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  **UNITED STATES SECURITIES AND EXCHANGE COMMISSION****Washington, D.C. 20549** **Form 10-Q**    þ     **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE    SECURITIES EXCHANGE ACT OF 1934**   **For the quarterly period ended June 30, 2005** **OR** **o** **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE    SECURITIES EXCHANGE ACT OF 1934**   **For the transition period    from           to****Commission File Number: 001-32249** **Dex Media, Inc.***(Exact name of registrant as specified in its charter)*    **Delaware** **14-1855759***(State or other jurisdiction of* *(IRS Employer**incorporation or organization)* *Identification No.)***198 Inverness Drive West****Englewood, Colorado****80112***(Address of principal executive offices)***(303) 784-2900***(Registrant’s telephone number, including area code)*     Indicate by check mark whether the registrant: (1) hasfiled all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past90 days.     Yes þ          No o     Indicate by check mark whether the registrant is an acceleratedfiler (as defined in Rule 12b-2 of the ExchangeAct).     Yes o          No þ     As of August 2, 2005, there were 150,463,818 shares ofthe registrant’s Common Stock, par value $0.01 pershare, outstanding.  

**TABLE OF CONTENTS**           **Page**    **No.**          PART I: FINANCIAL INFORMATION  2      Item 1.      Financial Statements  2        Condensed Consolidated Balance Sheets    (unaudited) — June 30, 2005 and December 31,    2004  2        Condensed Consolidated Statements of    Operations (unaudited) — Three months and six months    ended June 30, 2005 and 2004  3        Condensed Consolidated Statements of Cash    Flows (unaudited) — Six months ended June 30,    2005 and 2004  4        Notes to Condensed Consolidated Financial    Statements (unaudited)  5      Item 2.      Management’s Discussion and Analysis    of Financial Condition and Results of Operations  17      Item 3.      Quantitative and Qualitative Disclosures    About Market Risk  34      Item 4.      Controls and Procedures  35       PART II: OTHER INFORMATION  35      Item 1.      Legal Proceedings  35      Item 2.      Unregistered Sales of Equity Securities and    Use of Proceeds  35      Item 3.      Defaults Upon Senior Securities  35      Item 4.      Submission of Matters to a Vote of Security    Holders  35      Item 5.      Other Information  36      Item 6.      Exhibits  36      Signature  38  Fourth Amendment dated as of June 16, 2005 Fifth Amendment dated as of June 16, 2005 Certification of CEO Pursuant to Section 302 Certification of CFO Pursuant to Section 302 Certification of CEO and CFO Pursuant to Section 906
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**PART I.****FINANCIAL INFORMATION****Item I.*****Financial Statements*****DEX MEDIA, INC. AND SUBSIDIARIES****CONDENSED CONSOLIDATED BALANCE SHEETS****(Dollars in thousands)****(Unaudited)**              **As of** **As of**  **June 30,** **December 31,**  **2005** **2004**     **ASSETS**    Current assets:             Cash and cash equivalents $316  $9,234      Accounts receivable, net  120,370   104,232      Deferred directory costs  306,083   291,237      Current deferred income taxes  23,955   13,438      Other current assets  14,999   13,102              Total current assets  465,723   431,243     Property, plant and equipment, net  103,777   101,471     Goodwill  3,081,446   3,081,446     Intangible assets, net  2,860,808   3,033,659     Deferred income taxes  52,268   85,149     Deferred financing costs  125,401   142,182     Other assets  2,475   2,815              Total Assets $6,691,898  $6,877,965         **LIABILITIES AND STOCKHOLDERS’ EQUITY**    Current liabilities:             Accounts payable $46,348  $48,410      Employee compensation  30,718   36,432      Common stock dividend payable  13,548   13,528      Deferred revenue and customer deposits  218,301   207,655      Accrued interest payable  65,244   63,202      Current portion of long-term debt  302,122   189,534      Other accrued liabilities  11,115   18,563              Total current liabilities  687,396   577,324     Long-term debt  5,226,711   5,537,848     Post-retirement obligations  86,480   81,095     Other liabilities  1,596   1,163              Total Liabilities  6,002,183   6,197,430            Commitments and contingencies (Note 10)            Stockholders’ Equity:            Series A Junior Participating Preferred Stock,    $0.01 par value, 200,000 shares authorized  —   —     Common stock, $0.01 par value, 700 million shares    authorized, 150,457,926 and 150,281,662 shares issued and    outstanding at June 30, 2005 and December 31, 2004,    respectively  1,505   1,503     Additional paid-in capital  808,232   833,736     Accumulated deficit  (119,969)  (153,916)    Accumulated other comprehensive loss  (53)  (788)             Total Stockholders’ Equity  689,715   680,535               Total Liabilities and Stockholders’ Equity $6,691,898  $6,877,965        See accompanying notes to condensed consolidated financialstatements.
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**DEX MEDIA, INC. AND SUBSIDIARIES****CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS****(Dollars in thousands, except per share data)****(Unaudited)**                     **Three Months Ended** **Six Months Ended**  **June 30,** **June 30,**       **2005** **2004** **2005** **2004**             Revenue $413,549  $396,704  $825,208  $784,881     Operating expenses:                     Cost of revenue  124,876   122,193   248,301   240,385      General and administrative expense  47,093   42,094   90,625   83,025      Bad debt expense  12,496   10,740   22,892   23,160      Depreciation and amortization expense  7,356   7,383   14,139   13,713      Amortization of intangibles  86,425   103,111   172,851   206,221                    Total operating expenses  278,246   285,521   548,808   566,504                    Operating income  135,303   111,183   276,400   218,377     Other (income) expense:                     Interest income  (878)  (443)  (1,182)  (700)     Interest expense  106,838   117,994   223,125   242,619      Other (income) expense, net  (1,516)  10   (1,395)  43                    Income (loss) before income taxes  30,859   (6,378)  55,852   (23,585)    Income tax provision (benefit)  12,104   (2,319)  21,905   (8,985)                   Net income (loss) $18,755  $(4,059) $33,947  $(14,600)                 Basic income (loss) per common share $0.12  $(0.04) $0.23  $(0.14)    Diluted income (loss) per common share  0.12   (0.04)  0.22   (0.14)See accompanying notes to condensed consolidated financialstatements.
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**DEX MEDIA, INC. AND SUBSIDIARIES****CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS****(Dollars in thousands)****(Unaudited)**               **Six Months Ended June 30,**     **2005** **2004**         Operating activities:             Net income (loss) $33,947  $(14,600)     Adjustments to net income (loss):              Bad debt expense  22,892   23,160       Depreciation and amortization expense  14,139   13,713       Amortization of intangibles  172,851   206,221       Amortization of deferred financing costs  20,565   29,556       Accretion on discount notes  23,594   19,392       Stock-based compensation expense  1,068   315       Loss on disposition of assets  113   9       Deferred tax provision (benefit)  21,905   (8,985)      Changes in operating assets and liabilities:               Accounts receivable  (39,030)  (13,321)       Deferred directory costs  (14,846)  (26,027)       Other current assets  (1,897)  5,142        Other long-term assets  613   425        Accounts payable and other liabilities  (14,678)  (22,473)       Accrued interest  2,042   (10,570)       Deferred revenue and customer deposits  10,646   47,682        Other long-term liabilities  808   (3,701)       Employee benefit plan obligations  5,385   5,821                Cash provided by operating activities  260,117   251,759            Investing activities:             Expenditures for property, plant and equipment  (4,048)  (9,772)     Capitalized software development costs  (12,510)  (29,608)     Working capital adjustment related to the acquisition of Dex West  —   5,251                Cash used for investing activities  (16,558)  (34,129)           Financing activities:             Proceeds from borrowings on revolving credit facilities  158,500   31,000      Repayments of borrowings on revolving credit facilities  (62,000)  (28,000)     Proceeds from issuance of long-term debt  —   250,476      Payments on long-term debt  (318,643)  (222,000)     Exercise of employee stock options  505   4,743      Payment of financing costs  (3,784)  (6,072)     Contribution by stockholders  —   1,439      Distributions to stockholders  —   (254,154)     Common stock dividends paid  (27,055)  —                Cash used for financing activities  (252,477)  (222,568)           Cash and cash equivalents:             Decrease  (8,918)  (4,938)     Beginning balance  9,234   7,416                Ending balance $316  $2,478            Supplemental cash flow disclosures:             Interest paid $180,219  $204,227 See accompanying notes to condensed consolidated financialstatements.
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**DEX MEDIA, INC. AND SUBSIDIARIES****NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS****(Unaudited)****1.****Description of Business*****     (a)******The Company***     Dex Media, Inc. (“Dex Media” or the“Company”) is the exclusive official directorypublisher for Qwest Corporation, the local exchange carrier ofQwest Communications International Inc. (“Qwest”), inColorado, Iowa, Minnesota, Nebraska, New Mexico, North Dakotaand South Dakota (collectively, the “Dex East States”)and Arizona, Idaho, Montana, Oregon, Utah, Washington andWyoming (collectively, the “Dex West States,” and,together with the Dex East States, the “Dex States”).     Dex Media is the indirect parent of Dex Media East LLC(“Dex Media East”) and Dex Media West LLC (“DexMedia West”). Dex Media East operates the directorybusiness in the Dex East States and Dex Media West operates thedirectory business in the Dex West States.     The Company’s directory business was acquired from QwestDex, Inc. (“Qwest Dex”) in a two phase purchasebetween Dex Holdings LLC (“Dex Holdings”), the formerparent of Dex Media, and Qwest Dex. Dex Holdings and Dex Mediawere formed by two private equity firms: The Carlyle Group andWelsh, Carson, Anderson & Stowe (“WCAS”)(collectively, the “Sponsors”).     In the first phase of the purchase, which was consummated onNovember 8, 2002, Dex Holdings assigned its right topurchase the directory business of Qwest Dex in the Dex EastStates (“Dex East”) to the Company (the “Dex EastAcquisition”). In the second phase of the purchase, whichwas consummated on September 9, 2003, Dex Holdings assignedits right to purchase the directory business of Qwest Dex in theDex West States (“Dex West”) to the Company (the“Dex West Acquisition”). Dex Holdings was dissolvedeffective January 1, 2005.***     (b)******Operations***     The Company is the largest telephone directory publisher ofwhite and yellow pages directories to businesses and residentsin the Dex States. The Company provides directory, Internet anddirect marketing solutions to local and national advertisers.Virtually all of the Company’s revenue is derived from thesale of advertising in its various directories. Publisheddirectories are distributed to residents and businesses in theDex States through third-party vendors. The Company operates asa single segment.***     (c)******Dex Media’s Initial Public Offering***     Effective July 21, 2004, the Company consummated itsinitial public offering of common stock (the “IPO”).The Company issued 19,736,842 shares of common stock at anIPO price of $19.00 per share for net proceeds of$354.0 million. A portion of the net proceeds was used toredeem all of the Company’s outstanding 5% Series APreferred Stock, including accrued and unpaid dividends, for$128.5 million and to pay fees and expenses related to theIPO. On August 26, 2004, the remainder of net proceedsrelated to the IPO was used to redeem $183.8 million of DexMedia East’s senior subordinated notes at a redemptionprice of 112.125% along with the accrued and unpaid interest and$18.2 million of Dex Media West’s senior subordinatednotes at a redemption price of 109.875% along with the accruedand unpaid interest. Also in connection with the IPO, theCompany paid $10.0 million to each of the Sponsors toeliminate the $4.0 million aggregate annual advisory feespayable under Dex Media East’s and Dex Media West’smanagement consulting agreements. Immediately prior to the IPO,the Company effected a 10-for-1 common stock split. The shareand per share data for the three months and six months endedJune 30, 2004 have been adjusted to reflect the effects ofthe stock split.
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**DEX MEDIA, INC. AND SUBSIDIARIES****NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS — (Continued)****2.****Basis of Presentation*****     (a)******General***     The accompanying condensed consolidated interim financialstatements are unaudited. In compliance with the instructions ofthe Securities and Exchange Commission (“SEC”) forinterim financial statements, certain information and footnotedisclosures normally included in financial statements preparedin accordance with accounting principles generally accepted inthe United States of America have been omitted. Inmanagement’s opinion, the condensed consolidated financialstatements reflect all adjustments (which consist of normalrecurring adjustments) necessary to fairly present the condensedconsolidated statements of financial position as ofJune 30, 2005 and December 31, 2004, the condensedconsolidated statements of operations for the three months andsix months ended June 30, 2005 and 2004 and the condensedconsolidated statements of cash flows for the six months endedJune 30, 2005 and 2004.     These condensed consolidated financial statements should be readin conjunction with the audited consolidated financialstatements of the Company as of December 31, 2004 and 2003and for the years ended December 31, 2004 and 2003, and forthe periods from November 9 to December 31, 2002 and fromJanuary 1 to November 8, 2002, included in theCompany’s Annual Report on Form 10-K for the yearended December 31, 2004, as filed with the SEC. Thecondensed consolidated statements of operations for the threemonths and six months ended June 30, 2005 are notnecessarily indicative of the results expected for the fullyear. The accompanying condensed consolidated balance sheets asof June 30, 2005 and December 31, 2004, the condensedconsolidated statements of operations for the three months andsix months ended June 30, 2005 and 2004 and the condensedconsolidated statements of cash flows for the six months endedJune 30, 2005 and 2004 reflect the consolidated financialposition, results of operations and cash flows of the Company,which includes its wholly-owned subsidiaries. The accompanyingcondensed consolidated statements of operations for the threemonths and six months ended June 30, 2004 include allmaterial adjustments required under purchase accounting relatedto the Dex West Acquisition subsequent to September 9, 2003.***     (b)******Reclassifications***     Certain prior period amounts have been reclassified to conformto the 2005 presentation.**3.****Summary of Significant Accounting Policies*****     (a)******Principles of Consolidation***     The condensed consolidated financial statements of the Companyinclude the results of operations, financial position, and cashflows of Dex Media and its wholly-owned subsidiaries. Allintercompany balances and transactions have been eliminated inconsolidation.***     (b)******Use of Estimates***     The preparation of financial statements in conformity withaccounting principles generally accepted in the United States ofAmerica requires management to make estimates and assumptionsthat affect the amounts and disclosures reported in thesecondensed consolidated financial statements and accompanyingnotes. Actual results could differ from those estimates.***     (c)******Revenue Recognition***     The sale of advertising in printed directories published by theCompany is its primary source of revenue. The Company recognizesrevenue ratably over the life of each directory using thedeferral and amortization method of accounting, with revenuerecognition commencing in the month of delivery.
