and logos. The cost of display advertisements depends on the size and type of advertisement purchased. Display advertisements are usually placed at the front of a heading, and are ordered first by size and then by advertiser seniority. This process of ordering provides a strong incentive to advertisers to increase the size of their advertisements and renew their advertising purchases from year to year to ensure that their advertisements receive priority placement. Display advertisements range in size from a quarter column to as large as two pages (a “double truck” advertisement) and three pages (a “triple truck” advertisement).
	•	Awareness products. Our line of “awareness products” allows businesses to advertise in a variety of highly visible locations on or in a directory. Each directory has a limited inventory of awareness products, which provide high value to advertisers and are priced at a premium to in-column and display advertisements. Our awareness products include:

	•	Cover. Premium location advertisements are available on the front cover, inside front cover and the inside and outside back cover of a directory.
	•	Spine. Premium location advertisements are available on the spine of yellow and white pages directories.
	•	Tabs. A full-page, double-sided, hardstock, full-color insert that is bound inside and that separates key sections of the directory. These inserts enable advertisers to achieve prominence and increase the amount of information displayed to directory users.
	•	Tip-On. Removable paper or magnet coupon placed on the front cover of the directory.
	•	Banners. An ad sold at the bottom of any page in the Community or Government sections of the print directory.
	•	Delivery Bag. Used in the delivery of all hand-delivered print directories. Between one and three advertisers per bag.

      White pages directories. State public utilities commissions require Qwest LEC, as the local exchange carrier in its local service area, to have white pages directories published to serve the local service areas. Qwest LEC has contracted with us to publish these directories until November 7, 2052. By virtue of this agreement, we provide a white pages listing to every residence and business in a given area that sets forth the name, address and phone number of the residence or business in question unless they have requested to be a non-published or non-listed customer.

      For the year ended December 31, 2003, we derived approximately 4% of our directory services revenue, excluding the effects of purchase accounting, from the sale of advertising in our white pages directories. Advertising options include bolding and highlighting for added visibility, extra lines for the inclusion of supplemental information and in-column and display advertisements. With a renewed company focus on selling white pages advertising in 2003, we more than doubled our white pages revenue growth rate over the

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      Although we remain primarily focused on our printed directories, we also market an Internet-based directory service, DexOnline.com (formerly Qwestdex.com), to our advertisers. All of the listings in our printed directories also appear in our Internet-based directory, which is available in real time to users and at no additional charge to our advertisers. We began to post the proprietary display advertisements we create for our printed directions on DexOnLine.com in April 2003. We believe these proprietary display advertisements cannot currently be replicated by other Internet-based directories.

      We believe that DexOnline.com is the leading Internet-based directory in the Dex East States. In January 2004, we introduced significant new search capabilities. DexOnline.com now includes fully searchable content from our more than 240,000 Yellow Pages display advertisements. It also includes more than 15 million business listings and more than 200 million residential listings from across the United States. The new site incorporates free text search capability, with a single search box that is similar in its design and functionality to popular search engines. In addition, we have incorporated intelligence capabilities such as “spell check” and “thesaurus.” Users can now refine their searches using important selection criteria that include such things as specific product and brand names, hours of operation, payment options and locations.

      We view our Internet-based directory as an integrated complement to our printed directories through expanded distribution capability rather than as a stand-alone business. We believe that increased usage of Internet-based directories, such as DexOnline.com, will serve to enhance overall Yellow Pages advertising usage thereby lowering our advertisers’ cost per thousand uses (“CPMU”) despite some growth in advertising rates.

      To promote usage of our Internet-based directories, we have bundled some of our Internet products to enhance completeness with our print advertising products. We believe bundling will drive-up our usage rates, which will in turn increase the customer value proposition. As in our printed directories, businesses may pay to enhance their listings on DexOnline.com and for other premium advertising products. Options that are available include extra lines, replica advertisements, website and email link, pop-up windows, priority placement and banners.

      We provide database lists, direct mail services, insert delivered with the yellow pages directories and other database services to businesses through our direct marketing group. We sell continually updated lists of residents and businesses that have recently moved into or out of an area, a service that allows our customers to maintain up-to-date databases and customer lists. We are also able to overlay demographic and behavioral data that is purchased through third-party providers so that our customers can identify, for example, who in the area is newly retired, newly married or a new home owner. This content provides a valuable mechanism for direct mail and other targeted advertising.

      We also help businesses develop and refine their customer databases. In addition to list cleaning, the process of removing obsolete data from a data list, we are able to fill in missing names, addresses and telephone numbers when only partial information is available, and add demographic data (e.g., single-family or multi-family dwelling, home owner or renter, male or female). We provide data analysis that ranks consumers by likelihood of a response to direct marketing contact.

      While we provide customer names, addresses and telephone numbers to outside companies, this information does not include any private, non-published or non-listed information. In addition to the most current data, delivered to the customer every 24 hours, we have an extensive New Mover list providing businesses access to the most current new business or residence list in the Dex East States. These files are frequently utilized by our customers for direct mail advertising where we provide creative development, production and mailing with a one-stop delivery process, with the directory delivered right to the mailbox or

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Sales and Marketing

      The marketing of directory advertisements is primarily a direct sales effort that requires both maintaining existing customers and developing new customers. Renewing customers comprise our core advertiser base, and a large number of these customers have advertised in our directories for many years. For the year ended December 31, 2003, we retained approximately 91% of our local advertisers from the previous year. This high renewal rate reflects the importance of our directories to our local customers for whom yellow pages directory advertising is, in many cases, the primary form of advertising. Larger national companies also use advertising in our directories as an integral part of their national advertising strategy.

      We believe that we have one of the most experienced sales forces in the U.S. directory advertising industry. We believe this experience has enabled our sales representatives to develop long-term relationships with our advertisers, which we believe promotes a high level of renewal among our customers. In addition, we believe that in 2003, our experienced sales force has allowed us to achieve local market penetration of 38%, printed revenue per sales representative (local) of approximately $1.3 million and directory services revenue per advertiser (local) of approximately $2,900.

      As of December 31, 2003, our locally-based sales force was comprised of approximately 461 quota-bearing sales representatives who average approximately nine years of employment with us. The sales force is divided into three principal groups:

	•	Premise sales representatives. Our approximately 183 premise sales representatives generally focus on high revenue customers. A premise sales representative typically interacts with customers on a face-to-face basis at the customer’s place of business.
	•	Telephone sales representatives. Our approximately 185 telephone sales representatives generally focus on medium-sized customers. A telephone sales representative typically interacts with customers over the telephone. Telephone sales represent our principal source of new advertisers.
	•	Centralized sales representatives. Our approximately 93 centralized sales representatives include both centralized account representatives, who generally focus on the smallest accounts, and prospector sales representatives, who generally focus on customer win-back.

      We assign our customers among premise representatives and telephone representatives based on a careful assessment of a customer’s expected advertising expenditures. This practice allows us to deploy our sales force in an effective manner. Our sales force is generally decentralized and locally based, operating from 24 locations. We believe that our locally based sales force facilitates the establishment of personal, long-term relationships with local advertisers necessary to maintain a high rate of customer renewal.

      We believe that formal training is important to maintaining a highly productive sales force. Our sales force undergoes ongoing training, with new sales representatives receiving approximately eight weeks of training in their first year, including classroom training on sales techniques, our product portfolio, customer care and administration, and standards and ethics. Following classroom training, they are accompanied on sales calls by experienced sales personnel for further training. Ongoing training and our commitment to developing the best sales practices are intended to ensure that sales representatives are able to give advertisers high-quality service and advice on appropriate advertising products and services.

      We have well-established practices and procedures to manage the productivity and effectiveness of our sales force. Each sales representative has a specified customer assignment consisting of both new business leads and renewing advertisers and is accountable for meeting sales goals on a regular basis. Our sales

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      For purposes of managing our sales force, we divide the local service area into six territories. In each territory, between six and 15 sales managers supervise the performance of the sales representatives who are assigned to that territory. Every sales manager within a territory reports to the sales director for the territory, and the six sales directors report to the Senior Vice President of Sales for the relevant territory.

      In 2002, we began compensating our sales managers and directors pursuant to an incentive-based compensation plan that ties their compensation to their success in meeting specific sales targets. Prior to the November 8, 2002 Acquisition, bonuses for our sales managers and directors were determined by our Predecessor by reference to Qwest’s overall financial performance.

      In addition to our locally based sales personnel, we have a separate sales channel to serve our national advertisers. National advertisers are typically national or large regional chains, such as rental car companies, insurance companies and pizza delivery businesses, that purchase advertisements in many yellow pages directories in multiple geographical regions. In order to sell to national advertisers, we retain the services of third party certified marketing representatives (“CMRs”). CMRs design and create advertisements for national companies and place those advertisements in yellow pages directories nationwide. Some CMRs are departments of general advertising agencies, while others are specialized agencies that focus solely on directory advertising. The national advertiser pays the CMR, which then pays us after deducting its commission. We have contracts with approximately 160 CMRs and employ eight national sales managers to manage our selling efforts to national customers.

Customers

      In 2003, we had approximately 197,000 accounts with local businesses which purchased advertising in our directories. Approximately 81% of our revenue, excluding the effects of purchase accounting, for the year ended December 31, 2003 was generated by the sale of our advertising to local businesses, which are generally small and medium-sized enterprises. Approximately 16% of our revenue, excluding the effects of purchase accounting, was generated by sales to national advertisers. The remaining 3% of our revenue, excluding the effects of purchase accounting, was generated from sources other than sales of advertising in our print directories, including Internet-based directory and direct marketing services.

      We do not depend to any significant extent on the sale of advertising to a particular industry or to a particular advertiser. For the year ended December 31, 2003, no single directory heading accounted for more than 2.9% of our total revenue, no single customer accounted for more than 0.3% of our total revenue (other than Qwest, which accounted for 2.5% of our total revenue), the top 10 customers accounted for 1.5% of our total revenue and the top 10 directory headings accounted for approximately 15% of total revenue. The diversity of our customer base reduces exposure to adverse economic conditions that may affect particular geographic regions or particular industries and provides additional stability in operating results. The table

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      We enjoy high customer renewal rates. From 1996 to 2002, our annual renewal rate remained stable at approximately 93%, which we believe compared favorably with the renewal rates of our competitors. In 2003, we retained approximately 91% of our local advertiser accounts from the previous year (which excludes the loss of advertiser accounts as a result of business failures). This attrition was offset by the addition of new customer accounts such that the overall size of our local customer account base fell by approximately 2% in 2003. As it relates to our revenue results, increases in total advertising spending and average dollars spent per advertisement substantially offset the net loss of advertiser accounts.