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**DEX MEDIA, INC. AND SUBSIDIARIES****NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS — (Continued)**     The Company publishes white and yellow pages directories withprimarily 12-month lives. From time to time, the Company maychoose to change the publication dates of certain directories inorder to more efficiently manage work and customer flow. Thelives of the affected directories are expected to be12 months thereafter. Such publication date changes do nothave a significant impact on the Company’s recognizedrevenue as the Company’s sales contracts generally allowfor the billing of additional monthly charges in the case ofdirectories with extended lives. During the three months and sixmonths ended June 30, 2005, the Company published 96 and169 directories, respectively. During the three months andsix months ended June 30, 2004, the Company published 87and 161 directories, respectively.     The Company enters into transactions such as exclusivityarrangements, sponsorships, and other media access transactions,where the Company’s products and services are promoted by athird party and, in exchange, the Company carries theparty’s advertisement. The Company accounts for thesetransactions in accordance with Emerging Issues Task Force(“EITF”) Issue No. 99-17 *“Accounting forAdvertising Barter Transactions.”*Revenue and expenserelated to such transactions are included in the condensedconsolidated statements of operations consistent with reasonablysimilar items sold or purchased for cash. Such bartertransactions were not significant to the Company’sfinancial results for the three months and six months endedJune 30, 2005 and 2004.     In certain cases, the Company enters into agreements withcustomers that involve the delivery of more than one product orservice. Revenue for such arrangements is allocated inaccordance with EITF Issue No. 00-21 *“RevenueArrangements with Multiple Deliverables.”****     (d)******Cost of Revenue***     The Company accounts for cost of revenue under the deferral andamortization method of accounting. Accordingly, theCompany’s cost of revenue recognized in a reporting periodconsists of: (i) costs incurred in that period andrecognized in that period, principally sales salaries and wages;(ii) costs incurred in a prior period, a portion of whichare amortized and recognized in the current period; and(iii) costs incurred in the current period, a portion ofwhich are amortized and recognized in that period and thebalance of which are deferred until future periods.Consequently, there will be a difference between the cost ofrevenue recognized in any given period and the costs incurred inthe given period. Such differences may be significant.     Costs incurred in the current period and subject to deferralinclude direct costs associated with the publication ofdirectories, including sales commissions, paper, printing,transportation, distribution and pre-press production andemployee and systems support costs relating to each of theforegoing. Sales commissions include commissions paid toemployees for sales to local advertisers and to third-partycertified marketing representatives which act as theCompany’s channel to national advertisers. All deferredcosts related to the sales and production of directories arerecognized ratably over the life of each directory under thedeferral and amortization method of accounting, with costrecognition commencing in the month of delivery. From time totime, the Company has changed the publication dates of certaindirectories to more efficiently manage work and customer flow.In such cases, the estimated life of the related unamortizeddeferred cost of revenue is revised to amortize such cost overthe new remaining estimated life. Changes in directorypublication dates typically do not result in any additionaldirect incurred costs.***     (e)******Stock-Based Compensation***     The Company accounts for the Stock Option Plan of Dex Media,Inc. and the Dex Media, Inc. 2004 Incentive Award Plan, as morefully discussed in Note 8(e), under the recognition andmeasurement principles of Accounting Principles Board(“APB”) Opinion No. 25, *“Accounting forStock Issued to Employees,”*and relatedInterpretations. Had the Company accounted for employee stockoption grants under the minimum value method for options issuedprior to becoming a publicly traded company and the fair valuemethod after becoming a publicly traded company, both of whichare prescribed by Statement of Financial
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**DEX MEDIA, INC. AND SUBSIDIARIES****NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS — (Continued)**Accounting Standard (“SFAS”) No. 123,*“Accounting for Stock-Based Compensation,”*thepro forma results of the Company would have been as follows (inthousands, except per share data):                    **Three Months Ended** **Six Months Ended**  **June 30,** **June 30,**       **2005** **2004** **2005** **2004**             Net Income (loss)                     As reported $18,755  $(4,059) $33,947  $(14,600)     Add: Stock-based employee compensation expense included in    reported net income (loss), net of related tax effects  283   169   558   191      Deduct: Stock-based employee compensation expense determined    under minimum value or fair value based method, as applicable,    for all awards, net of related tax effects  (438)  (292)  (881)  (424)                  Pro forma $18,600  $(4,182) $33,624  $(14,833)                 Basic income (loss) per common share                     As reported $0.12  $(0.04) $0.23  $(0.14)     Pro forma  0.12   (0.04)  0.22   (0.14)    Diluted income (loss) per common share                     As reported $0.12  $(0.04) $0.22  $(0.14)     Pro forma  0.12   (0.04)  0.22   (0.14)***(f)     Income Tax    Provision***     The Company files a consolidated Federal income tax return andcombined or consolidated state income tax returns, wherepermitted. Income taxes are accounted for under the asset andliability method. Deferred tax assets and liabilities arerecorded to reflect the future tax consequences of temporarydifferences between the financial reporting bases of assets andliabilities and their tax bases at each year end. Deferred taxassets and liabilities are measured using the enacted income taxrates in effect for the year in which those temporarydifferences are expected to be recovered or settled. Deferredtax assets and liabilities are adjusted for future income taxrate changes in the year the changes are enacted. Deferred taxassets are recognized for operating loss and tax creditcarryforwards if management believes, based upon existingevidence, that it is more likely than not that the carryforwardswill be utilized. All deferred tax assets are reviewed forrealizability and valuation allowances are recorded if it ismore likely than not that the deferred tax assets will not berealized. No valuation allowance has been established againstdeferred tax assets as of June 30, 2005 orDecember 31, 2004.***     (g)******New Accounting Standards***     On March 29, 2005, the SEC released Staff AccountingBulletin (“SAB”) No. 107,*“Share-based Payment.”* SAB No. 107provides an interpretation of SFAS No. 123R*“Share-based Payment”* and its interaction withcertain SEC rules and regulations and provides the SEC’sviews regarding the valuation of share-based paymentarrangements for public companies. The SAB provides guidancewith regard to share-based payment transactions withnon-employees, the transition from nonpublic to public entitystatus, valuation methods (including assumptions such asexpected volatility and expected term), the accounting forcertain redeemable financial instruments issued undershare-based payment arrangements, the classification ofcompensation expense, non-GAAP financial measures, first-timeadoption of SFAS No. 123R, the modification ofemployee share options prior to adoption ofSFAS No. 123R and disclosures in Management’sDiscussion and Analysis subsequent to the adoption ofSFAS No. 123R. Based upon the options outstanding asof June 30, 2005, the Company has determined that theadoption of SAB No. 107 will not have a materialimpact on the Company’s results of operations.
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**DEX MEDIA, INC. AND SUBSIDIARIES****NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS — (Continued)**     On April 14, 2005, the SEC announced the adoption of a newrule that amends the compliance dates forSFAS No. 123R. Under SFAS No. 123R,registrants would have been required to implement the standardas of the beginning of the first interim or annual period thatbegins after June 15, 2005. The SEC’s new rulerequires companies to implement SFAS No. 123R at thebeginning of their first fiscal year beginning on or afterJune 15, 2005, instead of the first reporting period thatbegins after June 15, 2005. As a result, the financialstatements of the Company must comply withSFAS No. 123R beginning with the interim financialstatements for the first quarter of 2006. The SEC’s newrule does not change the accounting required bySFAS No. 123R; it changes only the dates forcompliance with the standard.     During May 2005, the Financial Accounting Standards Board(“FASB”) issued SFAS No. 154,*“Accounting Changes and Error Corrections — areplacement of APB Opinion No. 20 and FASB StatementNo. 3.”*This statement applies to all voluntarychanges in accounting principle and requires retrospectiveapplication of the new accounting principle to prior accountingperiods as if that principle has always been used. In addition,this statement requires that a change in depreciation method beaccounted for as a change in estimate. The requirements areeffective for changes made in fiscal years beginning afterDecember 15, 2005. The Company does not expect the adoptionof SFAS No. 154 to have a material impact on theCompany’s financial statements.**4.****Goodwill and Intangible Assets**     During the three months and six months ended June 30, 2005goodwill was not impaired or otherwise adjusted. The grosscarrying amount and accumulated amortization of other intangibleassets and their estimated useful lives are as follows (dollarsin thousands):                    **As of June 30, 2005**     **Gross**    **Carrying** **Accumulated** **Net Book**  **Intangible Assets** **Value** **Amortization** **Value** **Life**             Customer relationships — local $1,787,000  $(664,972) $1,122,028   20 years(1)    Customer relationships — national  493,000   (137,631)  355,369   25 years(1)    Non-compete/publishing agreements  610,000   (33,208)  576,792   39-40  years     Dex Trademark  696,000   —   696,000   Indefinite     Qwest Dex Trademark agreement  133,000   (64,018)  68,982   4-5 years     Advertising agreement  49,000   (7,363)  41,637   14-15  years                   Totals $3,768,000  $(907,192) $2,860,808                                      **As of December 31, 2004**     **Gross**    **Carrying** **Accumulated** **Net Book**  **Intangible Assets** **Value** **Amortization** **Value** **Life**             Customer relationships — local $1,787,000  $(542,968) $1,244,032   20 years(1)    Customer relationships — national  493,000   (110,722)  382,278   25 years(1)    Non-compete/publishing agreements  610,000   (25,488)  584,512   39-40  years     Dex Trademark  696,000   —   696,000   Indefinite     Qwest Dex Trademark agreement  133,000   (49,480)  83,520   4-5 years     Advertising agreement  49,000   (5,683)  43,317   14-15  years                   Totals $3,768,000  $(734,341) $3,033,659                   (1)     Amortization expense is calculated using a declining method in    relation to estimated retention lives of acquired customers.
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**DEX MEDIA, INC. AND SUBSIDIARIES****NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS — (Continued)****5.****Long-Term Debt**     Long-term debt is comprised of the following (in thousands):            **June 30,** **December 31,**  **2005** **2004**     **Dex Media East Notes Payable to Banks (equal right of    payment):**             Notes payable to banks, Tranche A term loan, bearing    interest at adjusted London Interbank Offering Rate    (“LIBOR”) plus the current applicable interest spread    of 1.25% (weighted average rate of 4.58% at June 30, 2005) $364,369  $474,654      Notes payable to banks, Tranche B term loan, bearing    interest at adjusted LIBOR plus the current applicable interest    spread of 1.75% (weighted average rate of 4.98% at June 30,    2005)  451,498   494,630      Revolving loan bearing interest at Alternative Base Rate    (“ABR”) plus the current applicable spread of 0.25%    and at adjusted LIBOR plus the current applicable interest    spread of 1.25% (weighted average interest rate of 4.64% at    June 30, 2005)  53,000   — **Dex Media West Notes Payable to Banks (equal right of    payment):**             Notes payable to banks, Tranche A term loan, bearing    interest at adjusted LIBOR plus the current applicable interest    spread of 1.25% (weighted average of 4.57% at June 30, 2005)  391,841   492,848      Notes payable to banks, Tranche B term loan, bearing    interest at adjusted LIBOR plus the current applicable interest    spread of 1.75% (weighted average of 4.93% at June 30, 2005)  916,933   981,152      Revolving loan bearing interest at ABR plus the current    applicable spread of 0.25% and at adjusted LIBOR plus the    current applicable interest spread of 1.25% (weighted average    interest rate of 4.75% at June 30, 2005)  43,500   — **Dex Media East Unsecured Notes Payable (in descending    order of right of payment):**             Unsecured senior notes payable, due in November 2009, bearing    interest at 9.875%  450,000   450,000      Unsecured senior subordinated notes payable, due in November    2012, bearing interest at 12.125%  341,250   341,250 **Dex Media West Unsecured Notes Payable (in descending    order of right of payment; senior notes equal right of    payment):**             Unsecured senior notes payable, due August 2010, bearing    interest at 8.5%  385,000   385,000      Unsecured senior notes payable, due November 2011, bearing    interest at 5.875%  300,000   300,000      Unsecured senior subordinated notes payable, due August 2013,    bearing interest at 9.875%  761,800   761,800 **Dex Media Unsecured Notes Payable (equal right of    payment):**             Unsecured senior notes payable, due November 2013, bearing    interest at 8%  500,000   500,000      Unsecured senior discount notes payable, due November 2013,    bearing interest at 9%  569,642   546,048           5,528,833   5,727,382     Less: current portion of long-term debt  (302,122)  (189,534)         $5,226,711  $5,537,848        
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**DEX MEDIA, INC. AND SUBSIDIARIES****NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS — (Continued)**     Dex Media West registered its 5.875% senior notes with theSEC through an exchange offer completed on March 8, 2005.As of June 30, 2005, there were $96.5 million ofborrowings under the Company’s revolving credit facilities(with an additional approximate $1 million committed undera standby letter of credit). The Company paid interest and feeson the credit facilities, interest rate swaps and outstandingnotes of $178.7 million and $202.0 million during thesix months ended June 30, 2005 and 2004, respectively. Asof June 30, 2005, the Company was in compliance with allcovenants under its credit facilities.**6.****Derivative Instruments and Hedging Activities**     As of June 30, 2005, Dex Media East has two interest rateswap agreements to hedge against the effects of increases in theinterest rates associated with floating rate debt on its termloans. The interest rate swap agreements have an aggregatenotional amount of $125.0 million, applicable fixed ratesranging from 3.638% to 4.085% and expire in November 2007 andMay 2008.     Changes in the fair value of interest rate swaps designated ashedging instruments that effectively offset the variability ofcash flows associated with Dex Media East’s variable-rateterm loan obligations are reported in accumulated othercomprehensive income, net of tax (“AOCI”). Theseamounts subsequently are reclassified into interest expense as ayield adjustment of the hedged interest payments in the sameperiod in which the related interest payments affect earnings.During the three months ended June 30, 2005 and 2004, theCompany reclassified $0.3 million and $1.8 million ofhedging losses into earnings, respectively. During the sixmonths ended June 30, 2005 and 2004, the Companyreclassified $0.9 million and $3.6 million of hedginglosses into earnings, respectively. For the three months and sixmonths ended June 30, 2005, the Company had$0.8 million of unrealized losses, net of tax, and$0.7 million of unrealized gains, net of tax, included inother comprehensive income, respectively. For the three monthsand six months ended June 30, 2004, the Company had$4.3 million and $3.0 million of unrealized gains, netof tax, included in other comprehensive income, respectively. Asof June 30, 2005 and December 31, 2004, the Companyhad $0.1 million and $0.8 million of unrealizedlosses, net of tax, respectively, included in AOCI.     As of June 30, 2005, less than $0.1 million ofdeferred losses, net of tax, on derivative instruments recordedin AOCI are expected to be reclassified to earnings during thenext 12 months. Transactions and events are expected tooccur over the next 12 months that will necessitatereclassifying these derivative losses to earnings.     During November 2002, Dex Media East entered into an interestrate cap agreement. The Company has not designated the interestrate cap as a hedging instrument and therefore reports all gainsand losses in the change in fair value of the interest rate capdirectly in earnings. No losses were reported in earnings forthe three months and six months ended June 30, 2005 andlosses of less than $0.1 million were reported for thethree months and six months ended June 30, 2004. Theinterest rate cap had a notional amount of $200.0 millionand expired in May 2005.     In October 2004, Dex Media West entered into four fixed interestrate swap agreements to hedge against the effects of increasesin the interest rates associated with the floating rate debt onDex Media West term loans. The interest rate swap agreementshave an aggregate notional amount of $300.0 million,applicable preset monthly fixed rates ranging from 1.901% to3.61% and expire in October 2006. The Company has not designatedthese interest rate swap agreements as hedging instruments andtherefore reports all gains and losses in the change in fairvalue directly in earnings as a component of interest expense.For the three months ended June 30, 2005, the Companyrecorded a loss of $1.1 million, which has been recorded asan increase to interest expense. For the six months endedJune 30, 2005, the Company recorded a gain of$1.4 million, which has been recorded as a reduction tointerest expense.     In May 2005 and June 2005, Dex Media West terminated the sixfloating interest rate swap agreements entered into in November2004. Under the terms of the floating interest rate swaps, theCompany received
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**DEX MEDIA, INC. AND SUBSIDIARIES****NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS — (Continued)**fixed interest payments that match the interest obligations ofthe57/8% notesissued in November 2004 and made floating interest payments,thereby converting the fixed interest rate notes into floatingrate debt instruments. The floating interest rate swaps had anaggregate notional amount of $300.0 million, floating rateLIBOR that reset semi-annually in May and November, plusapplicable margins ranging from 1.4975% to 1.57%, and were toexpire in November 2011. The Company had not designated theseinterest rate swap agreements as hedged instruments andtherefore, reported all gains and losses in the change in fairvalue directly in earnings as a component of interest expense.For the three months and six months ended June 30, 2005,the Company recorded net gains, as a reduction to interestexpense, of $7.8 million and $2.2 million,respectively, of which $7.1 million represents the gainrecognized upon termination of the swaps resulting in acumulative net gain of $0.4 million during the life ofthose swaps. The Company paid $2.1 million upon terminationof the swaps.     The Company does not speculate using derivative instruments.**7.****Comprehensive Income (Loss)**     Components of comprehensive income (loss) are changes in equityother than those resulting from contributions by stockholdersand distributions to stockholders. For the Company, thecomponent of comprehensive income (loss) other than net income(loss) is the change in fair value on derivatives designated ashedging instruments, net of tax. The aggregate amounts of suchchanges to equity that have not yet been recognized in netincome are reported in the equity portion of the condensedconsolidated balance sheets as accumulated other comprehensiveincome (loss).     For the three months and six months ended June 30, 2005 and2004, comprehensive income (loss) included the followingcomponents (in thousands):                   **Three Months Ended** **Six Months Ended**  **June 30,** **June 30,**       **2005** **2004** **2005** **2004**             Net income (loss) $18,755  $(4,059) $33,947  $(14,600)    Changes in fair value of derivatives, net of tax  (845)  4,279   735   3,008                  Comprehensive income (loss) $17,910  $220  $34,682  $(11,592)             **8.****Stockholders’ Equity*****     (a)******Preferred stock***     As discussed in Note 1(c), all outstanding preferred stockwas redeemed on July 27, 2004 for $128.5 million,including accrued and unpaid dividends, in connection with theIPO.***     (b)******Common stock***     As discussed in Note 1(c), the Company consummated its IPOeffective July 21, 2004. As part of the IPO, the Companyissued 19,736,842 shares of common stock. Immediately priorto the IPO, the Company completed a 10-for-1 stock split ofcommon shares outstanding. Effective January 25, 2005, theCompany consummated a secondary offering of common stock to sell18 million of the Sponsor’s shares of common stock.All of the proceeds were paid to the Sponsors.***     (c)******Dividends***     On May 19, 2005, Dex Media announced a common stockdividend of $0.09 per common share, which was paid onJuly 15, 2005 to shareholders of record as of June 16,2005. On February 17, 2005, Dex Media
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**DEX MEDIA, INC. AND SUBSIDIARIES****NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS — (Continued)**announced a common stock dividend of $0.09 per commonshare, which was paid on April 15, 2005 to stockholders ofrecord as of March 18, 2005. On December 14, 2004, DexMedia announced a common stock dividend of $0.09 per commonshare, which was paid on January 31, 2005 to stockholdersof record as of January 3, 2005. The terms of theCompany’s indebtedness and the terms of itssubsidiaries’ indebtedness restrict the Company from payingcash dividends on its common stock under some circumstances.     As discussed in Note 8(a), all accrued and unpaid preferredstock dividends were distributed on July 27, 2004 inconnection with the IPO. On January 28, 2004, Dex Mediadeclared a distribution to its parent of $250.5 millionwhich was paid February 17, 2004 and included payment ofcumulative undeclared dividends on its Series A PreferredStock up to February 17, 2004 of $2.8 million. Nodividends or other distributions could be paid to the holders ofcommon stock until the Company declared and set aside funds forpayment of all dividends in arrears on all Series APreferred Stock.***     (d)******Basic and Diluted Income (Loss) Per Common Share***                   **Three Months Ended** **Six Months Ended**  **June 30,** **June 30,**       **2005** **2004** **2005** **2004**           **(Dollars in thousands, except per share data)**    Net income (loss) $18,755  $(4,059) $33,947  $(14,600)    Dividend accumulated on Series A Preferred Stock  —   (1,571)  —   (3,467)                 Income (loss) available to common stockholders $18,755  $(5,630) $33,947  $(18,067)                 Basic income (loss) per share $0.12  $(0.04) $0.23  $(0.14)    Diluted income (loss) per share  0.12   (0.04)  0.22   (0.14)     The following table reflects the basic and dilutedweighted-average shares outstanding used to calculate basic anddiluted net income (loss) per share.                   **Three Months Ended** **Six Months Ended**  **June 30,** **June 30,**       **2005** **2004** **2005** **2004**             Denominator for basic net income (loss) per common    share — weighted-average common shares outstanding  150,377,455   130,541,014   150,334,924   130,067,175     Dilutive impact of options and unvested restricted stock    outstanding  2,084,580   —   2,099,016   —                  Denominator for diluted net income (loss) per common    share — weighted-average diluted common shares    outstanding  152,462,035   130,541,014   152,433,940   130,067,175                   For the three months and six months ended June 30, 2005,the effect of 161,883 and 152,800 of outstanding stock options,respectively, were excluded from the calculation of dilutedincome per common share because the effect of the assumedexercise was anti-dilutive. For the three months and six monthsended June 30, 2004 the effect of 5,066,540 of outstandingstock options and 323,970 of outstanding Series A PreferredStock were excluded from the calculation of diluted loss percommon share because the effect of the assumed exercise orconversion was anti-dilutive.
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**DEX MEDIA, INC. AND SUBSIDIARIES****NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS — (Continued)*****     (e)******Stock-Based Awards***     On November 8, 2002, Dex Media adopted the Stock OptionPlan of Dex Media, Inc. (the “2002 Plan”) that permitsthe grant of nonqualified and incentive stock options to itsemployees, consultants and independent directors or those of itswholly owned subsidiaries. In May 2004, Dex Media adopted theDex Media, Inc. 2004 Incentive Award Plan (the “2004Plan”). The 2004 Plan provides for a variety of stock-basedawards, including non-qualified stock options, incentive stockoptions, stock appreciation rights, restricted stock awards,restricted stock unit awards, deferred stock awards, dividendequivalents, performance-base awards and other stock-basedawards. Effective with the adoption of the 2004 Plan, theCompany discontinued grants under the 2002 Plan while theoptions outstanding under the 2002 Plan remain outstandingpursuant to the terms of that plan. As of June 30, 2005,6,100,386 shares of Company common stock were available forgrant under the 2004 Plan and 2002 Plan, with 67,500 sharesof restricted stock issued pursuant to restricted stockagreements. As of December 31, 2004, the maximum number ofshares of common stock available for grant under the 2004 Planand 2002 Plan was 6,251,650, with 25,000 shares ofrestricted stock awarded pursuant to restricted stock agreements.     Dex Media’s Compensation Committee determines the exerciseprice for each option awarded. Outstanding options issuedpursuant to the 2002 Plan vest in two segments. Subject to theoptionee’s continued employment with the Company:(i) 25% of the options granted will vest in equal annualinstallments of 5% each on each December 31 beginning inthe year of grant or the following year, depending upon whenduring the calendar year the options are granted, and endingfive years after and (ii) 75% of the options granted willvest in full on the eighth anniversary of the grant date;however, an installment equal to 15% of the options grantedshall become vested following each of the fiscal years beginningin the year of grant or the following year, depending upon whenduring the calendar year the options are granted, and endingfive years after if certain earnings before interest, taxes,depreciation and amortization (“EBITDA”) targets aremet with respect to each year. Options outstanding issuedpursuant to the 2004 Plan vest in equal annual installments overfour years.**9.****Employee Benefit Plans*****     (a)******General Description***     Effective November 8, 2002, Dex Media adopted a pensionplan and effective December 1, 2002, Dex Media adopted another post-retirement benefit plan providing retiree healthcare.The pension plan is a noncontributory defined benefit pensionplan covering substantially all management and occupationalemployees of the Company. The other post-retirement benefit planprovides healthcare and life insurance for certain retirees. DexMedia has filed for a determination letter with the IRS for itspension plan.     Pension costs and other post-retirement benefit costs arerecognized over the period in which the employee rendersservices and becomes eligible to receive benefits, as determinedby using the projected unit credit method. Dex Media’sfunding policy is to make contributions with the objective ofaccumulating sufficient assets to pay all benefits when due. Nopension funding was required for Dex Media for the three monthsended June 30, 2005 and 2004. The other post-retirementbenefit plan is pay-as-you go and is funded out of DexMedia’s operating cash as the costs are incurred.
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**DEX MEDIA, INC. AND SUBSIDIARIES****NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS — (Continued)*****     (b)******Components of Net Periodic Benefit Cost (in    thousands)***                   **Three Months Ended June 30,**     **2005** **2004**       **Pension** **Post-Retirement** **Pension** **Post-Retirement**  **Benefit** **Benefits** **Benefit** **Benefits**             Service cost $2,147  $517  $2,725  $625     Interest cost  3,128   970   3,100   800     Expected return on plan assets  (4,126)  —   (4,100)  —     Amortization of prior service costs  (104)  (135)  —   (100)    Amortization of net (gain) loss  —   22   —   —                  Net periodic benefit cost $1,045  $1,374  $1,725  $1,325                                 **Six Months Ended June 30,**     **2005** **2004**       **Pension** **Post-Retirement** **Pension** **Post-Retirement**  **Benefit** **Benefits** **Benefit** **Benefits**             Service cost $5,047  $1,167  $5,450  $1,250     Interest cost  6,228   1,870   6,200   1,600     Expected return on plan assets  (8,226)  —   (8,200)  —     Amortization of prior service costs  (104)  (235)  —   (200)    Amortization of net (gain) loss  —   22   —   —                  Net periodic benefit cost $2,945  $2,824  $3,450  $2,650                   Dex Media does not expect to make any contributions to itspension plan in 2005.     As a result of employee terminations, Dex Media expects thatlump sum settlement payments of pension liabilities will exceedpension service and interest costs during the three months endedSeptember 30, 2005. Dex Media expects to record asettlement as defined in SFAS No. 88,*“Employers’ Accounting for Settlements andCurtailments of Defined Benefit Pension Plans and forTermination Benefits.”*The result of this settlementaccounting will be to record a portion of the Company’sunrecognized actuarial gain or loss to income. The Company cannot estimate that gain or loss at this time.     In December 2003, the Medicare Prescription Drug, Improvementand Modernization Act of 2003 (“Medicare Act”) wassigned into law. The Medicare Act provides for a federal subsidyto be paid to employers beginning in 2006 if an employerprovides alternative prescription drug coverage for Medicareeligible retirees where that alternative coverage is at leastactuarially equivalent to the standard coverage provided underthe Medicare Act. Final regulations regarding the calculation ofactuarial equivalence were issued on January 21, 2005 andit was subsequently determined that the plan’s prescriptiondrug benefit for certain occupational (union) employees isprojected to satisfy the requirements to receive the federalsubsidy for approximately eight years beginning in 2006. Theexpected savings was not included in the 2004 financial results,but is expected to be reflected in the net periodic benefit costfor 2005 and later years.     In accordance with FASB Staff Position No. 106-2,*“Accounting for Disclosure Requirements Related to theMedicare Prescription Drug, Improvement and Modernization Act of2003,”* the reduction in plan liability was recognizedas an actuarial gain as of January 1, 2005. This reducedthe plan’s liability by approximately $0.2 million asof January 1, 2005. The impact of the subsidy on the total2005 net periodic benefit cost was immaterial. In addition,the amount of federal subsidies projected to be received by usfor the periods 2006 through 2013 are also expected to beimmaterial.
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**DEX MEDIA, INC. AND SUBSIDIARIES****NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS — (Continued)****10.****Commitments and Contingencies**     The Company is involved, from time to time, in litigationarising in the normal course of business. The outcome of thislitigation is not expected to have a material adverse impact onthe Company.**11.****Related Party Transactions**     In connection with the Dex East Acquisition and the Dex WestAcquisition, the Company entered into management consultingagreements with each of the Sponsors. Each agreement allows theCompany access to the Sponsors’ expertise in areas such ascorporate management, financial transactions, product strategy,investment, acquisitions and other matters that relate to theCompany’s business, administration and policies. Each ofthe Sponsors received a one-time transaction fee for structuringthe transactions related to the Dex East Acquisition and the DexWest Acquisition of $15.0 million and $20.1 million,respectively. In addition, each of the Sponsors received anannual advisory fee of $2.0 million for advisory,consulting and other services. The annual advisory fees payableunder the agreements were terminated for a one-time fee of$10.0 million paid to each of the Sponsors, for anaggregate of $20.0 million, in conjunction with the IPO.The Sponsors maintain the right to act as Dex Media’sfinancial advisor or investment banker in conjunction with anymerger, acquisition, disposition, finance or similar transactionin return for additional reasonable compensation and expenses asmay be agreed upon by the parties. Pursuant to these managementconsulting agreements, the Company incurred $1.0 and$2.0 million in advisory fees for the three months and sixmonths ended June 30, 2004.     During February 2003, Dex Media entered into a five yearagreement with Amdocs, Inc. (“Amdocs”) for thecomplete modernization of the Company’s core productionplatform. This project was designed to upgrade theCompany’s existing software system to enhance itsfunctionality. WCAS, one of the Sponsors, was a shareholder ofAmdocs at the time the Company entered into the agreement andceased to be a shareholder of Amdocs during 2004. For the sixmonths ended June 30, 2005 and 2004, the Company paidAmdocs $17.8 million and $30.5 million, respectively,under this agreement and for other related on-going support.