      We believe that this low level of turnover reflects a high level of satisfaction among our customers. The training that we provide to our sales representatives emphasizes the fostering of long-term relationships between sales representatives and their customers, and our incentive-based compensation structure rewards sales consultants who retain a high percentage of their accounts. In addition, our customers often do not reduce or eliminate directory spending during difficult economic periods because the failure to advertise cannot be remedied until the replacement directory is published, usually one year later. Moreover, most directory publishers, including us, give priority placement within a directory classification to long-time advertisers. As a result, businesses have a strong incentive to renew their directory advertising purchases from year to year, even during difficult economic times, so as not to lose their prominence within the directory.

Publishing, Production and Distribution

      We generally publish our directories on a 12-month cycle. The publishing cycles for our directories are staggered throughout the year, which allows us to efficiently use our infrastructure and sales capabilities and the resources of our third-party vendors. The following are the major steps of the publication and production process:

	•	Selling. The sales cycle of a directory varies based on the size of the revenue base and can range from a few weeks to six months. In the months prior to publication, the sales force approaches potential new advertisers in an effort to expand our customer base. Potential new advertisers include businesses that have operated in the area for some time, but did not purchase advertising in the most recent edition of our directory, as well as newly-formed businesses and businesses that have only recently moved into the area. At the same time, the sales force contacts existing advertisers and encourages them to renew and increase the size, and therefore, prominence of their advertisements and to purchase other products in our portfolio. Advertisers generally agree to our standard advertising terms and conditions at the time that they place their order.

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	•	Generation of advertisements. Upon entering into an agreement with a customer, we collaborate with the customer to generate its advertisement. We use our proprietary technology and a team of in-house graphic artists for this purpose.
	•	Pre-press activities. The selling of advertisements typically ceases one month prior to publication, at which time we do not accept additional customers. Once a directory has closed, pre-press activities commence. Pre-press activities include finalizing artwork and proofing and paginating the directories. When the composition of the directory is finalized, we deliver the directory pages to a third-party printer.
	•	Printing. We use two outside contractors, R.R. Donnelley & Sons Company (“Donnelley”) and Quebecor World Directory Sales Corporation (“Quebecor”), for the printing of our directories. In addition, we have purchase contracts with two paper suppliers, Nippon Paper Industries USA, Co., Ltd. (formerly Daishowa America Co., Ltd.) (“Nippon”) and Norske Skog Canada (USA), Inc. (“Norske”), for the paper needed for the pages of our directories and one paper supplier, Spruce Falls, Inc. (“Spruce Falls”), for the paper needed for the covers of our directories. The time required to print a directory depends on its size and may be as long as one month.
	•	Transportation. We use Matson Integrated Logistics (“Matson”) to manage the logistics of transporting our printed directories from our printers to our distributor.
	•	Distribution. We aim to deliver our directories to all of the residences and businesses in the geographical areas for which we produce directories. We use Product Development Corporation (“PDC”) for the distribution of our directories. Distribution begins as soon as the first completed directories are produced. Depending on the circulation and size of a directory, distribution ranges from three to six weeks with most directories taking 30 days or less.

      Paper is our principal raw material. Pursuant to Dex Media’s agreements with Nippon and Norske, they are required to provide up to 60% and 40% of our annual paper supply, respectively. Prices under the two agreements are negotiated each year based on prevailing market rates and are subject to certain price escalation limits. For the year ended December 31, 2003, paper costs were 4% of revenue, excluding the effects of purchase accounting. If, in a particular year, the parties to one of the agreements are unable to agree on repricing, either party may terminate the agreement. Our contracts with Nippon and Norske expire on December 31, 2009 and December 31, 2008, respectively. Pursuant to the agreement between Spruce Falls and Dex Media, Spruce Falls is required to provide 100% of our annual cover stock paper supply. Although the amount of future price increases are specified in the agreement, if Spruce Falls and Dex Media are unable to agree on repricing, either party may terminate this agreement. This agreement expires on December 31, 2006.

      In general, Donnelley prints our larger, higher-circulation directories and Quebecor prints those directories that are smaller and have a more limited circulation. We do not guarantee any minimum volume in our agreements with Donnelley and Quebecor. Our contract with Donnelley allows us to adjust prices annually on a formula based on changes to the consumer price index. Our contracts with Donnelly and Quebecor expire on December 31, 2011 and July 30, 2008, respectively.

      Although prices under Dex Media’s agreement with PDC are fixed, they may be renegotiated under some circumstances, such as new service specifications. We rely on Matson to manage the logistics of transporting our printed directories from our printers’ locations to PDC.

      We believe that each of these agreements is on favorable terms that are currently available in the market and could be replaced.

Billing and Credit Control

      Historically, we have generally billed our customers monthly for advertising fees, either directly by us or by Qwest LEC as part of the customer’s monthly bill for telecommunications services, for which we have paid Qwest LEC a fee. For the year ended December 31, 2003, Qwest LEC billed approximately 43% of our local customer billings on our behalf. In connection with the acquisition of Dex East, we entered into a billing and

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      Because most directories are published on 12-month cycles and we bill most of our customers over the course of that 12-month period, we effectively extend credit to our customers, many of which are small or medium-sized businesses with default rates that usually exceed those of larger businesses. Fees for national advertisers are typically billed upon issue of each directory in which advertising is placed by CMRs, after deduction of commissions. Because we do not usually enter into contracts with our national advertisers, we are subject to the credit risk of CMRs on sales to those advertisers, to the extent we do not receive fees in advance. For the year ended December 31, 2003, bad debt expense for all of our customers amounted to 3.6% of our revenue, excluding the effects of purchase accounting. We attempt to improve collection of accounts receivable by conducting initial credit checks of new advertisers under certain circumstances, reducing the time taken to resolve billing inquiries and, where appropriate, requiring personal guarantees from business owners. We check all new orders from existing advertisers for payments that are past due to us prior to publishing of the new order. When applicable, based on credit policy, we use both internal and external data to decide whether to extend credit to an advertiser. In some cases, where appropriate, we may also require the advertiser to prepay part or all of the amount of its order. Beyond efforts under certain circumstances to assess credit risk prior to extending credit to customers, we employ well-developed collection strategies utilizing an integrated system of internal, external and automated means to engage with customers concerning payment obligations.

Competition

      The U.S. directory advertising industry is competitive. We compete with many different advertising and other media, including newspapers, radio, television, the Internet, billboards, direct mail and other yellow pages directory publishers. There are a number of Independent directory publishers, such as TransWestern Publishing Company LLC and the U.S. business of Yell Group Ltd., with which we compete in one or more of the Dex East States. In addition, we compete with other directory publishers in some of our markets, including local exchange carriers such as Verizon Communications Inc. and SBC Communications Inc. We compete with these publishers on value, quality, features and distribution.

      In connection with the acquisition of Dex East, we entered into a publishing agreement and a non-competition agreement with Qwest LEC. Under the publishing agreement, we are the exclusive official publisher of directories for Qwest LEC in the Dex East States. The publishing agreement expires on November 7, 2052 and will automatically be renewed for additional one-year periods unless either party terminates the contract upon 12 months’ written notice. Acting as the exclusive official publisher of directories for the incumbent telephone company provides us with an advantage over our Independent competitors due to recognition of our brands, higher usage of our directories by end users and our long-term relationships with our customers. Under the non-competition and non-solicitation agreement, which remains in effect until November 7, 2042, Qwest LEC has agreed not to compete with us in the directory publication business in the areas in which we operate.

      The Internet has emerged as a new medium for advertisers. Although advertising on the Internet still represents only a small part of the total advertising market, as the Internet grows, it may become increasingly important as an advertising medium. Most major yellow pages publishers operate an Internet-based directory business. We compete directly through our Internet-based directory, DexOnline.com, with the Internet directories of the Independent publishers and some of the local exchange carriers. In addition, we compete

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Intellectual Property

      We own and license a number of patents, copyrights and trademarks in the United States. The only trademark we consider material to our operations is the DEX® trademark, which is owned by Dex Media and is used by Dex Media West and us. We do not consider any individual patent or other trademark to be material to our operations. We believe that the phrase “yellow pages” and the walking fingers logo are in the public domain in the U.S.

Employees

      As of December 31, 2003, we employed 2,964 employees, including 1,377 former employees of Dex West that were transferred to Dex Media East upon the September 9, 2003 consummation of the acquisition of Dex West. Most of our employees are represented by labor unions covered by two collective bargaining agreements. Our collective bargaining agreement with the International Brotherhood of Electrical Workers (“IBEW”), which covered approximately 27% of our unionized workforce as of December 31, 2003, was recently extended to May 2006. Our collective bargaining agreement with the Communications Workers of America (“CWA”), which covered approximately 73% of our unionized workforce as of December 31, 2003, was recently extended to October 2006. As of January 1, 2004, all non-senior management employees are employed by Dex Media Service LLC, an entity owned 49% by Dex Media East, Inc., 49% by Dex Media West, Inc. and 2% by Dex Media, and are made available to us by Dex Media Service LLC. Dex Media Service LLC was formed as a bankruptcy-remote entity pursuant to the terms of our credit facilities and Dex Media West’s credit facilities in order to mitigate the risk of not having available to us or Dex Media West the services of our non-management employees if the other entity merges, is acquired or files for bankruptcy.

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RISK FACTORS

      You should carefully consider the risks described below as well as the other information contained in this annual report. Any of the following risks could materially adversely affect our business, financial condition or results of operations.

Risks Related to Our Business

      In connection with the acquisition of Dex East, we entered into several agreements with Qwest LEC, including a publishing agreement, a non-competition agreement and a billing and collection services agreement. Under the publishing agreement, we are the exclusive official publisher of directories for Qwest LEC in the Dex East States until November 7, 2052. We believe that acting as the exclusive official publisher of directories for the incumbent telephone company provides us with a competitive advantage. Under the non-competition agreement, Qwest LEC agreed until November 7, 2042 not to sell directory products consisting principally of listings and classified advertisements for subscribers in the geographic areas in the Dex East States in which Qwest LEC provides local telephone service that are directed primarily at customers in those geographic areas. Under the billing and collection services agreement, Qwest LEC agreed until November 7, 2004 to continue to bill and collect, on our behalf, amounts owed by customers in connection with our directory services and purchase the associated accounts receivable from us. For the year ended December 31, 2003, Qwest LEC billed approximately 43% of our local customer billings on our behalf as part of Qwest LEC’s telephone bill and held these collections in joint accounts with Qwest LEC’s own collections. The termination of any of these agreements or the failure by Qwest LEC to satisfy its obligations under these agreements could have a material adverse effect on our business.