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**Item 2.*****Management’s Discussion and Analysis of Financial    Condition and Results of Operations*****Executive Overview*****Our Company***     In the following discussion and analysis, “we,”“our” or “us” refers to Dex Media and itsconsolidated subsidiaries and their predecessors.     We are the exclusive publisher of the “official”yellow pages and white pages directories for Qwest in thefollowing states where Qwest is the primary incumbent localexchange carrier: Arizona, Colorado, Idaho, Iowa, Minnesota,Montana, Nebraska, New Mexico, North Dakota, Oregon, SouthDakota, Utah, Washington and Wyoming. We have been publishingdirectories for over 100 years. Our contractual agreementswith Qwest grant us the right to be the exclusive incumbentpublisher of the “official” yellow pages and whitepages directories for Qwest in the Dex States until November2052 and prevent Qwest from competing with us in the directoryproducts business in the Dex States until November 2042.     We are the largest directory publisher in the Dex States and thefourth largest directory publisher in the U.S. During thethree months ended June 30, 2005 and 2004, we published 96and 87 directories, respectively, and printed approximately13.8 million and 9.4 million copies, respectively, ofthese directories for distribution to virtually all business andresidential consumers throughout the Dex States. During the sixmonths ended June 30, 2005 and 2004, we published 169 and161 directories, respectively, and printed approximately28.2 million and 25.2 million copies, respectively, ofthese directories. In addition, our Internet-based directory,DexOnline.comtm,which is bundled with our print product to provide web-basedaccess to our directories, further extends the distribution ofour advertisers’ content. DexOnline.com includesapproximately 21 million business listings and129 million residential listings from across the UnitedStates. Our other products and services include the sale ofdirect marketing lists and the sale of Dex directories and otherpublishers’ directories outside the normal deliveryschedule.     We seek to bring buyers together with our advertising customersthrough a cost-effective, bundled advertising solution thatincludes print, Internet-based and CD-ROM directories. Themajority of our advertising customers are small and medium-sizedlocal businesses and national businesses with a local presence.We believe that our advertising customers value: (i) ourability to provide consumers with an authoritative and diversereference source to search for products and services acrossmultiple platforms; (ii) our broad distribution topotential buyers of our advertisers’ products and services;(iii) our lower cost per usage compared with most otherdirectories and a higher return on investment than other formsof local advertising; and (iv) the quality of our clientservice and support.     For both the three months and six months ended June 30,2005, we generated approximately 97% and 98%, respectively, ofour total revenue from the sale of bundled print and Internetdirectory advertising. Our other products and services accountfor the remaining 3% and 2% of our total revenue. For the threemonths and six months ended June 30, 2005, we generated$413.5 million and $825.2 million in total revenue,respectively. See “Results of Operations” in thisItem 2.***Background***     The following discussion and analysis of our financial conditionand results of operations covers periods subsequent to theconsummation of the acquisitions of: (i) the directorybusiness of Qwest Dex in the Dex East States on November 8,2002 and (ii) the directory business of Qwest Dex in theDex West States on September 9, 2003.     We have operated as a stand-alone company since the Dex EastAcquisition. The Dex East Acquisition and the Dex WestAcquisition were accounted for under the purchase method ofaccounting. Under this method, the pre-acquisition deferredrevenue and related deferred costs associated with directoriesthat were published prior to the acquisition date were notcarried over to our balance sheet. The effect of this accountingtreatment was to reduce revenue and related costs that wouldotherwise have been recognized during the twelve monthssubsequent to the acquisition date.
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     The non-historical statements in this Item 2, includingstatements regarding industry outlook and our expectationsregarding the future performance of our business, areforward-looking statements. Such forward-looking statements aresubject to numerous risks and uncertainties, and our actualresults may differ materially from those contained in any suchforward-looking statements. See “CautionaryNote Regarding Forward-Looking Statements” in thisItem 2.**Results of Operations*****Overview***     Our consolidated financial statements included in this quarterlyreport have been prepared on the basis of the deferral andamortization method of accounting, under which revenue and costof revenue related to the publication of directories areinitially deferred and then recognized ratably over the life ofeach directory, commencing in the month of delivery. From timeto time, we have determined that the publication dates ofcertain directories will be extended. These publication datechanges are made to more efficiently manage work and customerflow. The lives of the affected directories are expected to be12 months following the new publication date. Generally, weare able to bill and collect for additional periods related todirectory extensions and under the deferral and amortizationmethod of accounting, our related cost of revenue is amortizedover the extended estimated useful life of the directory.Certain prior period amounts have been reclassified to conformto the 2005 presentation.***Revenue***     We derive virtually all our revenue from the sale of advertisingin our printed directories, which we refer to as directoryservices revenue. The sale of advertising in our printeddirectories also includes the replication of listings anddisplay advertisements in DexOnline.com, our Internet-baseddirectory. We also provide related services, including otherInternet-related products, direct marketing lists and the saleof Dex directories and other publishers’ directoriesoutside of the normal delivery schedule, which we refer tocollectively as other revenue. Directory services revenue isaffected by several factors, including changes in the quantityand size of advertisements sold, defectors and new advertisers,as well as the proportion of premium advertisements sold,changes in the pricing of advertising, changes in the quantityand mix of advertising purchased per account and theintroduction of additional products which generate incrementalrevenue. Directory services revenue may also increase throughthe publication of new printed directories. Revenue recognizedon sales under our Advertising Commitment Agreement with Qwestconsists primarily of directory services revenue.     Our revenue and cost of revenue for the twelve months followingthe consummation of the Dex West Acquisition were lower thanthey otherwise would have been because the Dex West Acquisitionwas accounted for under the purchase method of accounting. Underthe purchase method of accounting, deferred revenue and deferreddirectory costs associated with the directories published anddistributed prior to the Dex West Acquisition were not carriedover to our balance sheet at the time of purchase. The effect ofthis accounting treatment was to reduce revenue and relatedcosts that would otherwise be recognized in the twelve monthssubsequent to the Dex West Acquisition. The purchase method ofaccounting did not affect our revenue and directory costs inperiods subsequent to September 30, 2004. These purchaseaccounting adjustments are non-recurring and have no impact oncash flows.     We enter into transactions such as exclusivity arrangements,sponsorships and other media access transactions whereby ourproducts and services are promoted by a third party and, inexchange, we carry that party’s advertisement. We accountfor these transactions in accordance with EITF IssueNo. 99-17. Revenue and expense related to such transactionsare included in the consolidated statements of operationsconsistent with reasonably similar items sold or purchased forcash. These related revenue items are currently included inlocal directory services revenue. The revenue from suchtransactions for the three months and six months endedJune 30, 2005 and 2004 represented less than 1% of totalrevenue in each period and is expected to continue at this levelfor the foreseeable future. The revenue and related expense haveno impact on net income or cash flow over the life of thebartered advertisement.
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     In certain cases, we enter into agreements with accounts thatinvolve the delivery of more than one product or service. Weallocate revenue for such arrangements in accordance with EITFIssue No. 00-21.***Cost of Revenue***     We account for cost of revenue under the deferral andamortization method of accounting. Accordingly, our cost ofrevenue recognized in a reporting period consists of:(i) costs incurred in that period and recognized in thatperiod, principally sales salaries and wages; (ii) costsincurred in a prior period, a portion of which are amortized andrecognized in the current period; and (iii) costs incurredin the current period, a portion of which are amortized andrecognized in that period and the balance of which are deferreduntil future periods. Consequently, there will be a differencebetween the cost of revenue recognized in any given period andthe costs incurred in that period. Such differences may besignificant.     Costs incurred in the current period and subject to deferralinclude direct costs associated with the publication ofdirectories, including sales commissions, paper, printing,transportation, distribution and pre-press production, as wellas employee and systems support costs relating to each of theforegoing. Sales commissions include commissions paid toemployees for sales to local advertisers and to certifiedmarketing representatives, which act as our channel to nationaladvertisers. All deferred costs related to the sale andproduction of directories are recognized ratably over the lifeof each directory under the deferral and amortization method ofaccounting, with cost recognition commencing in the month ofdelivery.***General and Administrative Expense***     Our general and administrative expense consists primarily of thecosts of advertising, promotion and marketing, administrativestaff, pension and other post-retirement benefits, informationtechnology, training, account billing, corporate management,office and facilities expense and bad debt expense. All ourgeneral and administrative expense is recognized in the periodin which it is incurred.***Income Tax Provision***     We account for income taxes under the asset and liability methodof accounting. Deferred tax assets and liabilities are recordedto reflect the future tax consequences of temporary differencesbetween the financial reporting bases of assets and liabilitiesand their tax bases at each year end. Deferred tax assets andliabilities are measured using the enacted income tax rates ineffect for the year in which those temporary differences areexpected to be recovered or settled. Deferred tax assets andliabilities are adjusted for future income tax rate changes inthe year the changes are enacted. Deferred tax assets arerecognized for operating loss and tax credit carry forwards ifmanagement believes, based upon existing evidence, that it ismore likely than not that the carry forward will be utilized.All deferred tax assets are reviewed for realizability, andvaluation allowances are recorded if it is more likely than notthat the deferred tax assets will not be realized.**Items Affecting Comparability Between Periods**     Our revenue and cost of revenue for the twelve months followingthe consummation of the Dex West Acquisition onSeptember 9, 2003 were $120.6 million and$31.6 million lower, respectively, than our revenue andcost of revenue would have been otherwise because the Dex WestAcquisition was accounted for under the purchase method ofaccounting. For the three months ended June 30, 2004, ourrevenue and cost of revenue were $15.35 million and$3.3 million lower, respectively, than they would have beendue to the effects of purchase accounting. For the six monthsended June 30, 2004, our revenue and cost of revenue were$38.1 million and $9.7 million lower, respectively,than they would have been due to the effects of purchaseaccounting. Under the purchase method of accounting, deferredrevenue and related deferred directory costs associated withdirectories that had previously been published and distributedwere not carried over to the balance sheet. The effect of thisaccounting treatment is to reduce revenue and related costs thatwould otherwise have been recognized in the twelve monthssubsequent to the Dex West Acquisition. These purchaseaccounting adjustments are non-recurring and have no historicalor future cash impact. The
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purchase method of accounting will not affect our revenue ordirectory costs for any period subsequent to September 30,2004.     Prior to the IPO, we paid an annual management fee of$4.0 million to the Sponsors. In connection with the IPO,we made a lump sum payment of $20.0 million in aggregate tothe Sponsors to terminate our obligation to pay such annualadvisory fees. For the three months and six months endedJune 30, 2004, the Company incurred $1.0 million and$2.0 million of advisory fees, respectively.     During the six months ended June 30, 2005, the Companyincurred $0.7 million of secondary offering costs relatedto the sale of 18 million shares of common stock held bythe Sponsors. No offering costs were incurred in the six monthsended June 30, 2004.***Three Months Ended June 30, 2005 Compared to the    Three Months Ended June 30, 2004***     The results of operations for the three months endedJune 30, 2004 include the effect of purchase accounting onrevenue and cost of revenue related to the Dex West Acquisition.Accordingly, the periods presented are not comparable. Pleaserefer to “Items Affecting Comparability BetweenPeriods” in this Item 2 and the discussion below fordetail regarding the effects of these adjustments.             **Three Months Ended**  **June 30,**     **2005** **2004**       **(Dollars in thousands)**    Revenue:             Local directory services $339,220  $336,467      National directory services  58,176   45,304      Qwest advertising  4,290   6,204      Other revenue  11,863   8,729              Total revenue  413,549   396,704     Cost of revenue  124,876   122,193             Gross profit, excluding depreciation and amortization expense $288,673  $274,511      Gross margin  69.8%  69.2%    General and administrative expense, including bad debt expense $59,589  $52,834 ***Revenue***     Total revenue increased $16.8 million, or 4.2%, to$413.5 million for the three months ended June 30,2005 from $396.7 million for the three months endedJune 30, 2004. Total revenue for the three months endedJune 30, 2004 was $15.35 million lower than it wouldhave been due to the effects of purchase accounting. Excludingthe effects of purchase accounting in 2004, total revenue wouldhave increased $1.5 million, or 0.4%, for the three monthsended June 30, 2005. The increase in total revenue,excluding the effects of purchase accounting, was due to anincrease in national directory services revenue and an increasein other revenue relating to our Internet product line, whichwas partially offset by a decrease in Qwest advertising revenue.     Local and national directory services revenue is affected by avariety of volume and pricing factors. Volume related factorsinclude quantity of advertisements sold, the change in mix ofadvertisements among our product families, the proportion ofadvertisements sold with premium features, the volume ofpromotional services obtained from our advertisers in exchangefor our publication of their advertisements in our directories,the number of local advertisers’ disconnects and the numberof new advertisers obtained during a period. Pricing factorsinclude price increases related to our standard rates that maybe made from time to time in varying markets for varyingcategories, and are offset by discount programs that may beinitiated in local markets for certain advertiser headings. Suchfactors generally affect the dollar volume of orders initiatedin a period which are recognized as revenue over the life of agiven directory, beginning in the month of
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delivery. Fluctuations in product mix and pricing are among themultiple factors that contributed to the change in local andnational directory services revenue.     Local directory services revenue increased $2.8 million, or0.8%, to $339.2 million for the three months endedJune 30, 2005 compared to $336.5 million for the threemonths ended June 30, 2004. Local directory service revenuefor the three months ended June 30, 2004 was$3.5 million lower than it would have been due to theeffects of purchase accounting. Excluding the effects ofpurchase accounting in 2004, local directory services revenuedecreased $0.8 million, or 0.2%, for the three months endedJune 30, 2005. Local directory services revenue, excludingthe effects of purchase accounting in 2004, accounted for 82.0%and 82.5% of revenue for the three months ended June 30,2005 and the three months ended June 30, 2004, respectively.     Revenue from national advertisers increased $12.9 million,or 28.4%, to $58.2 million for the three months endedJune 30, 2005 compared to $45.3 million for the threemonths ended June 30, 2004. Revenue from nationaladvertisers for the three months ended June 30, 2004 was$11.9 million lower than it would have been due to theeffects of purchase accounting. Excluding the effects ofpurchase accounting in 2004, revenue from national advertisers,increased $1.0 million, or 1.7%, for the three months endedJune 30, 2005. Revenue from national advertisers, excludingthe effects of purchase accounting in 2004, accounted for 14.1%and 13.9% of revenue for the three months ended June 30,2005 and the three months ended June 30, 2004, respectively.     Revenue from Qwest advertising decreased $1.9 million, or30.9%, to $4.3 million for the three months endedJune 30, 2005 from $6.2 million for the three monthsended June 30, 2004. This decrease in Qwest advertisingrevenue was a result of the timing of Qwest’s purchasesunder its Advertising Commitment Agreement with us. Under theAdvertising Commitment Agreement, Qwest is obligated to purchase$20.0 million in advertising annually from us. However, ifin any given year Qwest exceeds the $20.0 million ofadvertising purchases, up to $5.0 million of the excess maybe credited to the following year’s purchase commitment. Asa result of purchases in excess of the $20.0 million forthe year ended December 31, 2003, Qwest purchased less than$20.0 million of Dex advertising in 2004, of which aportion is deferred and recognized over the life of the relateddirectory in 2005.     Other revenue increased $3.1 million, or 35.9%, to$11.9 million for the three months ended June 30, 2005from $8.7 million for the three months ended June 30,2004. This increase in other revenue was primarily due to anincrease in Internet revenue, and was partially offset by adecrease in our direct marketing revenue.***Cost of Revenue***     Cost of revenue recognized was $124.9 million for the threemonths ended June 30, 2005 compared to $122.2 millionfor the three months ended June 30, 2004. Cost of revenuerecognized for the three months ended June 30, 2004 was$3.3 million lower than it would have been due to theeffects of purchase accounting. Cost of revenue recognized,excluding the effects of purchase accounting in 2004,represented 30.2% and 30.5% of revenue for the three monthsended June 30, 2005 and 2004, respectively. The cost ofrevenue recognized does not include any depreciation andamortization expense.     For the three months ended June 30, 2005 and 2004, weincurred costs subject to deferral and amortization of$129.3 million and $118.1 million, respectively. Asdescribed below, the increase in incurred costs primarilyresulted from eight directories whose publication date wasshifted from the first quarter of 2005 to the second quarter of2005 partially offset by a decrease as a result of moving thepublication date of two directories from the second quarter of2005 to the first quarter of 2005 and two directories from thesecond quarter of 2005 to the third quarter of 2005. Under thedeferral and amortization method of accounting, the resultingincrease in cost of revenue recognized was less than 1% each ofrevenue and gross profit for the three months endedJune 30, 2005.     Employee costs incurred decreased $2.4 million, or 4.4%, to$52.2 million for the three months ended June 30, 2005from $54.6 million for the three months ended June 30,2004. This decrease resulted from a reduction in the number ofour employees, which related primarily to planned workforcereductions.
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     Direct publishing costs incurred, which primarily include paper,printing and distribution, increased $8.7 million, or23.3%, to $46.0 million for the three months endedJune 30, 2005 from $37.3 million for the three monthsended June 30, 2004. The increase was primarily a result ofmoving the publication date of eight directories from the firstquarter of 2005 to the second quarter of 2005, and was partiallyoffset by a decrease as a result of moving the publication dateof two directories from the second quarter of 2005 to the firstquarter of 2005 and two directories from the second quarter of2005 to the third quarter of 2005. This increase was alsopartially offset by a reduction in printing costs for a portionof our directories in 2005 due to the implementation of a newprinting agreement with one of the two outside providers ofprinting service.     Contracting and professional fees incurred increased$3.5 million, or 56.5%, to $9.7 million for the threemonths ended June 30, 2005 from $6.2 million for thethree months ended June 30, 2004. This increase wasprimarily due to costs related to supporting our new productionsystem, which we began to incur in the second quarter of 2004.     National commissions incurred increased $3.5 million, or31.0%, to $14.8 million for the three months endedJune 30, 2005 from $11.3 million for the three monthsended June 30, 2004. The increase was primarily a result ofmoving the publication of eight directories from the firstquarter of 2005 to the second quarter of 2005. This increase waspartially offset by a decrease in commissions as a result ofmoving the publication date of two directories from the secondquarter of 2005 to the first quarter of 2005 and two directoriesfrom the second quarter of 2005 to the third quarter of 2005.     Other cost of revenue incurred, which primarily includes systemsexpense and office and facilities expense, was $6.6 millionfor the three months ended June 30, 2005 compared to$8.7 million for the three months ended June 30, 2004.***Gross Profit***     Our gross profit was $288.7 million for the three monthsended June 30, 2005 compared to $274.5 million for thethree months ended June 30, 2004. Excluding the effects ofpurchase accounting, gross profit for the three months endedJune 30, 2004 would have been $286.6 million. Grossmargin, excluding the effects of purchase accounting in 2004,was 69.8% for the three months ended June 30, 2005 comparedto 69.5% for the three months ended June 30, 2004.***General and Administrative Expense***     General and administrative expense, including bad debt expense,increased $6.8 million, or 12.8% to $59.6 million forthe three months ended June 30, 2005 compared to$52.8 million for the three months ended June 30, 2004.     Employee costs increased $4.0 million, or 28.2%, to$18.2 million for the three months ended June 30, 2005compared to $14.2 million for the three months endedJune 30, 2004. Employee costs include salaries and wages,benefits and other employee costs. Salaries and wages were$9.1 million for the three months ended June 30, 2005and for the three months ended June 30, 2004. Benefitsdecreased $0.4 million, or 8.9%, to $4.1 million forthe three months ended June 30, 2005 from $4.5 millionfor the three months ended June 30, 2004. Other employeecosts increased $4.4 million for the three months endedJune 30, 2005, to $5.0 million from $0.6 millionfor the three months ended June 30, 2004. This increase wasprimarily related to recognition of net accrued severance costsof $4.0 million in connection with planned workforcereductions during the three months ended June 30, 2005.     Advertising expense decreased $0.5 million, or 5.4%, to$8.8 million for the three months ended June 30, 2005from $9.3 million for the three months ended June 30,2004. Advertising expense as a percentage of revenue, excludingthe effects of purchase accounting in 2004, decreased to 2.1%for the three months ended June 30, 2005 from 2.3% for thethree months ended June 30, 2004.     Contracting and professional fees increased $1.8 million,or 19.1%, to $11.2 million for the three months endedJune 30, 2005 compared to $9.4 million for the threemonths ended June 30, 2004. For the three months endedJune 30, 2004, contracting and professional fees included$1.0 million of advisory fees paid to
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our Sponsors. This fee was terminated in conjunction with theIPO and therefore was not incurred in the three months endedJune 30, 2005. The decrease related to such advisory feeswas offset by an increase in on-going support costs related toour new production system, which we began incurring in thesecond quarter of 2004.     Bad debt expense increased $1.8 million, or 16.4%, to$12.5 million for the three months ended June 30, 2005from $10.7 million for the three months ended June 30,2004. Bad debt expense as a percentage of total revenue,excluding the effects of purchase accounting in 2004, was 3.0%for the three months ended June 30, 2005 compared to 2.6%for the three months ended June 30, 2004.     All other general and administrative expense decreased$0.3 million, or 3.3%, to $8.9 million for the threemonths ended June 30, 2005 from $9.2 million for thethree months ended June 30, 2004.***Amortization of Intangibles***     For the three months ended June 30, 2005 and 2004, werecognized $86.4 million and $103.1 million,respectively, in amortization expense related to ouridentifiable intangible assets. The decrease in amortizationexpense was the result of a declining method used to amortizethe value of the acquired customer accounts in proportion withtheir estimated retention lives.***Interest Expense***     Interest expense was $106.8 million and $118.0 millionfor the three months ended June 30, 2005 and 2004,respectively. Interest expense for the three months endedJune 30, 2005 included $10.1 million of amortizationof deferred financing costs and $11.9 million of accretionon discount notes. Interest expense for the three months endedJune 30, 2004 included $11.3 million of amortizationof deferred financing costs and $10.9 million of accretionon discount notes.***Income Taxes***     SFAS No. 109, *“Accounting for IncomeTaxes,”*requires that we recognize deferred income taxassets on net operating losses to the extent that realization ofthese assets is more likely than not. As of June 30, 2005,we have recorded $76.2 million of net deferred income taxassets, of which $103.5 million is the result of estimatednet operating loss carryforwards of $268.8 million. As ofDecember 31, 2004, we recorded $98.6 million ofdeferred income tax assets, of which $107.3 millionresulted from estimated net operating loss carryforwards of$271.2 million pending the filing of the 2004 income taxreturn. Net operating loss carryforwards do not begin to expireuntil 2022. Based on current projections of income and expenses,we have determined that it is more likely than not that we willutilize these deferred tax assets before the expiration of thenet operating loss carryforward periods. Accordingly, novaluation allowance has been recorded.
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***Six Months Ended June 30, 2005 Compared to the Six    Months Ended June 30, 2004***     The results of operations for the six months ended June 30,2004 include the effect of purchase accounting on revenue andcost of revenue related to the Dex West Acquisition.Accordingly, the periods presented are not comparable. Pleaserefer to “Items Affecting Comparability BetweenPeriods” in this Item 2 and the discussion below fordetail regarding the effects of these adjustments.             **Six Months Ended**  **June 30,**     **2005** **2004**       **(Dollars in thousands)**    Revenue:             Local directory services $680,210  $671,505      National directory services  116,376   82,807      Qwest advertising  8,426   12,754      Other revenue  20,196   17,815              Total revenue  825,208   784,881     Cost of revenue  248,301   240,385             Gross profit, excluding depreciation and amortization expense $576,907  $544,496      Gross margin  69.9%  69.4%    General and administrative expense, including bad debt expense $113,517  $106,185 ***Revenue***     Total revenue increased $40.3 million, or 5.1%, to$825.2 million for the six months ended June 30, 2005from $784.9 million for the six months ended June 30,2004. Total revenue for the six months ended June 30, 2004was $38.1 million lower than it would have been due to theeffects of purchase accounting. Excluding the effects ofpurchase accounting in 2004, total revenue would have increased$2.2 million, or 0.3%, for the six months endedJune 30, 2005. The increase in total revenue, excluding theeffects of purchase accounting, was due to an increase in localand national directory services revenue and an increase in otherrevenue relating to our internet product line, and was partiallyoffset by a decrease in Qwest advertising revenue.     Local and national directory services revenue is affected by avariety of volume and pricing factors. Volume related factorsinclude quantity of advertisements sold, the change in mix ofadvertisements among our product families, the proportion ofadvertisements sold with premium features, the volume ofpromotional services obtained from our advertisers in exchangefor our publication of their advertisements in our directories,the number of local advertisers’ disconnects and the numberof new advertisers obtained during a period. Pricing factorsinclude price increases related to our standard rates that maybe made from time to time in varying markets for varyingcategories, and are offset by discount programs that may beinitiated in local markets for certain advertiser headings. Suchfactors generally affect the dollar volume of orders initiatedin a period which are recognized as revenue over the life of agiven directory, beginning in the month of delivery.Fluctuations in product mix and pricing are among the multiplefactors that contributed to the change in local and nationaldirectory services revenue.     Local directory services revenue increased $8.7 million, or1.3%, to $680.2 million for the six months endedJune 30, 2005 compared to $671.5 million for the sixmonths ended June 30, 2004. Local directory service revenuefor the six months ended June 30, 2004 was$5.9 million lower than it would have been due to theeffects of purchase accounting. Excluding the effects ofpurchase accounting in 2004, local directory services revenueincreased $2.8 million, or 0.4%, for the six months endedJune 30, 2005. Local directory services revenue, excludingthe effects of purchase accounting in 2004, accounted for 82.4%and 82.3% of revenue for the six months ended June 30, 2005and the six months ended June 30, 2004, respectively.     Revenue from national advertisers increased $33.6 million,or 40.5%, to $116.4 million for the six months endedJune 30, 2005 compared to $82.8 million for the sixmonths ended June 30, 2004. Revenue from
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national advertisers for the six months ended June 30, 2004was $32.2 million lower than it would have been due to theeffects of purchase accounting. Excluding the effects ofpurchase accounting in 2004, revenue from national advertisers,increased $1.4 million, or 1.2%, for the six months endedJune 30, 2005. Revenue from national advertisers, excludingthe effects of purchase accounting in 2004, accounted for 14.1%and 14.0% of revenue for the six months ended June 30, 2005and the six months ended June 30, 2004, respectively.     Revenue from Qwest advertising decreased $4.3 million, or33.9%, to $8.4 million for the six months endedJune 30, 2005 from $12.8 million for the six monthsended June 30, 2004. This decrease in Qwest advertisingrevenue was a result of the timing of Qwest’s purchasesunder its Advertising Commitment Agreement with us. Under theAdvertising Commitment Agreement, Qwest is obligated to purchase$20.0 million in advertising annually from us. However, ifin any given year Qwest exceeds the $20.0 million ofadvertising purchases, up to $5.0 million of the excess maybe credited to the following year’s purchase commitment. Asa result of purchases in excess of the $20.0 million forthe year ended December 31, 2003, Qwest purchased less than$20.0 million of Dex advertising in 2004, of which aportion is deferred and recognized over the life of the relateddirectory in 2005.     Other revenue increased $2.4 million, or 13.4%, to$20.2 million for the six months ended June 30, 2005from $17.8 million for the six months ended June 30,2004. This increase in other revenue was primarily due to anincrease in Internet revenue, and was partially offset by adecrease in our direct marketing revenue.***Cost of Revenue***     Cost of revenue recognized was $248.3 million for the sixmonths ended June 30, 2005 compared to $240.4 millionfor the six months ended June 30, 2004. Cost of revenuerecognized for the six months ended June 30, 2004 was$9.7 million lower than it would have been due to theeffects of purchase accounting. Cost of revenue recognized,excluding the effects of purchase accounting in 2004,represented 30.1% and 30.4% of revenue for the six months endedJune 30, 2005 and 2004, respectively. The cost of revenuerecognized does not include any depreciation and amortizationexpense.     For the six months ended June 30, 2005 and 2004, weincurred costs subject to deferral and amortization of$256.7 million and $258.5 million, respectively.     Employee costs incurred decreased $5.5 million, or 5.0%, to$104.2 million for the six months ended June 30, 2005from $109.7 million for the six months ended June 30,2004. This decrease was a result of a reduction in the number ofour employees, which related primarily to planned workforcereductions.     Direct publishing costs incurred, which primarily include paper,printing and distribution, decreased $3.0 million, or 3.2%,to $92.2 million for the six months ended June 30,2005 from $95.2 million for the six months endedJune 30, 2004. The decrease is primarily a result ofprinting costs for a portion of our directories declining in2005 due to the implementation of a new printing agreement withone of the two outside providers of printing services.     Contracting and professional fees incurred increased$8.3 million, or 74.8%, to $19.4 million for the sixmonths ended June 30, 2005 from $11.1 million for thesix months ended June 30, 2004. This increase was primarilydue to costs related to supporting our new production system,which we began to incur in the second quarter of 2004.     National commissions incurred increased $1.3 million, or4.9%, to $28.1 million for the six months endedJune 30, 2005 from $26.8 million for the six monthsended June 30, 2004. This increase was primarily a resultof commissions related to extension billings issued inconnection with moving the publication of eight directories fromthe first quarter of 2005 to the second quarter of 2005.     Other cost of revenue incurred, which primarily includes systemsexpense and office and facilities expense, was$12.8 million for the six months ended June 30, 2005compared to $15.7 million for the six months endedJune 30, 2004.