      Qwest is currently highly leveraged and has a significant amount of debt service obligations over the near term and thereafter. In addition, Qwest has faced and may continue to face significant liquidity issues as well as issues relating to its compliance with certain covenants contained in the agreements governing its indebtedness. Based on Qwest’s public filings and announcements, Qwest has recently taken measures to improve its near-term liquidity and covenant compliance. However, Qwest still has a substantial amount of indebtedness outstanding and substantial debt service requirements. Consequently, it may be unable to meet its debt service obligations without obtaining additional financing or improving operating cash flow. Accordingly, we cannot assure you that Qwest will not ultimately seek protection under U.S. bankruptcy laws. If Qwest were forced to seek such protection, Qwest LEC, which is controlled by Qwest, might also seek bankruptcy protection. In any such proceeding, our agreements with Qwest LEC, and Qwest LEC’s ability to provide the services under those agreements, could be adversely impacted. For example:

	•	Qwest LEC, or a trustee acting on its behalf, could seek to reject our agreements with Qwest LEC as “executory” contracts under U.S. bankruptcy law, thus allowing Qwest LEC to avoid its obligations under such contracts. Loss of substantial rights under these agreements could effectively require us to operate our business as an independent directory business, which could have a material adverse effect on our business.
	•	Qwest LEC could seek to sell certain of its assets, including the assets relating to Qwest LEC’s local telephone business, to third parties pursuant to the approval of the bankruptcy court. In such case, the purchaser of any such assets might be able to avoid, among other things, our publishing agreement and non-competition agreement with Qwest LEC.
	•	We may have difficulties obtaining the funds collected by Qwest LEC on our behalf pursuant to the billing and collection services agreement at the time such proceeding is instituted, although pursuant to such agreement, Qwest LEC prepares settlement statements 10 times per month for each state in the Dex East States summarizing the amounts due to us and purchases our accounts receivable billed by it within approximately nine business days following such settlement date. Further, if Qwest LEC continued to bill our customers pursuant to the billing and collection services agreement following any

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		such bankruptcy filing, customers of Qwest LEC may be less likely to pay on time, or at all, bills received, including the amount owed to us. Qwest LEC has completed the preparation of its billing and collection system so that we will be able to transition from the Qwest LEC billing and collection system to our own billing and collection system within approximately two weeks should we choose to do so.

      The U.S. directory advertising industry is competitive. There are a number of independent directory publishers, such as TransWestern Publishing Company LLC and the U.S. business of Yell Group Ltd., with which we compete in one or more of the Dex East States. In addition, we compete with other directory publishers in some of our markets, including local exchange carriers such as Verizon Communications Inc. and SBC Communications Inc. Through our Internet-based directory, we compete with these publishers and with other non-publisher Internet sites providing classified directory information, such as Yellowpages.com, Citysearch.com and Zagat.com, and with search engines and portals, such as Yahoo!, Google, MSN, and AOL, some of which have entered into affiliate agreements with other major directory publishers. We cannot assure you that we will be able to compete effectively with these other companies, some of which may have greater resources than we do, for advertising in the future. In addition, we compete against other media, including newspapers, radio, television, the Internet, billboards and direct mail, for business and professional advertising, and we cannot assure you that we will be able to compete successfully against these and other media for such advertising.

      The Telecommunications Act of 1996 effectively opened local telephone markets to increased competition. Consequently, there can be no assurance that Qwest LEC will remain the dominant local telephone service provider in its local service area. If Qwest LEC were no longer the dominant local telephone service provider in its local service area, we may not realize some of the anticipated benefits under our publishing agreement with Qwest LEC, which could have a material adverse effect on our business.

      We believe that overall usage of printed yellow pages directories in the United States and in the Dex East States declined by a compound annual rate of approximately 4% between 1998 and 2002, and increased slightly in 2003. Notwithstanding these declines in usage, we have been able to increase our annual revenue in recent years through, among other things, increases in our advertising prices and new product offerings and enhanced features such as color advertisements and awareness products. There can be no assurance that usage of our yellow pages directories will not continue to decline at the existing rate or more severely. In addition, there can be no assurance that we will be able to continue to increase prices or the average size of our advertisements in the future.

      Any declines in usage could:

	•	impair our ability to maintain or increase our advertising prices;
	•	cause businesses that purchase advertising in our yellow pages directories to reduce or discontinue those purchases; and
	•	discourage businesses that do not purchase advertising in our yellow pages directories from doing so.

      Although we believe that the decline in the usage of our printed directories will be offset in part by an increase in usage of our Internet-based directory, we cannot assure you that we will be able to provide services over the Internet successfully or to compete successfully with other Internet-based directory services. Any of the factors that may contribute to a decline in usage of our printed directories, or a combination of them, could impair our revenue and have a material adverse effect on our business.

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      On March 8, 2002, Qwest, the former owner of our business, received a request from the Denver regional office of the SEC to voluntarily produce documents and information as part of an informal inquiry into certain of its accounting practices. On April 3, 2002, the SEC issued an order authorizing a formal investigation of Qwest. The matters under investigation include, among others, the revenue recognition practices of Qwest Dex. In addition, two former Chief Executive Officers (one of whom is our current Chief Executive Officer) and two former Chief Financial Officers (one of whom is our current Vice President, Financial Planning and Analysis) of Qwest Dex were subpoenaed in August 2002 and have provided documents and testimony to the SEC. In the investigation, the SEC may issue additional subpoenas seeking documents and/or testimony from other current Dex Media and former Qwest Dex employees. We cannot assure you that the SEC investigation will not result in any enforcement action against Qwest Dex (now Dex Media), its employees or those of our employees who were formerly employees of Qwest Dex.

      In addition, on July 9, 2002, Qwest was informed by the U.S. Attorney’s Office for the District of Colorado that it had begun a criminal investigation of Qwest. Although the U.S. Attorney’s Office has not disclosed the subject matter of the investigation, it has indicated that it is investigating the matters under inquiry in the SEC investigation, which include Qwest Dex’s recognition of revenue under the point of publication method. It is not clear whether this investigation involves the business or management of Qwest Dex’s directory business (other than its former revenue recognition policy) or employees who historically worked for the Qwest Dex business, most of whom are now our employees. We do not have any knowledge that former employees of Qwest Dex, most of whom are now our employees, are the subject of the U.S. Attorney’s investigation. None of the former employees of Qwest Dex have informed us that they are the targets of the U.S. Attorney’s investigation or have been contacted by the U.S. Attorney’s office in connection with the investigation.

      Although we acquired only the assets of the Qwest Dex business located in the Dex East States and not the Qwest Dex corporate entity and we did not assume in the acquisition of Dex East any liabilities relating to the SEC or the U.S. Attorney’s Office investigations, there can be no assurances that these investigations or other investigations will not have a material adverse effect on our business.

      We derive our net revenue from the sale of advertising in our directories. Our advertising revenue, as well as those of yellow pages publishers in general, generally do not fluctuate widely with economic cycles. However, a prolonged national or regional economic recession could have a material adverse effect on our business.

      We depend on third parties for the printing and distribution of our directories. For the printing of our directories, Dex Media has a contract with R.R. Donnelley & Sons Company and Quebecor World Directory Sales Corporation, expiring on December 31, 2011 and July 30, 2008, respectively. Because of the large print volume and specialized binding of directories, there are only a small number of companies in the printing industry that could service our needs. Accordingly, the inability or unwillingness of Donnelley or Quebecor to provide printing services to us on acceptable terms or at all could have a material adverse effect on our business.

      Dex Media has a contract with a single company, Product Development Corporation, or “PDC,” for the distribution of our directories. This contract will expire on March 31, 2004. The parties are currently in negotiations to extend the contract through December 31, 2008. However, there can be no assurance that such negotiations will be successful. There are only a small number of companies that could service our distribution needs. Accordingly, the inability or unwillingness of PDC to provide distribution services to us on acceptable terms or at all could have a material adverse effect on our business.

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      Dex Media has a contract with Matson Integrated Logistics to provide logistical support and to transport our printed directories from our printers’ locations to PDC. This contract expires on December 31, 2008. We rely on Matson’s services extensively for our transportation and logistical needs, and only a small number of companies could provide an integrated solution for our transportation needs. Accordingly, any disruptions in the services provided to us by Matson or by a third party upon termination of our contract with Matson could have a material adverse effect on our business.

      The principal raw material that we use is paper. For the year ended December 31, 2003, paper costs equaled 4% of our revenue and 12% of our cost of revenue, each excluding the effects of purchase accounting. Approximately 97% of the paper that we use is supplied by two companies: Nippon and Norske. Pursuant to Dex Media’s agreements with, Nippon and Norske, they are required to provide up to 60% and 40% of our annual paper supply, respectively. Prices under both agreements are set each year based on prevailing market rates. If, in a particular year, the parties to either of the agreements are unable to agree on repricing, either party may terminate the agreement. The Nippon agreement expires on December 31, 2009 and the Norske agreement expires on December 31, 2008. Furthermore, we purchase paper used for the covers of our directories from Spruce Falls. Pursuant to an agreement between Spruce Falls and Dex Media, Spruce Falls is required to provide 100% of our annual cover stock paper supply. Although the amount of future price increases are specified in the agreement, if Spruce Falls and Dex Media are unable to agree on repricing, either party may terminate this agreement. This agreement expires on December 31, 2006. We do not engage in hedging activities to limit our exposure to paper price increases. The price of paper may fluctuate significantly in the future. Changes in the supply of or demand for paper could affect delivery times and prices. We cannot assure you that we will continue to have access to paper in the necessary amounts or at reasonable prices or that any increases in the cost of paper will not have a material adverse effect on our business. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

      We depend on our ability to identify, hire, train and retain qualified sales personnel. Non-management personnel providing services to us are currently employed by Dex Media Service LLC, a bankruptcy-remote entity owned 49% by Dex Media East, Inc., 49% by Dex Media West, Inc. and 2% by Dex Media, and are made available to us and Dex Media West. A loss of a significant number of experienced sales representatives would likely result in fewer sales of advertising in our directories and could materially adversely affect our business. We expend significant resources and management time in identifying and training our sales representatives. Our ability to attract and retain qualified sales personnel depends, however, on numerous factors, including factors that we cannot control, such as conditions in the local employment markets in which we operate. We cannot assure you that we will be able to hire or retain a sufficient number of sales representatives to achieve our financial objectives.

      Furthermore, we depend on the continued services of key personnel, including our senior management and regional sales management personnel. Senior management personnel providing services to us are currently employed by Dex Media and made available to us and Dex Media West. Each of these shared executives must divide his or her time, effort and resources between Dex Media West and us. Consequently, the executives are not able to devote his or her full attention to our business. Although we believe that we could replace our key employees within a reasonable time should the need arise, the loss of key personnel could have a material adverse effect on our business.