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***Gross Profit***     Our gross profit was $576.9 million for the six monthsended June 30, 2005 compared to $544.5 million for thesix months ended June 30, 2004. Excluding the effects ofpurchase accounting, gross profit for the six months endedJune 30, 2004 would have been $572.9 million. Grossmargin, excluding the effects of purchase accounting in 2004,was 69.9% for the six months ended June 30, 2005 comparedto 69.6% for the six months ended June 30, 2004.***General and Administrative Expense***     General and administrative expense, including bad debt expense,increased $7.3 million, or 6.9% to $113.5 million forthe six months ended June 30, 2005 compared to$106.2 million for the six months ended June 30, 2004.     Employee costs increased $4.0 million, or 13.5%, to$33.6 million for the six months ended June 30, 2005compared to $29.6 million for the six months endedJune 30, 2004. Employee costs include salaries and wages,benefits and other employee costs. Salaries and wages were$18.5 million for the six months ended June 30, 2005compared to $18.4 million for the six months endedJune 30, 2004. Benefits decreased $0.1 million, or1.1%, to $9.3 million for the six months endedJune 30, 2005 from $9.4 million for the six monthsended June 30, 2004. Other employee costs increased$4.0 million for the six months ended June 30, 2005 to$5.8 million from $1.8 million for the six monthsended June 30, 2004, respectively. The increase wasprimarily related to recognition of net accrued severance costsof $4.0 million in connection with planned workforcereductions during the three months ended June 30, 2005.     Advertising expense increased $0.8 million, or 4.8%, to$17.4 million for the six months ended June 30, 2005from $16.6 million for the six months ended June 30,2004. Advertising expense as a percentage of revenue, excludingthe effects of purchase accounting in 2004, increased to 2.1%for the six months ended June 30, 2005 from 2.0% for thesix months ended June 30, 2004.     Contracting and professional fees were $20.7 million forthe six months ended June 30, 2005 compared to$18.8 million for the six months ended June 30, 2004.For the six months ended June 30, 2004, contracting andprofessional fees included $2.0 million of advisory feespaid to our Sponsors. This fee was terminated in conjunctionwith the IPO and therefore was not incurred in the six monthsended June 30, 2005. The decrease related to such advisoryfees was offset by an increase in on-going support costs relatedto our new production system, which we began incurring in thesecond quarter of 2004.     Bad debt expense decreased $0.3 million, or 1.2%, to$22.9 million for the six months ended June 30, 2005from $23.2 million for the six months ended June 30,2004. Bad debt expense as a percentage of total revenue,excluding the effects of purchase accounting in 2004, was 2.8%for the six months ended June 30, 2005 and for the sixmonths ended June 30, 2004.     All other general and administrative expense increased$0.9 million, or 5.0%, to $18.9 million for the sixmonths ended June 30, 2005 from $18.0 million for thesix months ended June 30, 2004.***Amortization of Intangibles***     For the six months ended June 30, 2005 and 2004, werecognized $172.9 million and $206.2 million,respectively, in amortization expense related to ouridentifiable intangible assets. The decrease in amortizationexpense was the result of a declining method used to amortizethe value of the acquired accounts in proportion with theirestimated retention lives.***Interest Expense***     Interest expense was $223.1 million and $242.6 millionfor the six months ended June 30, 2005 and 2004,respectively. Interest expense for the six months endedJune 30, 2005 includes $20.6 million of amortizationof deferred financing costs and $23.6 million of accretionon discount notes. Interest expense for the six months
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ended June 30, 2004 includes $29.6 million ofamortization of deferred financing costs and $19.4 millionof accretion on discount notes.***Income Taxes***     SFAS No. 109 requires that we recognize deferredincome tax assets on net operating losses to the extent thatrealization of these assets is more likely than not. As ofJune 30, 2005, we have recorded $76.2 million of netdeferred income tax assets, of which $103.5 million is theresult of estimated net operating loss carryforwards of$268.8 million. As of December 31, 2004, we recorded$98.6 million of deferred income tax assets, of which$107.3 million resulted from estimated net operating losscarryforwards of $271.2 million pending the filing of the2004 income tax return. Net operating loss carryforwards do notbegin to expire until 2022. Based on current projections ofincome and expenses, we have determined that it is more likelythan not that we will utilize these deferred tax assets beforethe expiration of the net operating loss carryforward periods.Accordingly, no valuation allowance has been recorded.**Liquidity and Capital Resources*****Overview***     Our primary source of liquidity continues to be cash flowgenerated from the operations of our subsidiaries, Dex MediaEast and Dex Media West. Our subsidiaries also have availabilityunder the revolving loans of their credit facilities, subject tocertain conditions. Our subsidiaries’ credit facilitieseach continue to consist of revolving loan and term loans.     As of June 30, 2005, we had a total outstanding debtbalance of $5,528.8 million comprised of:(i) $2,221.1 million of variable rate debt drawn underour subsidiaries’ credit facilities;(ii) $1,135.0 million of unsecured senior notes and$1,103.1 million of senior unsecured subordinated notesissued by our subsidiaries; and (iii) $500.0 millionof 8% notes due 2013 and $569.6 million of 9% discountnotes due 2013 issued directly by us. Dex Media East’scredit facilities were made up of $364.4 million ofTranche A term loans maturing in November 2008,$451.5 million of Tranche B term loans maturing in May2009 and $53.0 million borrowing on a revolving loan. DexMedia West’s credit facilities were made up of$391.8 million of Tranche A term loans maturing inSeptember 2009, $916.9 million of Tranche B term loansmaturing in March 2010 and $43.5 million borrowings on arevolving loan. Our 8% notes and 9% discount notes are expectedto be serviced and repaid from distributions from Dex Media Eastand Dex Media West, subject in each case to restrictionscontained in our subsidiaries’ respective debt agreements.     On June 16, 2005, Dex Media West amended its CreditAgreement, as amended and restated, to, among other things:(i) permit Dex Media West to engage in accounts receivablesecuritization transactions not exceeding $232.0 million inthe aggregate at any time; (ii) increase the restrictedpayment basket for cash dividends by Dex Media West from$40.6 million to $58.0 million annually; and(iii) reduce the applicable margins for Tranche A termloans and revolving loans made under such Credit Agreement.     On June 16, 2005, Dex Media East amended its CreditAgreement, as amended and restated, to, among other things(i) permit Dex Media East to engage in accounts receivablesecuritization transactions not exceeding $168.0 million inthe aggregate at any time; (ii) increase the restrictedpayment basket for cash dividends by Dex Media East from$29.4 million to $42.0 million annually; and(iii) reduce the applicable margins for Tranche A termloans and revolving loans made under such Credit Agreement.***Sources of Liquidity***     Net cash provided by operations was $260.1 million and$251.8 million for the six months ended June 30, 2005and 2004, respectively. Cash provided by operations wasgenerated primarily from cash receipts from the sale ofdirectory advertisements, reduced by cash disbursements for costof revenue incurred, general and administrative expenses andinterest expense.     Net cash used for investing activities was $16.6 millionand $34.1 million for the six months ended June 30,2005 and 2004, respectively. The principal use of cash forinvesting activities for the six months
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ended June 30, 2005 and 2004 was expenditures for property,plant and equipment and software. The principal source of cashfrom investing activities in the six months ended June 30,2004 was the $5.3 million cash received in settlement ofthe working capital true-up for assets acquired and liabilitiesassumed in the Dex West Acquisition.     Net cash used for financing activities was $252.5 millionand $222.6 million for the six months ended June 30,2005 and 2004, respectively. Significant uses of cash forfinancing activities for the six months ended June 30, 2005include $318.6 million of repayments on long-termborrowings, $27.1 million of common stock dividends and$62.0 million of repayments of borrowings on revolvingcredit facilities. Significant uses of cash for financingactivities for the six months ended June 30, 2004 include a$254.2 million distribution to stockholders, plus accruedand unpaid dividends and $28.0 million of repayments ofborrowings on revolving credit facilities. Significant sourcesof cash for financing activities for the six months endedJune 30, 2005 and 2004 include $158.5 million and$31.0 million, respectively, of proceeds from borrowings onrevolving credit facilities and $250.5 million of proceedsfrom issuance of long-term debt, for the six months endedJune 30, 2004.     Our ability to make payments on and to refinance ourindebtedness and to fund planned capital expenditures willdepend to a large extent on our ability to generate cash in thefuture. This, to a certain extent, is subject to generaleconomic, financial, competitive, legislative, regulatory andother factors that are beyond our control. Based on our currentlevel of operations, we believe our cash flow from operations,available cash and available borrowings under oursubsidiaries’ credit facilities will be adequate to meetour future liquidity needs for at least the next 12 months.     We cannot ensure, however, that our business will generate cashflow from operations in an amount sufficient to enable us to payour indebtedness or to fund our other liquidity needs. Therestrictive covenants under our subsidiaries’ noteindentures and credit agreements prohibit us from comminglingthe funds of our subsidiaries. They also prohibit oursubsidiaries from borrowing any funds from each other. Despitethe restrictive covenants under our subsidiaries’ noteindentures and credit agreements limiting our ability to incuradditional indebtedness and dispose of our assets, we havemultiple sources of limited liquidity that we may access to meetour ongoing business needs, including:          i. Cash from operating cash flow;           ii. Up to $102.6 million of our subsidiaries’    revolving loans available to our subsidiaries as of    June 30, 2005;           iii. Other unsecured indebtedness up to an aggregate    principal amount of $360.0 million of which our    subsidiaries may incur up to an aggregate principal amount of    $125.0 million;           iv. Dex Media East and Dex Media West, respectively, may    sell, or dispose of, assets up to $10.0 million and    $15.0 million annually, subject to an aggregate amount of    $20.0 million and $30.0 million, respectively;           v. The proceeds from any debt issuance, which our    subsidiaries may use as long as the respective leverage ratio of    Dex Media East and Dex Media West is at or below 4.0 to    1.0; and           vi. Our subsidiaries may use the proceeds from any equity    offering as follows: (i) 50%, if the respective leverage    ratio is above 4.0 to 1.0 or (ii) 100%, if the respective    leverage ratio is at or below 4.0 to 1.0. As a condition to the    closing of the IPO, we amended our subsidiaries’ credit    facilities to, among other things, allow our subsidiaries access    to 100% of the proceeds from the IPO irrespective of their    leverage ratios.     Our subsidiaries’ credit agreements and the indenturesrelating to our subsidiaries’ senior notes and seniorsubordinated notes permit our subsidiaries to pursue the optionof financing capital expenditures with capital leases as long asthe aggregate outstanding balance of such capital leases is notin excess of $30.0 million at any time for Dex Media Eastand $45.0 million at any time for Dex Media West. As ofJune 30, 2005, the outstanding balance of capital leaseswas $0.2 million.