      For the year ended December 31, 2003, approximately 81% of our revenue, excluding the effects of purchase accounting, was generated through the sale of advertising to local businesses, which are generally small and medium-sized businesses. In the ordinary course of our directory operations, we extend credit to

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      Approximately 16% of our revenue, excluding the effects of purchase accounting, for the year ended December 31, 2003 was derived from the sale of advertising to national or large regional chains, such as rental car companies, automobile repair shops and pizza delivery businesses, that purchase advertising in several of the directories that we publish. In order to sell advertising to these accounts, we contract with approximately 160 CMRs. As a result, our relationships with these national advertisers depend significantly on the performance of these third party CMRs whom we do not control. In particular, we rely on one of our CMRs, TMP Worldwide Inc., or “TMP,” whose billings were approximately 4% of our revenue for the year ended December 31, 2003. Although we believe that our relationship with TMP is mutually beneficial and that those CMRs with whom we have existing relationships or other third parties could service our needs if TMP were unable or unwilling to provide its services to us on acceptable terms or at all, such inability or unwillingness could materially adversely affect our business. In addition, any decline in the performance of TMP or the other CMRs with whom we contract could harm our ability to generate revenue from our national accounts and could materially adversely affect our business.

      Pursuant to the publishing agreement, we are required to satisfy Qwest LEC’s regulatory obligation to publish white pages directories covering each service territory in the Dex East States where it provides local telephone service as the incumbent service provider. If the staff of a state public utility commission in a Dex East State were to impose additional or changed legal requirements in any of Qwest LEC’s service territories with respect to this obligation, we would be obligated to comply with these requirements on behalf of Qwest LEC, even if such compliance were to increase our publishing costs. Pursuant to the publishing agreement, Qwest LEC will only be obligated to reimburse us for one half of any material net increase in our costs of publishing directories that satisfy Qwest LEC’s publishing obligations (less the amount of any previous reimbursements) resulting from new governmental legal requirements, and this obligation will expire on November 7, 2009. Our competitive position relative to competing directory publishers could be adversely affected if we are not able to recover from Qwest LEC that portion of our increased costs that Qwest LEC has agreed to reimburse and, moreover, we cannot assure you that we would be able to increase our revenue to cover any unreimbursed compliance costs.

      Dex Holdings, which is equally controlled by Carlyle and WCAS (together, the “Sponsors”) and their respective affiliates, owns substantially all of the equity of our indirect parent, Dex Media (certain members of management, a de minimus amount of Dex Media’s common and preferred stock and options to purchase a de minimus amount of Dex Media’s common stock). The Sponsors have the power to control our affairs and policies. The Sponsors also control the election of directors, the appointment of management, the entering into of mergers, sales of substantially all of our assets and other extraordinary transactions. The directors so elected have the authority, subject to the terms of our debt, to issue additional stock, implement stock repurchase programs, declare dividends and make other decisions.

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      The interests of the Sponsors could conflict with the interest of our creditors. For example, if we encounter financial difficulties or are unable to pay our debts as they mature, the interests of the Sponsors, as equity holders, might conflict with the interests of our creditors. Affiliates of the Sponsors may also have an interest in pursuing acquisitions, divestitures, financings or other transactions that, in their judgment, could enhance their equity investments, even though such transactions might involve risks to our creditors.

Risks Related to Our Indebtedness

      We are a highly leveraged company. As of December 31, 2003, we had $2,141.1 million of outstanding indebtedness, including approximately $1,166.1 million of indebtedness under our credit facilities (exclusive of unused commitments under our credit facilities), $450.0 million of senior notes and $525.0 million of senior subordinated notes. Our ratio of total debt to owner’s equity at December 31, 2003 was 4.9 to 1.0. This level of indebtedness could have important consequences including the following:

	•	our indebtedness limits our ability to borrow money or sell stock to fund our working capital, capital expenditures, acquisitions and debt service requirements;
	•	our interest expense could increase if interest rates in general increase because a substantial portion of our indebtedness bears interest at floating rates;
	•	our indebtedness may limit our flexibility in planning for, or reacting to, changes in our business and future business opportunities;
	•	we are more highly leveraged than some of our competitors, which may place us at a competitive disadvantage;
	•	our indebtedness may make us more vulnerable to a downturn in our business or the economy;
	•	the debt service requirements of our indebtedness could make it more difficult for us to make payments on all of our indebtedness;
	•	a substantial portion of our cash flow from operations is dedicated to the repayment of our indebtedness, including indebtedness we may incur in the future, and will not be available for other purposes; and
	•	there would be a material adverse effect on our business and financial condition if we were unable to service our indebtedness or obtain additional financing, as needed.

      Although covenants under our credit facilities and the indentures governing the East Notes limit our ability and the ability of our future restricted subsidiaries to incur additional indebtedness, the terms of our credit facilities and the indentures permit us to incur significant additional indebtedness in the future if certain conditions are satisfied. As of December 31, 2003, we had approximately $99.1 million available for additional borrowing under our revolving credit facility. All borrowings under our credit facilities will rank senior in right of payment to the senior subordinated notes and any future guarantees thereof and will be effectively senior (to the extent of the value of the collateral securing the borrowings) to the senior notes and any future guarantees thereof.

      Our ability to make payments on and to refinance our indebtedness, and to fund planned capital expenditures will depend on our ability to generate cash from our operations in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are

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      We cannot assure you, however, that our business will generate sufficient cash flow from operations or that future borrowings will be available to us under our new credit facilities or otherwise in an amount sufficient to enable us to pay our indebtedness or to fund our other liquidity needs. If we consummate an acquisition, our debt service requirements could increase. We may need to refinance or restructure all or a portion of our indebtedness on or before maturity. We cannot make any assurances that we will be able to refinance any of our indebtedness, including our credit facilities and the East Notes, on commercially reasonable terms or at all. If we cannot service our indebtedness, we may have to take actions such as selling assets, seeking additional equity or reducing or delaying capital expenditures, strategic acquisitions, investments and alliances. We cannot make any assurances that any such actions, if necessary, could be effected on commercially reasonable terms, or at all.

      Our credit facilities and the indentures limit our ability, among other things, to:

	•	incur additional indebtedness;
	•	issue preferred stock;
	•	pay dividends or make distributions in respect of our capital stock or to make certain other restricted payments or investments;
	•	sell assets, including capital stock of future restricted subsidiaries;
	•	agree to payment restrictions affecting our future restricted subsidiaries;
	•	consolidate, merge, sell or otherwise dispose of all or substantially all of our assets;
	•	enter into transactions with our affiliates;
	•	incur liens;
	•	designate any of our future subsidiaries as unrestricted subsidiaries; and
	•	enter into new lines of businesses.

      In addition, our credit facilities include other and more restrictive covenants and severely restrict us from prepaying our other indebtedness, including the East Notes, while indebtedness under our credit facilities is outstanding. The agreement governing our credit facilities also requires us to achieve specified financial and operating results and maintain compliance with specified financial ratios. Our ability to comply with these ratios may be affected by events beyond our control.

      The restrictions contained in the indentures and the agreement governing our credit facilities could:

	•	limit our ability to plan for or react to market conditions or meet capital needs or otherwise restrict our activities or business plans; and
	•	adversely affect our ability to finance our operations, strategic acquisitions, investments or alliances or other capital needs or to engage in other business activities that would be in our interest.

      A breach of any of these restrictive covenants or our inability to comply with the required financial ratios could result in a default under the agreement governing our credit facilities. If a default occurs, the lenders under our credit facilities may elect to:

	•	declare all borrowings outstanding, together with accrued interest and other fees, to be immediately due and payable; or

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	•	prevent us from making payments on the East Notes,

any of which would result in an event of default under the East Notes. The lenders will also have the right in these circumstances to terminate any commitments they have to provide further borrowings. If we are unable to repay outstanding borrowings when due, the lenders under our credit facilities will also have the right to proceed against the collateral, including our available cash, granted to them to secure the indebtedness. If the indebtedness under our credit facilities and the East Notes were to be accelerated, we can make no assurances that our assets would be sufficient to repay in full that indebtedness and our other indebtedness, including the East Notes.

Risks Related to Our Parent

      Dex Media, our indirect parent, currently has over $1.1 billion in aggregate principal amount of outstanding notes (“Parent Notes”). Dex Media has no operations of its own and derives all of its cash flow and liquidity from us and Dex Media West. Dex Media therefore depends on distributions from us and Dex Media West to meet its debt service and repayment obligations. Beginning on May 15, 2009, in order to enable Dex Media to meet this debt service obligation, we and Dex Media West currently expect to increase our semiannual dividends to Dex Media by approximately $14.2 million and $19.6 million, respectively, for total semiannual dividends of approximately $22.6 million and $31.2 million, respectively. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”

      The terms of Dex Media East’s credit facilities and Dex Media West’s credit facilities, the indentures governing the East Notes and West Notes and various other restrictions significantly restrict us and Dex Media West from paying dividends and otherwise transferring assets to Dex Media. If we and/or Dex Media West are not able to pay dividends to Dex Media in an amount necessary to meet Dex Media’s debt service and repayment obligations relating to the Parent Notes, Dex Media may be forced to seek protection under U.S. bankruptcy laws, which could materially adversely affect us. In this event, Dex Media and/or the bankruptcy court may decide to sell us and/or Dex Media West to a third party, which, among other things, could incrementally increase our cost of operations. An incremental increase to our cost of operations could materially adversely affect us.

      Our headquarters are located at 198 Inverness Drive West, Englewood, Colorado. Dex Media East leases this facility from Qwest. The lease covering this facility expires October 31, 2008 and we have the option to renew it for one additional term for a period of five years. We have co-occupancy rights with Dex Media West for these headquarters. We also have significant operations at our facility located at 3190 South Vaughn Way, Aurora, Colorado, which we lease from a third party. The lease covering this facility expires October 31, 2008, and we have the option to renew it for two additional terms, each for a period of five years. We operate from approximately 25 other facilities and, in the aggregate, utilize over 660,000 square feet. We lease all of our facilities.

      From time to time, we are a party to litigation matters arising in connection with the normal course of our business. In many of these matters, plaintiffs allege that they have suffered damages from errors or omissions or improper listings contained in directories published by us. Although we have not had notice of any such claims that we believe to be material, any pending or future claim could have a material adverse effect on our business.

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      In addition, we are exposed to defamation and breach of privacy claims arising from our publication of directories and our methods of collecting, processing and using personal data. The subjects of our data and users of data that we collect and publish could have claims against us if such data were found to be inaccurate, or if personal data stored by us was improperly accessed and disseminated by unauthorized persons. Although we have not had notice of any material claims relating to defamation or breach of privacy claims to date, we may be party to litigation matters that could have a material adverse effect on our business.

      None.

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PART II

      The outstanding common stock of each of Dex Media East Finance Co. and Dex Media International is owned solely by Dex Media East. The membership interests of Dex Media East are owned solely by Dex Media East, Inc. The outstanding common stock of Dex Media East, Inc. is owned solely by Dex Media. The outstanding common stock of Dex Media West Finance Co. is owned solely by Dex Media West. The membership interests of Dex Media West are owned solely by Dex Media West, Inc. The outstanding common stock of Dex Media West, Inc., is owned solely by Dex Media. There is no established trading market for the common equity of any of Dex Media East Finance Co., Dex Media International, Dex Media East, Dex Media East, Inc., Dex Media West Finance Co., Dex Media West, Dex Media West, Inc. or Dex Media. Substantially all of the common stock of Dex Media is owned by Dex Holdings, an entity controlled by funds affiliated with Carlyle and WCAS.

      As of December 31, 2003, there were 12,952,557 shares of common stock of Dex Media issued and outstanding. There were 16 holders (14 holders are beneficial holders and two holders are a trust) of the common stock.

      On November 10, 2003, Dex Media paid a cash dividend on all the issued and outstanding shares of common stock, in the total amount of $593.5 million, and paid a cash dividend on all the issued and outstanding shares of preferred stock, in the total amount of $148.4 million. In connection with the dividend, Dex Media East declared a distribution of $4.3 million to Dex Media East, Inc. and Dex Media West declared a distribution of $11.8 million to Dex Media West, Inc.

      The indentures governing the East Notes place restrictions on our ability to pay dividends on our common equity. In addition, our new credit facilities place restrictions on our ability and the ability of Dex Media East, Inc. to pay dividends on our respective common equity.

      On November 8, 2002, Dex Media East and Dex Media East Finance Co. issued $450.0 million in aggregate principal amount of their 9 7/8% senior notes due 2009 and $525.0 million in aggregate principal amount of their 12 1/8% senior subordinated notes due 2012 in a private placement. On August 29, 2003, Dex Media West and Dex Media West Finance Co. issued $385.0 million in aggregate principal amount of their 8 1/2% senior notes due 2010 and $780.0 million in aggregate principal amount of their 9 7/8% senior subordinated notes due 2013 in a private placement.

      On November 8, 2002, Dex Media sold 5,240,000 shares of its common stock and 131,000 shares of its 5% Series A Preferred Stock to Dex Holdings for an aggregate offering price of $524.0 million and $131.0 million, respectively. Exemption from registration was claimed under Section 4(2) of the Securities Act. The owners of Dex Holdings are institutional investors.

      On September 9, 2003, Dex Media sold 7,696,000 shares of its common stock and 192,400 shares of its 5% Series A Preferred Stock to Dex Holdings for an aggregate offering price of $769.6 million and $192.4 million, respectively. Exemption from registration was claimed under Section 4(2) of the Securities Act. The owners of Dex Holdings are institutional investors.

Equity Compensation Plan Information

      The following table provides information about the common equity of Dex Media that may be issued upon the exercise of options under the Stock Option Plan of Dex Media, Inc. (the “Plan”) as of December 31, 2003. This table does not reflect the effects of adjustments made in March 2004 to the exercise price and

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      For a description of the material features of the Stock Option Plan of Dex Media, Inc., see “Executive Compensation — Stock Option Plan of Dex Media, Inc.”

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      The selected historical financial data for each of the year ended December 31, 2003, for the Successor Period and Predecessor Period in 2002 and for the year ended December 31, 2001 and as of December 31, 2003 and 2002, have been derived from our consolidated financial statements, included elsewhere in this annual report, which have been audited by KPMG LLP, independent auditors. The selected historical data as of and for the years ended December 31, 2000 and 1999 has been derived from our audited consolidated financial statements. The following data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes thereto included elsewhere in this annual report.

      While we have been a stand-alone company since the consummation of the transactions related to the acquisition of Dex East on November 8, 2002, our Predecessor historically operated as the directory business of Qwest Dex in our region. Because our relationship with Qwest Dex as well as Qwest and its other affiliates has changed as a result of the acquisition of Dex East, we expect our cost structure to change significantly from that reflected in our Predecessor’s historical operating results. As a result, our Predecessor’s historical results of operations, financial position and cash flows are not indicative of what they would have been had we operated as a stand-alone company without the shared resources of Qwest and its affiliates. Also, as a result of the application of purchase accounting related to the Acquisition, as discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our revenue and cost of revenue reflect adjustments not included in Predecessor periods.

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Executive Overview

      The following discussion and analysis of our financial condition and results of operations covers periods prior and subsequent to the consummation of the acquisition of Dex East on November 8, 2002 (the “Acquisition”).

      We have operated as a stand-alone company since the Acquisition. The Acquisition has been accounted for under the purchase method of accounting. Under this method, the pre-acquisition deferred revenue and related deferred costs associated with directories that were published prior to the acquisition date were not carried over to Dex Media East’s balance sheet. The effect of this accounting treatment is to reduce revenue and related costs that would otherwise have been recognized during the twelve months subsequent to the acquisition date. For purposes of comparison and analysis in this annual report, we have provided the combined results of the Successor Period and Predecessor Period (together the “Combined Year 2002”) which include the effects of purchase accounting, to provide additional financial information about our results, which we believe is important to a reader’s understanding of Dex Media East’s future operations due to the Acquisition. This presentation is not in accordance with generally accepted accounting principles due to the change in basis of our assets that resulted from the Acquisition.

      The discussion and analysis of historical Predecessor periods does not reflect the significant impact that the Acquisition has had on us, including significantly increased leverage and liquidity requirements. In addition, the statements in the discussion and analysis regarding industry outlook, our expectations regarding the future performance of our business and the other non-historical statements in the discussion and analysis are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in Item 1 — “Business — Risk Factors.” Our actual results may differ materially from those contained in any forward-looking statements. You should read the following discussion together with the section entitled Item 1 — “Business — Risk Factors,” Item 6 — “Selected Historical Financial Data,” Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources” and the consolidated financial statements and related notes thereto included elsewhere in this annual report.

      We are the largest directory publisher in the Dex East States and the sixth largest directory publisher in the U.S. In 2003 we published 147 directories and distributed approximately 20 million copies of these directories to business and residential consumers in the Dex East States. We also provide related services, including an Internet-based directory and direct marketing services. For the year ended December 31, 2003 we generated $668.8 million in revenue. Excluding the effects of purchase accounting adjustments to deferred revenue which totaled $44.4 million, our revenue for the year ended December 31, 2003 would have been $713.2 million. Approximately 97% of our total revenue, excluding the effects of purchase accounting, for the year ended December 31, 2003 was generated from the publication of directories. Approximately 96% of the directory services revenue for this period came from the sale of advertising in our yellow pages directories and 4% of the revenue came from the sale of advertising in our white pages directories.

      Our Predecessor historically operated as the directory business of Qwest Dex in the Dex East States and not as a stand-alone company. The combined financial statements included in this annual report for periods prior to the November 8, 2002 (the “Predecessor Financial Statements”) have been derived from the historical financial statements of Qwest Dex and include the activities of Qwest Dex for business conducted in the Dex East States prior to the Acquisition. To prepare the Predecessor Financial Statements, management of Qwest Dex either specifically identified, assigned or apportioned all revenue and expenses of Qwest Dex to either Dex East or Dex West. Whenever possible, account balances and specific amounts that directly related to Dex East or Dex West were assigned directly to Dex East or Dex West, as appropriate. Substantially all of

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      Historically, the Predecessor reimbursed Qwest for services it and its affiliates provided to Dex East based upon either (1) tariffed or negotiated contract rates, (2) market prices or (3) fully distributed costs (“FDC”). FDCs include costs associated with employees of Qwest or Qwest affiliates that are entirely dedicated to functions within Qwest Dex, many of whom became our employees upon consummation of the Acquisition. Such fully distributed employee costs were paid by Qwest Dex through shared payroll and benefit systems as incurred. Other affiliate service costs were paid by Qwest Dex based upon presentation of periodic billings from Qwest or affiliates of Qwest. For more detail regarding how the Predecessor historically reimbursed Qwest for services Qwest and its affiliates provided to the Predecessor, see Note 16 to our consolidated financial statements included in this annual report. The allocation methodologies are consistent with the guidelines established for Qwest reporting to federal and state regulatory bodies. The historical costs for services provided to the Predecessor by Qwest affiliates may not necessarily reflect the expenses that we will incur as an independent entity.

      After the Acquisition, Qwest and Qwest LEC continued to provide certain services to us that they had historically provided to the Predecessor, including but not limited to support services relating to information technology services and payroll services, pursuant to a transition services agreement. We have terminated the transition services agreement with Qwest and Qwest LEC as of December 31, 2003 with services provided internally or through arrangements with third parties.

      Our strategy is centered on building relationships with our major customer groups: small and medium-sized local business and national companies doing business in the Dex East States. We plan to continue to build our knowledge of their businesses and develop value-added content from that knowledge that can be distributed to our customers in a variety of forms. Currently, the primary method of distribution is our print yellow page directories, which represents 97% of our total revenue. We also use the Internet and CD-ROMs to deliver our content. We plan to continue evaluating different methods of distribution as markets and electronic device acceptance change, particularly in the digital space. Additionally, we will look to enhance product offerings such as bundled print and Internet.

      One of our strengths is being the incumbent in the Dex East States. In the Dex East States, we enjoy all of the competitive advantages of incumbency. Our strategy is to continue concentrating on these geographic areas, while not precluding select opportunities in strategic areas outside of the Dex East States. We may look at acquisitions that would enhance our market position within the Dex East States or in strategic areas outside of the Dex East States.

      Maximizing the utility of our content is an important aspect of our overall strategy. To accomplish this, we plan to continue: innovating new products such as advertising on book spines, covers and tabs; expanding on market segmentation such as bilingual directories in select markets; and enhancing our distribution platforms. In addition, we plan to continue to evaluate our related businesses, such as direct marketing, based on the utility of these product offerings to our advertisers.

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      Now that we are a stand-alone company, our strategy is to focus on improving our infrastructure in order to achieve a more efficient cost structure and improve revenue opportunities in the long-term. In 2004, we expect to replace our entire production system with Amdocs technology in a phased deployment.

Results of Operations

      We derive virtually all of our revenue from the sale of advertising in our printed directories, which we refer to as directory services revenue. We also provide related services, including an Internet-based directory and direct marketing services. Growth in directory services revenue is affected by several factors, including changes in advertising customers, changes in the pricing of advertising, changes in the quantity of advertising purchased per customer and the introduction of additional products which generate incremental revenue. Directory services revenue may also increase through the publication of new printed directories.