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***Uses of Liquidity***     We expect that our primary liquidity requirements will be fordebt service on our indebtedness, our subsidiaries’ creditfacilities and notes, capital expenditures and working capital.During the six months ended June 30, 2005, we used cashgenerated from operations in excess of liquidity requirements tomake principal repayments under our subsidiaries’ creditfacilities.     Our capital expenditure requirements over the last three years(including capital expenditures for Dex East for the periodJanuary 1 to November 8, 2002 and capital expenditures ofDex West for the period from January 1 to September 9, 2003and the year ended December 31, 2002) averaged$49.6 million per year, or 3.1% of average total revenue,excluding the effects of purchase accounting. During 2005, asignificant portion of our capital expenditures will be spent onsoftware development and related hardware upgrades pertaining toourDexOnline.comtmwebsite, the implementation of the Amdocs software system andother initiatives.     During the six months ended June 30, 2005, oursubsidiaries, Dex Media East and Dex Media West, collectivelymade required and optional repayments in an aggregate principalamount of $318.6 million under their respective term loansusing the excess cash flow generated from operations andproceeds from borrowings on revolving credit facilities. As aresult of these repayments and the fixed interest rate swapsthat were entered into in 2002 and 2004, our consolidated debtportfolio, consisting of the amounts borrowed under the creditfacilities, senior notes, senior subordinated notes and discountnotes, was comprised of 67.5% fixed rate debt and 32.5% floatingrate debt as of June 30, 2005. Repayments under the creditfacilities in the future will cause the percentage of fixed ratedebt in the Dex Media East and Dex Media West debt portfolio toincrease. As fixed rate debt as a percentage of total debtincreases, the effective interest rate of our debt portfoliowill rise. Due to the current low interest rate environment, thefloating rate debt under the credit facilities havesignificantly lower interest rates than the fixed interest ratesof our senior notes and senior subordinated notes. If short-terminterest rates rise, the effective interest rate of theportfolio will also increase.     Tranche A and Tranche B of Dex Media East’s termloans have required quarterly principal repayments that werescheduled to begin September 30, 2003 and continue untilthe maturity dates of the facilities. Any optional repayment isapplied to reduce the subsequent scheduled repayments of eachtranche, in direct order of the first four scheduled repayments,and thereafter, ratably. As a result of the repayments madethrough June 30, 2005, the next mandatory repayment is dueon September 30, 2005 in an amount of $22.6 million.     Tranche A and Tranche B of Dex Media West’s termloans have required quarterly principal repayments that werescheduled to begin June 30, 2004 and continue until thematurity dates of the facilities. Any optional repayment isapplied to reduce the subsequent scheduled repayments of eachtranche, in direct order of the first four scheduled repayments,and thereafter, ratably. As a result of the repayments madethrough June 30, 2005, the next mandatory repayment is dueon September 30, 2005 in an amount of $23.2 million.     We have no operations of our own and we derive all of our cashflow and liquidity from our subsidiaries. We depend on theearnings and the distribution of funds from Dex Media East andDex Media West to meet our liquidity needs. Although oursubsidiaries are not obligated to make funds available to us forany purpose, Dex Media East and Dex Media West are expected tomake cash distributions of up to $8.4 million and$11.6 million, respectively, to us semi-annually to serviceour cash interest obligations on the 8% notes due 2013,subject to certain covenant requirements under the subsidiarynote indentures and the credit agreements. Such requirements aredescribed in our Annual Report on Form 10-K for the yearended December 31, 2004.     Although the terms of our subsidiaries’ credit facilitiespermitted Dex Media to issue the outstanding discount notes,such credit facilities do not specifically permit the payment ofdividends to Dex Media to pay cash interest on the outstandingdiscount notes and when cash interest becomes payable on suchnotes on May 15, 2009. Accordingly, any dividend to DexMedia for payment of cash interest on the outstanding discountnotes must be permitted to be paid pursuant to the generaldividend basket of each of our subsidiaries’ creditfacilities, which restricts Dex Media East (including itsimmediate parent and its subsidiaries) and Dex Media West(including its immediate parent and its subsidiaries), asapplicable, from paying dividends to Dex Media in excess of$5.0 million and $12.5 million per year, respectively,if Dex Media
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East (including its immediate parent and its subsidiaries) orDex Media West (including its immediate parent and itssubsidiaries), as applicable, does not comply with a coverageratio and a leverage ratio test; furthermore, assuming theapplicable parties comply with such tests, any such dividendwould be limited to a portion of excess cash flow (as defined inthe Dex Media East and Dex Media West credit facilities). If DexMedia East and Dex Media West are not able to pay dividends toDex Media under the general dividend basket of their creditfacilities in amounts sufficient to meet our obligations to paycash interest on the outstanding discount notes once cashpayments become due, we will need to refinance or amend oursubsidiaries’ credit facilities before such date. We cannotassure you that we will be able to refinance or amend oursubsidiaries’ credit facilities on commercially reasonableterms or at all.     Furthermore, our subsidiaries are permitted under the terms oftheir respective credit facilities, the indentures governing thesubsidiaries’ notes and the terms of their otherindebtedness to enter into other agreements or incur additionalindebtedness that may severely restrict or prohibit the makingof distributions, the payment of dividends or the making ofloans by such subsidiaries to us. In addition to thesecontractual restrictions and prohibitions, the laws of oursubsidiaries’ jurisdiction of organization may restrict orprohibit the making of distributions, the payment of dividendsor the making of loans by our subsidiaries to us. We cannotassure you that the agreements governing the current and futureindebtedness of our subsidiaries, other agreements of oursubsidiaries and statutory restrictions will permit oursubsidiaries to provide us with sufficient dividends,distributions or loans to fund scheduled interest and principalpayments on our indebtedness when due.     In addition to the limitations on distributions, dividends orloans to us by our subsidiaries mentioned above, oursubsidiaries’ credit facilities, the indentures governingour notes, the terms of our other indebtedness or any futureagreements may prohibit or limit our ability to, among otherthings, dispose of assets (including the stock of oursubsidiaries), issue additional indebtedness, or issue equitysecurities, which transactions could provide funds to makepayments on our notes if not prohibited or limited. In addition,even if such transactions were permitted, use of the proceedstherefrom for payment on our notes may be prohibited or limitedby agreements governing our current and future indebtedness. Theindentures governing our notes will not significantly limit oursubsidiaries from entering into agreements restricting suchdistributions, dividends or loans. We cannot assure you that theagreements governing our current and future indebtedness orother agreements will permit us to engage in transactions tofund scheduled interest and principal payments on ourindebtedness when due, if such transactions are necessary.     In addition, we cannot assure you that our business willgenerate sufficient cash flow from operations or that futureborrowings will be available to our subsidiaries under oursubsidiaries’ revolving credit facilities in an amountsufficient to enable us to pay our indebtedness or to fund ourother liquidity needs. Further, if we consummate an acquisition,our debt service requirements could increase. We may need torefinance all or a portion of our indebtedness on or beforematurity. We cannot assure you that we will be able to refinanceany of our indebtedness on commercially reasonable terms or atall.**Material Trends, Known Facts and Uncertainties*****Directory Services Revenue***     For the three months and six months ended June 30, 2005,approximately 97% and 98%, respectively, of our revenue camefrom directory services revenue, our bundled advertisingsolution that includes print, Internet-based directories andCD-ROMs. Our ability to increase directory services revenue isdependent on our ability to attract and retain advertisers orincrease revenue per advertiser account through a change inadvertising volume and/or rates.     While we do not believe there has been any material change inour advertiser account renewal rate, we were unable to reportour renewal rate in 2004 or to date in 2005 due to ourconversion to the Amdocs software system. The Amdocs conversionhas resulted in certain of our customer account categories beingreclassified, which may result in a change in how we report ourtotal number of customer accounts, thereby having an effect onour reported renewal rate. Further, we believe that our revenueper advertiser account has likely
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increased primarily as a result of the inherent value in ourproducts resulting in a continued ability to increase prices.***Segmented Pricing***     We are continuing to implement a more sophisticated segmentedpricing strategy, which prices advertisements by headingcategory. We believe that implementing this strategy willimprove advertiser retention ultimately improving revenue growthas we better align our pricing with our customers’perception of value.***Competition***     The U.S. directory advertising industry continues to bevery competitive. There are a number of independent directorypublishers and publishers affiliated with local exchangecarriers with which we compete in one or more of the Dex States.On average, there are two to three competing directories(including Dex Media) in each of our local markets. Competitionfrom other yellow pages publishers affects our ability toattract and retain advertisers and to increase advertising rates.     Through our Internet-based directory, DexOnline.com, we competewith these publishers and with other Internet sites providingsearch and classified directory information. In addition, wecompete against other forms of media, including newspapers,radio, television, the Internet, billboards and direct mail forbusiness advertising.***Internet***     We believe that our Internet-based directory, DexOnline.com, isan extension of our printed directories. We believe that anydecline in the usage of our printed directories could be offsetby an increase in usage of our Internet-based directory,DexOnline.com, which was the number one rated Internet YellowPages local search site during 2004 and in the first quarter of2005 in the Dex States, as reported by comScore. Additionally,the full roll-out of our Search Engine Marketing(“SEM”) product, Dex WebClickstm,will serve to provide our advertisers with a simplified solutionto their participation in the complex area of auction-basedinternet advertising and could provide us with incrementalrevenue growth. However, if we are unsuccessful in monetizingincreased usage from our Internet-based directory or are notable to effectively deliver our SEM product, our business couldbe negatively impacted.***Paper Prices***     Paper is our principal raw material. Substantially all of thepaper that we use (other than for covers) is supplied by twocompanies: Nippon Paper Industries USA, Co., Ltd. and NorskeSkog Canada (USA), Inc. Prices under the two agreements arenegotiated each year based on prevailing market rates, whichhave been declining consistent with general U.S. markettrends for directory paper over the last three years. Afterrecent favorable trends, beginning in the second half of 2004,pulp prices have been increasing at rates higher than thegeneral inflation rate. This has resulted in upward pressure onour paper prices. The effect of such upward price pressure,however, will be moderated due to the fact that prices underboth our paper agreements are subject to certain priceescalation limits.**Critical Accounting Policies and Estimates**     We have identified the policies below as critical to ourbusiness operations and the understanding of our results ofoperations. The effect of and any associated risks related tosuch policies on our business operations are discussedthroughout this Item 2.***Revenue Recognition***     The sale of advertising in printed directories published by usis our primary source of revenue. We recognize revenue ratablyover the life of each directory using the deferral andamortization method of
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accounting, with revenue recognition commencing in the month ofdelivery. Our directories are initially published with anestimated 12-month useful life, although we may revise theestimate of a directory’s publication date subsequent toits publication in order to better manage customer andproduction workflow as it relates to other directories publishedin the same period. Because we generally have the right to billand collect revenue related to the extension of directorypublishing dates, a revision in the estimated life as a resultof a change in publication date of a given directory should nothave a significant impact on our results of operations or cashflows.***Cost of Revenue***     Direct costs related to the sales, production and distributionof directories are recognized ratably over the life of eachdirectory under the deferral and amortization method ofaccounting, with cost recognition commencing in the month ofdelivery. Direct costs include sales commissions, graphics costsand the costs of printing, publishing and distribution.Revisions in the estimated useful lives of directories aftertheir initial publication may cause the acceleration ordeceleration of cost recognition related to the amortization ofdeferred directory costs. Although we cannot predict the extentsuch changes could have on future cost recognition, the movementof book publishing dates has historically had a minimal impacton cost recognition between periods.***Allowance for Doubtful Accounts and Bad Debt    Expense***     We periodically make judgments regarding the collectibility ofoutstanding receivables and provide appropriate allowances whencollectibility becomes doubtful. Although we believe ourallowance for doubtful accounts adequately reflects that portionof our receivables that are uncollectible, we may revise ourestimates in future periods based upon new circumstances andsuch revisions may be material.***Income Taxes***     It is our determination that it is more likely than not that wewill utilize our deferred tax assets before the expiration ofthe net operating loss carryforward periods. This determinationis based upon our estimation of projected book and taxableincome over the next several years. To the extent ourprojections vary significantly from actual results, a portion ofour deferred tax benefits may not be realizable, resulting in acharge to income tax expense.**New Accounting Standards**     On March 29, 2005, the SEC released SAB No. 107,which provides an interpretation of SFAS No. 123R andits interaction with certain SEC rules and regulations andprovides the SEC’s views regarding the valuation ofshare-based payment arrangements for public companies. SABNo. 107 provides guidance with regard to share-basedpayment transactions with non-employees, the transition fromnonpublic to public entity status, valuation methods (includingassumptions such as expected volatility and expected term), theaccounting for certain redeemable financial instruments issuedunder share-based payment arrangements, the classification ofcompensation expense, non-GAAP financial measures, first-timeadoption of SFAS No. 123R, the modification ofemployee share options prior to adoptions ofSFAS No. 123R and disclosures in Management’sDiscussion and Analysis subsequent to the adoption ofSFAS No. 123R. Based upon the number of stock optionsoutstanding as of June 30, 2005, the Company has determinedthat the adoption of SAB No. 107 will not have a materialimpact on its results of operations.     On April 14, 2005, the SEC announced the adoption of a newrule that amends the compliance dates forSFAS No. 123R. Under SFAS No. 123R,registrants would have been required to implement the standardas of the beginning of the first interim or annual period thatbegins after June 15, 2005. The SEC’s new rulerequires companies to implement SFAS No. 123R at thebeginning of their first fiscal year beginning on or afterJune 15, 2005, instead of the first reporting period thatbegins after June 15, 2005. As a result, the financialstatements of the Company must comply withSFAS No. 123R beginning with the interim financial
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statements for the first quarter of 2006. The SEC’s newrule does not change the accounting required bySFAS No. 123R; it changes only the dates forcompliance with the standard.     During May 2005, the FASB issued SFAS No. 154. Thisstatement applies to all voluntary changes in accountingprinciple and requires retrospective application of the newaccounting principle to prior accounting periods as if thatprinciple had always been used. In addition, this statementrequires that a change in depreciation method be accounted foras a change in estimate. The requirements are effective foraccounting changes made in fiscal years beginning afterDecember 15, 2005. The Company does not expect the adoptionof SFAS No. 154 to have a material impact on theCompany’s financial statements.**Cautionary Note Regarding Forward-Looking Statements**     This quarterly report contains “forward-lookingstatements” within the meaning of Section 27A of theSecurities Act of 1933, as amended, and Section 21E of theSecurities Exchange Act of 1934, as amended (the “ExchangeAct”). These statements relate to future events or ourfuture financial performance, and involve known and unknownrisks, uncertainties and other factors that may cause our actualresults, levels of activity, performance or achievements to bematerially different from any future results, levels ofactivity, performance or achievements expressed or implied bythese forward-looking statements. Such risks and uncertaintiesare described in detail in our Annual Report on Form 10-Kfor the year ended December 31, 2004 and include, but arenot limited to: (i) our substantial indebtedness, whichcould impair our ability to operate our business; (ii) theterms of our subsidiaries’ credit facilities andindentures, which may restrict our access to cash flow and ourability to pursue our business strategies; (iii) increasedcompetitive pressure from other directory publishers or mediacompanies; (iv) the loss of any of our key agreements withQwest; (v) declining usage of printed yellow pagedirectories; (vi) our inability to renew customeradvertising contracts; (vii) risks related to the start-upof new print or Internet directories and media services;(viii) our practice of extending credit to small andmedium-sized businesses; (ix) our dependence on third-partyproviders of printing, distribution and delivery services;(x) the impact of fluctuations in the price or availabilityof paper; (xi) our failure to successfully convert to theAmdocs software system; (xii) the impact of turnover amongsales representatives or the loss of key personnel;(xiii) the occurrence of work stoppages; and(xiv) general economic, market or business conditions. Insome cases, you can identify forward-looking statements byterminology such as “may,” “will,”“should,” “expects,” “intends,”“plans,” “anticipates,”“believes,” “estimates,”“predicts,” “potential,”“continue,” “assumption” or the negative ofthese terms or other comparable terminology. These statementsare only predictions.     In particular, forward-looking statements include, but are notlimited to, statements made under the heading“Management’s Discussion and Analysis of FinancialCondition and Results of Operations” relating to ourstrategies, revenue and cost trends, gross margins, cost savingsbenefits, industry and competitive forces, our segmented pricingstrategy, usage of DexOnline.com and Dex Web Clicks, our debtservice capabilities, our ability to meet our future liquidityneeds and the impact on the Company of recent accountingpronouncements.     Although we believe that the expectations reflected in theforward-looking statements are reasonable, we cannot guaranteefuture results, levels of activity, performance or achievements.These forward-looking statements are made as of the date of thisquarterly report and, except as required under the federalsecurities laws and the rules and regulations of the SEC, weassume no obligation to update or revise them or to providereasons why actual results may differ.     We do not undertake any responsibility to release publicly anyrevisions to these forward-looking statements to take intoaccount events or circumstances that occur after the date ofthis quarterly report. Additionally, we do not undertake anyresponsibility to update you on the occurrence of anyunanticipated events which may cause actual results to differfrom those expressed or implied by the forward-lookingstatements contained in this quarterly report.