      Our revenue and cost of revenue for the twelve months following the consummation of the Acquisition were lower than they would have been had the Acquisition not occurred because the Acquisition has been accounted for under the purchase method of accounting. Under the purchase method of accounting, deferred revenue and deferred directory costs associated with the directories published and distributed prior to the Acquisition were not carried over to our balance sheet at the time of purchase. The effect of this accounting treatment was to reduce revenue and related costs that would have otherwise been recognized in the twelve months subsequent to the Acquisition. The purchase method of accounting will not affect our revenue and directory costs in periods subsequent to 2003. This purchase accounting adjustment is non-recurring and has no impact on cash flows.

      Our consolidated financial statements included in this annual report have been prepared on the basis of the deferral and amortization method of accounting, under which revenue and expenses are initially deferred and then recognized ratably over the life of each directory, commencing in the month of delivery. In 2003, we determined that the 12-month lives of five directories published in December 2002 would be extended. These five directories were published in January 2004. These extensions were made to more efficiently manage work and customer flow. The lives of the affected directories are expected to be 12 months, thereafter. The change in estimated directory life is not expected to have a material effect on revenue or cost of revenue in future periods under the deferral and amortization method of accounting.

      We enter into transactions where our products and services are promoted by a customer and, in exchange, we carry that customer’s advertisement. We account for these transactions in accordance with Emerging Issues Task Force (“EITF”) Issue No. 99-17, “Accounting for Advertising Barter Transactions.”

      In certain cases, we enter into agreements with customers that involve the delivery of more than one product or service. We allocate revenue for such arrangements in accordance with EITF Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables.”

      As part of the Advertising Commitment Agreement dated September 9, 2003 between Qwest and us, Qwest agreed to purchase from us and Dex Media West, under a take-or-pay arrangement, a minimum of $20.0 million annually in advertising services over a 15-year period beginning with the date of the acquisition of Dex East on November 8, 2002. If Qwest purchases more than $20.0 million of advertising in any one year pursuant to such agreement, up to $5.0 million of the excess would be carried over to the subsequent year’s minimum advertising purchase commitment. In addition, as part of the agreement, we agreed to allocate $2.9 million of advertising purchased in 2002 to the 2003 advertising purchase commitment. Supplementally, we and Dex Media West agreed to allocate the cash received under the take-or-pay arrangement at 42% and 58%, respectively.

      We account for cost of revenue under the deferral and amortization method of accounting. Accordingly, our cost of revenue recognized in a reporting period consists of (1) costs incurred in that period and

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      Costs incurred in the current period and subject to deferral include direct costs associated with the publication of directories, including sales commissions, paper, printing, transportation, distribution and pre-press production, and employee and systems support costs relating to each of the foregoing. Sales commissions include commissions paid to employees for sales to local advertisers and to CMRs, which act as our channel to national advertisers. All deferred costs related to the sales and production of directories are recognized ratably over the life of each directory under the deferral and amortization method of accounting, with cost recognition commencing in the month of delivery.

      Our general and administrative expense consists primarily of the costs of advertising, promotion and marketing, administrative staff, information technology, training, customer billing, corporate management and bad debt expense. All of our general and administrative expense is recognized in the period in which it is incurred. Historically, our general and administrative expense has included the costs of other services that were shared among Qwest affiliates, including real estate, information technologies, finance and human resources. However, since we have terminated the transition services agreements with Qwest and Qwest LEC as of December 31, 2003, we now incur these costs directly. Our general and administrative expense has increased as a stand-alone company and may continue to increase as we complete our transition to a stand-alone company.

      We account for income taxes under the asset and liability method of accounting. Deferred tax assets and liabilities are recorded to reflect the future tax consequences of temporary differences between the financial reporting bases of assets and liabilities and their tax bases at each year end. Deferred tax assets and liabilities are measured using the enacted income tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. Deferred tax assets and liabilities are adjusted for future income tax rate changes in the year the changes are enacted. Deferred tax assets are recognized for operating loss and tax credit carry forwards if management believes, based upon existing evidence, that it is more likely than not that the carry forward will be utilized. All deferred tax assets are reviewed for realizability and valuation allowances are recorded if it is more likely than not that the deferred tax assets will not be realized.

      Our revenue and cost of revenue for the twelve months following the consummation of the Acquisition were approximately $85.9 million and $22.2 million lower, respectively, than our revenue and cost of revenue would have been if we had not consummated the Acquisition, because the Acquisition is accounted for under the purchase method of accounting. Under the purchase method of accounting, deferred revenue and related deferred directory costs associated with directories that had previously been published and distributed were not carried over to the balance sheet. The effect of this accounting treatment is to reduce revenue and related costs that would otherwise have been recognized in the twelve months subsequent to the Acquisition. The purchase method of accounting will not affect our revenue and directory costs in periods subsequent to the twelve-month period following the Acquisition. This purchase accounting adjustment is non-recurring and has no historical or future cash impact.

      Dex East financial information for the period prior to the consummation of the Acquisition on November 8, 2002 reflects a historic basis of accounting. Financial information for the period subsequent to the consummation of the Acquisition reflects a purchase accounting basis of accounting. As a result of the differing bases of accounting, the financial information for these respective periods are not comparable.

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      Upon the consummation of the Dex East Acquisition, we became a stand-alone company. Operating as a separate entity from Qwest would have increased our costs for the Predecessor Period and the year ended December 31, 2001. In addition, we have incurred incremental pension and benefit costs as a stand-alone entity. The increase in pension costs result from the elimination of pension credits included in Dex East’s historical results related to Qwest’s over-funded pension plan from which Dex Media East will no longer benefit. Additionally, Dex Media East is expected to incur increased employee benefit costs incurred due to separation from Qwest’s larger employee base. Other additional incremental costs relate primarily to post-retirement pension and other post-employment medical benefits, and to employee medical insurance and other employee related benefits. We have incurred certain stand-alone costs in connection with operating as a separate entity from Qwest. Future stand-alone costs incurred are unpredictable due to various factors. In addition, we pay an annual management fee of $2.0 million to the sponsors. Furthermore, an aggregate of approximately $0.3 million of these management fees are reflected in our historical financial data for the period from November 9, 2002 to December 31, 2002.

      Historically, we have been included in the consolidated federal income tax returns filed by Qwest. Our Predecessor had an informal agreement with Qwest pursuant to which we were required to compute our provision for income taxes on a separate return basis and pay to, or receive from, Qwest the separate U.S. federal income tax return liability or benefit so computed, if any. For federal income tax purposes, the Acquisition is treated as an asset purchase and we generally have a tax basis in the acquired assets equal to the purchase price. As a result, for tax purposes, we will be able to depreciate assets, primarily intangibles, with a higher tax basis after the consummation of the Acquisition. These step-ups in tax basis for intangibles, which will be amortized over 15 years, should significantly reduce our cash taxes over that period.

      In connection with the Acquisition, we incurred substantial indebtedness. As a result, we incur significant interest expense and we have significant repayment obligations. The interest expense relating to this debt adversely affects our net income.

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Results of Operations

      For purposes of comparison and analysis of the year ended December 31, 2003 to the year ended December 31, 2002, the Successor Period from November 9 to December 31, 2002, has been combined with the Predecessor Period from January 1 to November 8, 2002 (the “Combined Year 2002”). Although we have provided these combined results in order to provide a more meaningful discussion of the periods presented, this presentation is not in accordance with generally accepted accounting principles due to the change in basis of our assets that resulted from the Acquisition.

      Total revenue increased by $20.8 million or 3.2%, to $668.8 million for the year ended December 31, 2003 from $648.0 million for the Combined Year 2002. The effects of purchase accounting for deferred revenue totaled $44.4 million and $41.5 million for the year ended December 31, 2003 and the period from November 9 to December 31, 2002, respectively. Excluding the effects of purchase accounting in each year, total revenue would have been $713.2 million, a $23.7 million, or 3.4% increase from $689.5 million in the Combined Year 2002. Total revenue, excluding the effects of purchase accounting, included $694.4 million in directory services revenue and $18.8 million in revenue for all other products. The increase in total revenue, excluding the effects of purchase accounting, is substantially due to increases in local directory services revenue and revenue from national advertisers, as discussed below.

      Total directory services revenue, which consists of local and national directory services revenue, increased $18.5 million, or 2.9% to $650.0 million for the year ended December 31, 2003 from $631.5 million for the Combined Year 2002. Excluding the effects of purchase accounting in each year, total directory services revenue increased by $21.4 million, or 3.2%, to $694.4 million for the year ended December 31, 2003 from $673.0 million in the Combined Year 2002.

      Directory services revenue is affected by a variety of volume and pricing factors. Volume related factors include customer retention, additions and disconnects, the size of advertisements purchased and premium features purchased. Pricing factors include price increases related to our standard rates that may be made from time to time in varying markets for varying categories, offset by discount programs that may be initiated in local markets for certain advertiser headings. Such factors generally affect the dollar volume of orders initiated

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      Local directory services revenue increased $29.5 million, or 5.5% to $565.9 million for the year ended December 31, 2003 compared to $536.4 million for the Combined Year 2002. The effects of purchase accounting on local directory services revenue totaled $13.4 million and $27.1 million for the year ended December 31, 2003 and the period from November 9 to December 31, 2002, respectively. Excluding the effects of purchase accounting in each year, local directory services revenue increased by $15.8 million, or 2.8% to $579.3 million for the year ended December 31, 2003 from $563.5 million for the Combined Year 2002. Local directory services revenue, excluding the effects of purchase accounting in each year, accounted for 81.2% and 81.7% of revenue for the year ended December 31, 2003 and the Combined Year 2002, respectively.

      Revenue from national advertisers, including Qwest, decreased $11.0 million, or 11.5%, to $84.1 million for the year ended December 31, 2003, as compared to $95.1 million for the Combined Year 2002. The effects of purchase accounting on revenue from national advertisers totaled $31.0 million and $14.4 million for the year ended December 31, 2003 and for the period from November 9 to December 31, 2002, respectively. Excluding the effects of purchase accounting in each year, revenue from national advertisers, including Qwest, increased $5.6 million, or 5.1% to $115.1 million for the year ended December 31, 2003 compared to $109.5 million for the Combined Year 2002. Revenue from national advertisers, including Qwest, excluding the effects of purchase accounting in each year, accounted for 16.1% of revenue for the year ended December 31, 2003 as compared to 15.9% for the Combined Year 2002.

      Other revenue increased by $2.2 million, or 13.6%, to $18.8 million for the year ended December 31, 2003 from $16.5 million for the Combined Year 2002.