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**Item 3.*****Quantitative and Qualitative Disclosures About Market    Risk*****Long-Term Debt**     As of June 30, 2005, we had a total outstanding debtbalance of $5,528.8 million comprised of:(i) $2,221.1 million of variable rate debt drawn underour subsidiaries’ credit facilities;(ii) $1,135.0 million of unsecured senior notes and$1,103.1 million of senior unsecured subordinated notesissued by our subsidiaries; and (iii) $500.0 millionof 8% notes due 2013 and $569.6 million of 9% discountnotes due 2013 issued directly by us. Dex Media East’scredit facilities were made up of $364.4 million ofTranche A term loans maturing in November 2008,$451.5 million of Tranche B term loans maturing in May2009 and $53.0 million borrowing on the revolving loan. DexMedia West’s credit facilities were made up of$391.8 million of Tranche A term loans maturing inSeptember 2009, $916.9 million of Tranche B term loansmaturing in March 2010 and $43.5 million borrowings onrevolving loan. Due to the variable rate characteristics of thecredit facilities, the carrying amounts of the Tranche Aterm loans, Tranche B term loans and revolving loansapproximated fair values.     Dex Media East’s $450.0 million of unsecured seniornotes bears a fixed interest rate of 9.875% and matures inNovember 2009. Dex Media West’s $385.0 million ofunsecured senior notes bears a fixed interest rate of 8.5% andmatures in August 2010. Dex Media West’s$300.0 million of unsecured senior notes bears a fixedinterest rate of 5.875% and matures in November 2011. Due tochanges in interest rates and market conditions since theissuance of these fixed rate notes, the fair values of Dex MediaEast’s and Dex Media West’s senior notes were$496.1 million, $419.7 million and$296.3 million, respectively, as of June 30, 2005.     Dex Media East’s $341.3 million of unsecured seniorsubordinated notes bears a fixed interest rate of 12.125% andmatures in November 2012. Dex Media West’s$761.8 million of unsecured senior subordinated notes bearsa fixed interest rate of 9.875% and matures in August 2013. Dueto changes in interest rates and market conditions since theissuance of these fixed rate notes, the fair values of Dex MediaEast’s and Dex Media West’s senior subordinated noteswere $408.6 million and $868.5 million, respectively,as of June 30, 2005.     The $500.0 million cash pay notes and the$569.6 million discount notes issued directly by us allmature in November 2013. The cash pay notes bear a fixedinterest rate of 8.0% while the discount notes bear a fixedinterest rate of 9%. Interest will accrue on the discount notesin the form of an increase in the accreted value between thedate of the original issuance and November 15, 2008. Due tochanges in interest rates and market conditions since theissuance of these fixed rate notes, the fair values of the cashpay and the discount notes were $531.3 million and$603.8 million, respectively, as of June 30, 2005.**Interest Rate Risk**     As of June 30, 2005, we had $96.5 million of debtoutstanding under our subsidiaries’ revolving loans (withan approximate additional $1 million committed under astand-by letter of credit), $756.2 million of debtoutstanding under our subsidiaries’ Tranche A termloans and $1,368.4 million of debt outstanding under oursubsidiaries’ Tranche B term loans. Oursubsidiaries’ revolving loans and term loans are subject tovariable rates. Accordingly, our earnings and cash flow areaffected by changes in interest rates. We have hedged a portionof our interest rate risk. The Dex Media East interest rate swapagreements, which became effective May 8, 2003, have acurrent aggregate notional amount of $125.0 million andapplicable fixed rates ranging from 3.638% to 4.085%. They willexpire in November 2007 and May 2008. The Dex Media West fixedinterest rate swap agreements, which were entered into inOctober 2004, have an aggregate notional amount of$300.0 million, with applicable preset monthly fixed ratesranging from 1.901% to 3.61% and expire in October 2006. The DexMedia West floating interest rate swap agreements, which wereentered into in November 2004, had an aggregate notional amountof $300.0 million, with a LIBOR that resets semiannually inMay and November, plus applicable margins ranging from 1.4975%to 1.57%, and were terminated in May and June 2005. The notionalamount of Dex Media East’s interest rate cap totaled$200.0 million, had a cap interest rate of 4.75% andexpired in May 2005. Assuming we had incurred this level ofborrowings and interest rate swap agreements on January 1,2005 with interest payable at variable rates and assuming a onepercentage point increase in the average interest rate underthese borrowings and interest rate swap agreements, our
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interest expense for the three months and six months endedJune 30, 2005 would have increased $0.7 million and$5.2 million. The offsetting decrease related to thechanges in the fair value of the swap agreements would have been$3.9 million and $3.9 million for the three months andsix months ended June 30, 2005, respectively. We do notintend to use any financial derivative instruments forspeculative purposes.**Item 4.*****Controls and Procedures***     Dex Media maintains disclosure controls and procedures (asdefined in Rule 13a-15(e) promulgated under the ExchangeAct) that are designed to ensure that information that would berequired to be disclosed in Exchange Act reports is recorded,processed, summarized and reported within the time periodsspecified in the SEC’s rules and forms, and that suchinformation is accumulated and communicated to Dex Media’smanagement, including its Chief Executive Officer and ChiefFinancial Officer, as appropriate, to allow timely decisionsregarding required disclosure.     As of the end of the period covered by this report, Dex Mediacarried out an evaluation, under the supervision and with theparticipation of Dex Media’s management, including itsChief Executive Officer and Chief Financial Officer, of theeffectiveness of the design and operation of Dex Media’sdisclosure controls and procedures. Based on the foregoing, DexMedia’s Chief Executive Officer and Chief Financial Officerconcluded that Dex Media’s disclosure controls andprocedures were effective as of the end of the period covered bythis report.     During the three months ended June 30, 2005, there was nochange in Dex Media’s internal controls or in other factorsthat has materially affected, or is reasonably likely tomaterially affect, Dex Media’s internal controls overfinancial reporting.**PART II.****OTHER INFORMATION****Item 1.*****Legal Proceedings***     From time to time, we are a party to litigation matters arisingin connection with the normal course of our business. In many ofthese matters, plaintiffs allege that they have suffered damagesfrom errors or omissions or improper listings contained indirectories published by us. Although we have not had notice ofany such claims that we believe to be material, any pending orfuture claim could have a material adverse effect on ourbusiness.     In addition, we are exposed to defamation and breach of privacyclaims arising from our publication of directories and ourmethods of collecting, processing and using personal data. Thesubjects of our data and users of data that we collect andpublish could have claims against us if such data were found tobe inaccurate, or if personal data stored by us were improperlyaccessed and disseminated by unauthorized persons. Although todate we have not had notice of any material claims relating todefamation or breach of privacy claims, we may be party tolitigation matters that could have a material adverse effect onour business.**Item 2.*****Unregistered Sales of Equity Securities and Use of    Proceeds***     None.**Item 3.*****Defaults Upon Senior Securities***     None.**Item 4.*****Submission of Matters to a Vote of Security Holders***     We held our 2005 Annual Meeting of Stockholders on May 18,2005. At the 2005 Annual Meeting, George A. Burnett, R. GlennHubbard and Russell T. Lewis were each elected as a Class Idirector for a three-year term and until their successors areelected and qualified. James A. Attwood, Jr., Anthony J. de
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Nicola, John Almeida, Jr., William E. Kennard, Bruce E.Rosenblum and Sanjay Swani continued to serve as directors afterthe 2005 Annual Meeting. In addition, on May 19, 2005,Michael P. Connors was appointed to serve as a Class IIdirector.     The record date for the 2005 Annual Meeting was April 4,2005. On that date, there were 150,381,098 shares of theCompany’s common stock outstanding and entitled to vote atthe 2005 Annual Meeting. A total of 135,048,034 shares ofthe Company’s common stock (representing 89.8% of theshares entitled to vote) were present in person or by proxy atthe 2005 Annual Meeting. At the 2005 Annual Meeting,stockholders present in person or by proxy voted on thefollowing matters:          1. Election of three Class I directors to hold office    for a three-year term and until their successors are elected and    qualified.           **Votes For** **Votes Withheld**         George A. Burnett  122,114,184   12,933,850     R. Glenn Hubbard  132,193,024   2,855,010     Russell T. Lewis  134,014,514   1,033,520           2. Ratification of the selection by the Audit Committee of    the Board of Directors of KPMG LLP as the Company’s    independent registered public accounting firm for the year    ending December 31, 2005.           **Votes For** **Votes Against** **Abstentions**      134,988,095   48,023   11,915 **Item 5.*****Other Information***     On June 16, 2005, Dex Media West amended its CreditAgreement, as amended and restated, to, among other things:(i) permit Dex Media West to engage in accounts receivablesecuritization transactions not exceeding $232.0 million inthe aggregate at any time; (ii) increase the restrictedpayment basket for cash dividends by Dex Media West from$40.6 million to $58.0 million annually; and(iii) reduce the applicable margins for Tranche A termloans and revolving loans made under such Credit Agreement.     On June 16, 2005, Dex Media East amended its CreditAgreement, as amended and restated, to, among other things(i) permit Dex Media East to engage in accounts receivablesecuritization transactions not exceeding $168.0 million inthe aggregate at any time; (ii) increase the restrictedpayment basket for cash dividends by Dex Media East from$29.4 million to $42.0 million annually; and(iii) reduce the applicable margins for Tranche A termloans and revolving loans made under such Credit Agreement.**Item 6.*****Exhibits***      Exhibit 10.1     Dex Media, Inc. Deferred Compensation Plan (incorporated by    reference to Dex Media, Inc.’s Current Report on Form 8-K    dated May 17, 2005).  Exhibit 10.2     Dex Media, Inc. Corporate Aircraft Policy (incorporated by    reference to Dex Media, Inc.’s Current Report on Form 8-K    dated May 17, 2005).  Exhibit 10.3     Dex Media, Inc. Financial Planning Benefit (incorporated by    reference to Dex Media, Inc.’s Current Report on Form 8-K    dated May 17, 2005).  Exhibit 10.4     Dex Media, Inc. 2005 Bonus Plan Targets (incorporated by    reference to Dex Media, Inc.’s current Report on Form 8-K    dated May 17, 2005).  Exhibit 10.5     Fourth Amendment, dated as of June 16, 2005, to the Credit    Agreement dated as of September 9, 2003, as amended and    restated as of July 27, 2004, by and among    Dex Media, Inc., Dex Media West, Inc., Dex Media West    LLC, JPMorgan Chase Bank, N.A., as administrative agent,    J.P. Morgan Securities Inc. and Banc of America    Securities LLC, as joint bookrunners and co-lead arrangers,    and Bank of America, N.A., Wachovia Bank, National Association,    Lehman Commercial Paper Inc. and Deutsche Bank Trust Company    Americas, as co-syndication agents.
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      Exhibit 10.6     Fifth Amendment, dated as of June 16, 2005, to the Credit    Agreement, dated as of November 8, 2002, as amended and    restated as of July 27, 2004, by and among Dex Media, Inc.,    Dex Media East, Inc., Dex Media East LLC, JPMorgan Chase Bank,    as administrative agent, J.P. Morgan Securities Inc. and    Banc of America Securities LLC, as joint bookrunners and co-lead    arrangers, and Bank of America, N.A., Wachovia Bank, National    Association, Lehman Commercial Paper Inc. and Deutsche Bank    Trust company Americas, as co-syndication agents.  Exhibit 31.1     Certification of Chief Executive Officer of Dex Media, Inc.    pursuant to Section 302 of the Sarbanes Oxley Act of 2002.  Exhibit 31.2     Certification of Chief Financial Officer of Dex Media, Inc.    pursuant to Section 302 of the Sarbanes Oxley Act of 2002.  Exhibit 32.1*     Certification of Chief Executive Officer and Chief Financial    Officer of Dex Media, Inc. pursuant to Section 906 of the    Sarbanes Oxley Act of 2002. *     Exhibit 32.1 is being furnished solely to accompany this    report pursuant to U.S.C. § 1350, and is not being    filed for purposes of Section 18 of the Securities Exchange    Act of 1934, as amended, and is not to be incorporated by    reference into any of our filings, whether made before or after    the date hereof, regardless of any general incorporation    language in such filing.
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**SIGNATURE**     Pursuant to the requirements of the Securities Exchange Act of1934, the registrant has duly caused this report to be signed bythe undersigned, thereunto duly authorized.     DEX MEDIA, INC. By:     /s/ ROBERT M. NEUMEISTER, JR.       Robert M. Neumeister, Jr. *Executive Vice President and Chief Financial Officer* *(Principal Financial Officer and Duly Authorized Officer)*Date: August 4, 2005
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**EXHIBIT INDEX**      Exhibit 10.1     Dex Media, Inc. Deferred Compensation Plan (incorporated by    reference to Dex Media, Inc.’s Current Report on Form 8-K    dated May 17, 2005).  Exhibit 10.2     Dex Media, Inc. Corporate Aircraft Policy (incorporated by    reference to Dex Media, Inc.’s Current Report on Form 8-K    dated May 17, 2005).  Exhibit 10.3     Dex Media, Inc. Financial Planning Benefit (incorporated by    reference to Dex Media, Inc.’s Current Report on Form 8-K    dated May 17, 2005).  Exhibit 10.4     Dex Media, Inc. 2005 Bonus Plan Targets (incorporated by    reference to Dex Media, Inc.’s current Report on Form 8-K    dated May 17, 2005).  Exhibit 10.5     Fourth Amendment, dated as of June 16, 2005, to the Credit    Agreement dated as of September 9, 2003, as amended and    restated as of July 27, 2004, by and among    Dex Media, Inc., Dex Media West, Inc., Dex Media West    LLC, JPMorgan Chase Bank, N.A., as administrative agent,    J.P. Morgan Securities Inc. and Banc of America    Securities LLC, as joint bookrunners and co-lead arrangers,    and Bank of America, N.A., Wachovia Bank, National Association,    Lehman Commercial Paper Inc. and Deutsche Bank Trust Company    Americas, as co-syndication agents.  Exhibit 10.6     Fifth Amendment, dated as of June 16, 2005, to the Credit    Agreement, dated as of November 8, 2002, as amended and    restated as of July 27, 2004, by and among Dex Media, Inc.,    Dex Media East, Inc., Dex Media East LLC, JPMorgan Chase Bank,    as administrative agent, J.P. Morgan Securities Inc. and    Banc of America Securities LLC, as joint bookrunners and co-lead    arrangers, and Bank of America, N.A., Wachovia Bank, National    Association, Lehman Commercial Paper Inc. and Deutsche Bank    Trust company Americas, as co-syndication agents.  Exhibit 31.1     Certification of Chief Executive Officer of Dex Media, Inc.    pursuant to Section 302 of the Sarbanes Oxley Act of 2002.  Exhibit 31.2     Certification of Chief Financial Officer of Dex Media, Inc.    pursuant to Section 302 of the Sarbanes Oxley Act of 2002.  Exhibit 32.1*     Certification of Chief Executive Officer and Chief Financial    Officer of Dex Media, Inc. pursuant to Section 906 of the    Sarbanes Oxley Act of 2002. *     Exhibit 32.1 is being furnished solely to accompany this    report pursuant to U.S.C. § 1350, and is not being    filed for purposes of Section 18 of the Securities Exchange    Act of 1934, as amended, and is not to be incorporated by    reference into any of our filings, whether made before or after    the date hereof, regardless of any general incorporation    language in such filing.
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