      Cost of revenue recognized increased by $4.4 million to $201.7 million for the year ended December 31, 2003 from $197.3 million for the Combined Year 2002. Cost of revenue recognized reflects reductions to costs related to purchase accounting of $11.6 million and $10.6 million for the year ended December 31, 2003 and the period from November 9 to December 31, 2002, respectively. Excluding the effects of purchase accounting for deferred costs, cost of revenue recognized would have been $213.3 million for the year ended December 31, 2003 compared to $207.9 for the Combined Year 2002. Cost of revenue represented 29.9% of revenue, excluding the effects of purchase accounting, for the year ended December 31, 2003, compared to 30.2% of revenue for the Combined Year 2002.

      For the year ended December 31, 2003 and the Combined Year 2002, we and our Predecessor incurred costs subject to deferral and amortization of $216.8 million and $207.2 million, respectively. Costs subject to deferral and amortization include employee costs, direct costs of publishing, sales commissions, systems costs and other costs.

      Employee costs incurred during the period increased by $8.7 million, or 10.2% to $94.4 million for the year ended December 31, 2003 from $85.7 million in the Combined Year 2002. This increase was primarily a result of increases in the number of employees, higher cost of medical insurance and higher sales commissions and sales incentives paid to employees.

      Direct costs of publishing incurred during the period, which include paper, printing and distribution, were $71.6 million and $76.5 million for the year ended December 31, 2003 and the Combined Year 2002, respectively. The decrease is primarily a result of differences in directory publication schedules between the periods.

      National commissions incurred during the period decreased by $1.2 million, or 5.3%, to $21.3 million for the year ended December 31, 2003 from $22.5 million in the Combined Year 2002.

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      System costs increased $4.5 million, or 46.9%, to $14.1 million for the year ended December 31, 2003 from $9.6 million for the Combined Year 2002 as a result of increased technology spending associated with being a stand-alone entity.

      Other cost of revenue incurred during the period, which primarily includes contractor and professional fees and office and facilities expense increased by $2.5 million, or 19.4% to $15.4 million from $12.9 million for the Combined Year 2002.

      Our gross profit was $467.1 million for the year ended December 31, 2003 compared to $450.7 million in the Combined Year 2002. Excluding the effects of purchase accounting in each year, gross profit for the year ended December 31, 2003 would have been $499.9 million compared to $481.6 million for the Combined Year 2002. Gross margin, excluding the effects of purchase accounting, increased to 70.1% for the year ended December 31, 2003 from 69.8% for the Combined Year 2002.

      General and administrative expense, excluding depreciation and amortization, increased $31.1 million, or 44.3%, to $101.2 million from $70.1 million in the Combined Year 2002. The increase was primarily due to increases in employee costs, bad debt expense, advertising and professional services and other general and administrative expense associated with operating as a stand-alone company.

      Employee costs increased $25.1 million to $34.8 million for the year ended December 31, 2003 from $9.7 million in the Combined Year 2002 primarily due to increases in salaries and wages and employee benefits of $16.4 million and $8.0 million, respectively. Salaries and wages increased as a result of additional stand-alone costs resulting from operating as a separate entity from Qwest, including additional employees in information technology, finance and human resources. The services related to these stand alone costs were previously provided to our Predecessor by Qwest, and were included in other general and administrative expense in Predecessor periods, as further discussed below. Salary and wages also includes an increase in bonus expense in 2003 compared to the Combined Year 2002. Employee benefits increased due to additional costs related to transitioning to a stand-alone entity including pension and other post-retirement expense of $7.0 million in 2003 compared to pension credits, net of other post-retirement expense, of $1.7 million in 2002.

      Bad debt expense increased $8.5 million, or 48.8%, to $25.8 million for the year ended December 31, 2003 from $17.3 million in the Combined Year 2002 due to the effects of weak local economies and aging receivables. Bad debt expense as a percent of total revenue, excluding the effects of purchase accounting in each year, was 3.6% for the year ended December 31, 2003 compared to 2.5% for the Combined Year 2002.

      Advertising increased $8.0 million to $11.7 million for the year ended December 31, 2003 from $3.7 million for the Combined Year 2002 due to efforts to increase customer awareness, including promoting the new Dex trademark and product offerings. Advertising as a percent of revenue, excluding the effects of purchase accounting, increased to 1.6% from 0.5% for the year ended December 31, 2003 and the Combined Year 2002, respectively.

      Contractor and professional fees increased $5.3 million, or 37.6%, to $19.4 million for the year ended December 31, 2003 from $14.1 million in the Combined Year 2002. The increase in contracting and professional fees is primarily due to increased spending for consulting and contract labor in connection with transitioning to a stand-alone entity as well as management fees for which there was minimal comparable cost in the Combined Year 2002.

      All other general and administrative expense, decreased $15.8 million to $9.5 million for the year ended December 31, 2003 from $25.3 million for the Combined Year 2002. The Combined Year 2002 includes ten months of allocations from Qwest, including costs for information technology, finance and human resource services. The cost of these services are incurred directly in salaries and wages, advertising and professional fees in 2003.

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      In connection with the Acquisition we recorded significant intangible assets at the date of the Acquisition. Substantial portions of these assets have definite lives and are subject to amortization. For the year ended December 31, 2003 and the Successor Period, we recognized $214.4 million and $31.8 million, respectively, in amortization expense related to our identifiable intangible assets. There were no comparable expenses in the Predecessor Period.

      We incurred significant indebtedness in connection with the Acquisition. As such, interest expense between the Predecessor Period and the Successor Period is not comparable. We recognized interest expense of $198.3 million and $27.9 million, for the year ended December 31, 2003 and the Successor Period, respectively.

      Other expense consists primarily of accrued fees to various financial institutions for financing commitments relating to the acquisition of Dex West. The obligation for such fees was extinguished in connection with the consummation of the Dex West acquisition on September 9, 2003. For the year ended December 31, 2003 and the period from November 9 to December 31, 2002 we recognized $11.7 million and $2.6 million in other expense related to the accrual of such fees.

      SFAS No. 109 requires that we recognize deferred income tax assets on net operating losses to the extent realization of such assets is more likely than not. As of December 31, 2003 we have recorded $48.1 million of deferred income tax assets resulting primarily from net operating loss carryforwards of $85.0 million. Based upon current projections of income and expenses, we have determined that it is more likely than not that we will utilize these deferred tax assets before the expiration of the net operating loss carryforward periods. Accordingly, no valuation allowance has been recorded.

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      For purposes of comparison and analysis of the year ended December 31, 2002 to the year ended December 31, 2001, the Successor Period from November 9 to December 31, 2002, has been combined with the Predecessor Period from January 1 to November 8, 2002 (the “Combined Year 2002”). Although we have provided these combined results in order to provide a more meaningful discussion of the periods presented, this presentation is not in accordance with generally accepted accounting principles due to the change in basis of our assets that resulted from the Acquisition.

      Total revenue decreased by $18.2 million, or 2.7%, to $648.0 million for the Combined Year 2002 from $666.2 million for the year ended December 31, 2001. Excluding the effects of purchase accounting for deferred revenue, which totaled $41.5 million, total revenue for the Combined Year 2002 would have been $689.5 million, a $23.3 million, or 3.5% increase from the year ended December 31, 2001. Total revenue, excluding the effects of purchase accounting, included $673.0 million in directory services revenue and $16.5 million in revenue for all other products. The increase in total revenue, excluding the effects of purchase accounting, is substantially due to increases in local directory services revenue and revenue from national advertisers, discussed below.

      Total directory services revenue, which consists of local and national directory services revenue, decreased $16.6 million, or 2.6% to $631.5 million for the Combined Year 2002 from $648.1 million for the year ended December 31, 2001. Excluding the effects of purchase accounting, total directory services revenue increased by $24.9 million, or 3.8%, to $673.0 million for the Combined Year 2002.

      Local directory services revenue decreased $4.2 million, or 0.8% to $536.4 million for the Combined Year ended December 31, 2002 compared to $540.6 million for year ended December 31, 2001. Local directory services revenue, excluding the effects of purchase accounting which totaled $27.1 million, increased by $22.9 million, or 4.2% to $563.5 million for the Combined Year 2002 from $540.6 million for the year ended December 31, 2001. Local directory services revenue, excluding the effects of purchase accounting, accounted for 81.7% and 81.2% of revenue for the Combined Year 2002 and year ended December 31, 2001, respectively.

      Revenue from national advertisers decreased $12.3 million, or 11.5%, to $95.1 million for the Combined Year 2002, as compared to $107.4 million for the year ended December 31, 2001. Revenue from national advertisers, excluding the effects of purchase accounting which totaled $14.4 million, increased $2.1 million,

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      Other revenue decreased by $1.6 million, or 9.0%, to $16.5 million for the Combined Year 2002 from $18.2 million for the year ended December 31, 2001.

      Cost of revenue was $197.3 million for the Combined Year 2002 compared to $209.1 million for the year ended December 31, 2001. Excluding the effects of purchase accounting for deferred costs, which totaled $10.6 million for the period from November 9 to December 31, 2002, cost of revenue would have been $207.9 million for the Combined Year 2002. Cost of revenue represented 30.2% of revenue, excluding the effects of purchase accounting, for the Combined Year 2002, compared to 31.4% of revenue for the year ended December 31, 2001.

      For the Combined Year 2002 and the year ended December 31, 2001, we and our Predecessor incurred costs subject to deferral and amortization of $207.2 million and $208.1 million, respectively. Costs subject to deferral and amortization include employee costs, direct costs of publishing, national sales commissions and other costs.

      Employee costs incurred increased by $4.6 million, or 5.7% to $85.7 million for the Combined Year 2002 from $81.1 million for the year ended December 31, 2001. Included in employee costs are salaries and wages which increased $3.7 million, to $71.3 million from $67.6 million for the year ended December 31, 2001. The increase in salaries and wages resulted from annual wage increases and higher commission payments associated with revenue growth.

      Direct costs of publishing incurred during the period, which include paper, printing and distribution decreased $0.8 million, or 1.0% to $76.5 million for the Combined Year 2002 and from $77.3 million for the year ended December 31, 2001, respectively. The decrease was due in part to a reduction in the number of copies printed resulting from increased demand for CD-Rom versions of our directories.

      National commissions decreased $4.6 million, or 17.0% to $22.5 million in the Combined Year 2002 from $27.1 million for the year ended December 31, 2001.

      Other cost of revenue incurred during the period, which include contractor and professional fees, office and facilities expense, systems costs and other expenses, decreased by $0.1 million, or 0.4% to $22.5 million in the combined Year 2002 from $22.6 million for the year ended December 31, 2001.

      Our gross profit was $450.7 million for the Combined Year 2002 compared to $457.2 million for the year ended December 31, 2001. Excluding the effects of purchase accounting, gross profit for the Combined Year 2002 would have been $481.6 million. Gross margin, excluding the effects of purchase accounting, increased to 69.8% for the Combined Year 2002 from 68.6% for the year ended December 31, 2001.

      General and administrative expense, excluding depreciation and amortization, increased $22.5 million, or 47.3%, to $70.1 million in the Combined Year 2002 from $47.6 million for the year ended December 31, 2001. The increase was primarily due to increases in benefits and contracting and professional fees.

      Employee costs increased $12.8 million to $9.7 million for the Combined Year 2002 from a credit of $3.1 million for the year ended December 31, 2001. Included in employee costs are employee benefits which increased $11.5 million, to $1.7 million from a credit of $9.8 million for the year ended December 31, 2001. The increase in employee benefits resulted from the incurrence of pension credits of $1.7 million in the Combined Year 2002 compared to pension credits of $9.6 million for 2001.

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      Bad debt expense increased $1.3 million, or 7.9%, to $17.3 million for the Combined Year 2002 from $16.1 million for the year ended December 31, 2001. Bad debt expense as a percent of total revenue, excluding the effects of purchase accounting, was 2.5% for the Combined Year 2002 compared to 2.4% for the year ended December 31, 2001.

      Advertising decreased $3.3 million, or 47.1%, to $3.7 million for the Combined Year 2002 from $7.0 million for the year ended December 31, 2001. Advertising as a percent of revenue, excluding the effects of purchase accounting, decreased to 0.5% from 1.1% for the Combined Year 2002 and the year ended December 31, 2001, respectively.

      Contractor and professional fees increased $10.5 million to $14.1 million for the Combined Year 2002 from $3.6 million for the year ended December 31, 2001. The increase resulted primarily from professional fees related to the acquisition of Dex East and increased expenses related to marketing research.

      All other general and administrative expense, increased $1.3 million, or 5.4%, to $25.3 million for the Combined Year 2002 from $24.0 million for the year ended December 31, 2001.

      SFAS No. 109 requires that we recognize deferred tax assets on net operating losses to the extent realization of such assets is more likely than not. As of December 31, 2002 we have recorded $21.2 million of deferred income tax assets resulting primarily from net operating loss carryforwards of $40.7 million. Based upon current projections of income and expenses, we have determined that it is more likely than not that we will utilize these deferred tax assets before the expiration of the net operating loss carryforward periods. Accordingly, no valuation allowance has been recorded.

Liquidity and Capital Resources

      Following the transactions related to the Acquisition of Dex East, our primary source of liquidity continues to be cash flow generated from operations. We also have availability under our revolving credit facility, subject to certain conditions.

      In connection with the Acquisition, we incurred $1,280 million of borrowings under our credit facilities and $975.0 million of indebtedness with the issuance of the outstanding notes. In connection with the acquisition in September 2003, of Dex West by Dex Media, our indirect parent, we borrowed an additional $160.0 million under our credit facilities. As of December 31, 2003, we had outstanding $2,141.1 million in aggregate indebtedness. As a result, our liquidity requirements have significantly increased due to increased debt service obligations.

      Our credit facilities consist of a revolving credit facility and term loan facilities. The revolving credit facility expiring in November 2008 is comprised of total principal of up to $100.0 million available for general corporate purposes, subject to certain conditions. The term loan facilities consist of a Tranche A term loan facility and a Tranche B term loan facility. The Tranche A term loan facility and Tranche B term loan facility mature in November 2008 and May 2009, respectively.

      Our credit facilities bear interest, at our option, at either:

	•	a base rate used by JPMorgan Chase Bank, plus an applicable margin; or
	•	a eurocurrency rate on deposits for one, two, three or six-month periods (or nine or twelve-month periods if, at the time of the borrowing, all lenders agree to make such a duration available), plus an applicable margin.

      The applicable margins on loans under our revolving credit facility and the Tranche A term loan facility and the Tranche B term loan facility are subject to change depending on our leverage ratio. In addition to paying interest on outstanding principal amounts under our credit facilities, we are required to pay an annual

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      On November 10, 2003, we restructured our credit facilities to replace the Tranche B Euro denominated term loan facility with a larger Tranche B U.S. dollar denominated term loan facility. Through this restructuring, we eliminated the currency risk exposure in our credit facilities and terminated the cross currency swap that had been in place since November 2002. In conjunction with the restructuring, the applicable margins on loans under the revolving credit facility, Tranche A term loan facility and Tranche B term loan facility have been reduced. Consequently, the interest expense and liquidity needs associated with the credit facilities will decrease in the future even when the floating interest rate remains unchanged from the current level. Assuming the December 31, 2003 balance of $1,166.1 million had been in place since January 1, 2003, our interest expense for the year ended December 31, 2003 would have been approximately $10.3 million lower.

      Our credit facilities contain negative and affirmative covenants and requirements affecting us and domestic subsidiaries that we create or acquire, with certain exceptions set forth in our credit agreement. Our credit facilities contain the following negative covenants and restrictions, among others: restrictions on liens, sale-leaseback transactions, incurrence of debt, payment of dividends and other restricted junior payments, redemptions and stock repurchases, consolidations and mergers, acquisitions, asset dispositions, investments, loans, advances, changes in line of business, changes in fiscal year, restrictive agreements with subsidiaries, transactions with affiliates, capital expenditures, amendments to charter, by-laws and other material documents, hedging agreements and inter-company indebtedness. Our credit facilities also require us to meet certain financial covenants, including leverage ratios, an interest coverage ratio and a fixed charges coverage ratio.

      We entered into a billing and collection services agreement with Qwest LEC upon the consummation of the Acquisition. Under this agreement, Qwest LEC will continue until November 7, 2004 subject to renewal, to bill and collect, on our behalf, amounts owed by customers, that are also Qwest local telephone customers, for our directory services. In 2003, Qwest LEC billed approximately 43% of our revenue, excluding the effects of purchase accounting, on our behalf, and we billed the remaining 57% directly. Qwest LEC bills the customer on the same billing statement on which it bills the customer for local telephone service. In connection with the Acquisition, we developed and continue to maintain the ability to transition from the Qwest LEC billing and collection system to our own billing and collection system, for those customers billed by Qwest, within approximately two weeks should we choose to do so.

      Historically, our principal source of liquidity has been cash flow generated from operations. Prior to the consummation of the Acquisition, Dex East’s primary liquidity requirements were for debt service on that portion of a Qwest Dex line of credit borrowing arrangement with an affiliate of Qwest which was apportioned to them, debt service on $750.0 million of debt issued by Qwest Dex, dividends to Qwest, income tax payments to Qwest to reflect their portion of the estimated tax liability of Qwest Dex as well as capital expenditures and working capital. Dex East historically generated sufficient cash flow to fund its operations and investments and to make payments to Qwest.

      Net cash provided by operations was $209.5 million for the year ended December 31, 2003, and $77.4 million for the Successor Period. Cash provided by operations was generated primarily from cash receipts from the sale of directory advertisements, reduced by cash disbursements for cost of revenue incurred, general and administrative expenses and interest expense.

      Net cash used for investing activities was $11.7 million and $2,804 million for the year ended December 31, 2003 and the Successor Period, respectively. The principal use of cash flows for investing activities for the year ended December 31, 2003 was for capitalized software and property, plant and equipment purchases. These were offset by proceeds related to the disposition of our investment in a partnership interest held by Dex Media International Inc. (formerly LCI International Inc.). The principal

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      Net cash used for financing activities was $232.6 million and $2,764 million for the year ended December 31, 2003 and for the Successor Period, respectively. The principal uses of cash flows from financing activities for the year ended December 31, 2003 were $230.1 million of net repayments on long-term borrowings. Additionally, sources of cash related to financing activities came from proceeds from issuance of long term debt and owner contributions, totaling $210.0 million, obtained in relation to the consummation of the Dex West Acquisition by Dex Media in September of 2003. In connection with the same transactions the Company distributed $210.0 million to Dex Media for their use in the Dex West Acquisition and $4.1 million for the financing costs for parent company debt. The principal source of cash flows from financing activities for the Successor Period were proceeds from issuance of long-term debt and owner contributions totaling $2,910 million.

      Our ability to make payments on and to refinance our indebtedness and to fund planned capital expenditures will depend to a large extent on our ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. Based on our current level of operations, we believe our cash flow from operations, available cash and available borrowings under our credit facilities will be adequate to meet our future liquidity needs for at least the next 12 months.

      We cannot ensure, however, that our business will generate cash flow from operations in an amount sufficient to enable us to pay our indebtedness or to fund our other liquidity needs. The restrictive covenants under the note indentures and credit agreement prohibit us from commingling the funds of Dex Media West with ours. They also prohibit us from borrowing any funds from Dex Media West. Despite the restrictive covenants under the note indentures and credit agreement limiting our ability to incur additional indebtedness and dispose of our assets, we have multiple sources of limited liquidity that we may access to meet our ongoing business needs, including:

	i. Cash from operating cash flow.
	ii. Up to $99.1 million of the revolving facility available to us as of December 31, 2003.
	iii. Other unsecured indebtedness which we may incur up to an aggregate principal amount of $50 million.
	iv. We may sell, or dispose of assets up to $10 million annually, subject to an aggregate amount of $20 million.
	v. The proceeds from any debt issuance, which we may use as long as our leverage ratio is at or below 4.0 to 1.0.
	vi. We may use the proceeds from any equity offering as follows: a) 50%, if leverage ratio is above 4.0 to 1.0 or b) 100%, if our leverage ratio is at or below 4.0 to 1.0.

      The credit agreement and indentures of the senior notes and senior subordinated notes permit us to pursue the option of financing our capital expenditures with capital leases as long as the aggregate outstanding balance of capital leases is not in excess of $30.0 million at any time. As of December 31, 2003, the outstanding balance of capital leases was $0.6 million.

      Our access to liquidity will improve significantly when our leverage ratio drops below 4.0 to 1.0. The leverage ratio can be improved by reducing our debt level or increasing the amount of EBITDA. When our leverage ratio is under 4.0 to 1.0, we may retain any proceeds from debt or equity issuances for any business purpose, except for optional repayment of non-credit facility related debt with equity proceeds. If we use equity proceeds to repay optionally a cumulative amount of non-credit facility related debt in excess of $20.0 million, we are required to repay equal amounts of debt under our term facilities with the proceeds from the same equity issuances.

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      We expect that our primary liquidity requirements will be for debt service on our credit facilities and notes, capital expenditures and working capital. During 2003, we used cash generated from operations in excess of liquidity requirements to make optional repayments under our credit facilities.

      Our capital expenditure requirements over the last three years (including the combined Predecessor Period and Successor Period) averaged approximately $18.1 million per year, or 2.6% of average total revenue, excluding the effects of purchase accounting. Over the next twelve months, a significant portion of our capital expenditures will be spent on software development and implementation including the replacement of our production system with technology from Amdocs.

      The following table sets forth, as of December 31, 2003, debt, lease and employment agreement obligations for the next several years: