##### Table of Contents









SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549




---

FORM 10-Q

(Mark One)


|  |  |                                                                                 
|- |  | --------------------------------------------------------------------------------
|x |  | QUARTERLY REPORT PURSUANT TO
    SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE 
|  |  | ACT OF 1934                                                                     
|  |  | FOR THE QUARTERLY PERIOD ENDED JUNE 30,
    2002                                
|  |  | OR                                                                              
|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 1-8607




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BELLSOUTH CORPORATION

(Exact name of registrant as specified in its
charter)


|                                                                                               |  |                                                      
|---------------------------------------------------------------------------------------------- |  | -----------------------------------------------------
|Georgia(State of Incorporation)                                                                |  | 58-1533433(I.R.S. Employer
    Identification Number)
|                                                                                              
|1155 Peachtree Street, N. E.,
    Atlanta, Georgia(Address of principal executive
    offices) |  | 30309-3610(Zip Code)                                 

Registrants telephone number 404-249-2000




---

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

At July 26, 2002, 1,871,705,594 common
shares were outstanding.



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---

TABLE OF CONTENTS



|                                                                                      |                                                                          |                                                  |  |  |  |  |  | 
|------------------------------------------------------------------------------------- | ------------------------------------------------------------------------ | ------------------------------------------------ |  |  |  |  |  | 
|PART I -- Financial Information                                                      
|Item 1. Financial Statements                                                         
|                                                                                      | CONSOLIDATED STATEMENTS OF INCOME                                       
|                                                                                      | CONSOLIDATED BALANCE SHEETS                                             
|                                                                                      | CONSOLIDATED STATEMENTS OF CASH FLOWS                                   
|                                                                                      | CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY AND COMPREHENSIVE INCOME
|                                                                                      | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                              
|MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                                                                                      |                                                                          | Consolidated Results of Operations              
|                                                                                      |                                                                          | Overview of Consolidated Results of Operations  
|                                                                                      |                                                                          | Results by Segment                              
|                                                                                      |                                                                          | Communications Group                            
|                                                                                      |                                                                          | Domestic Wireless                               
|                                                                                      |                                                                          | Operating Environment and Trends of the Business
|                                                                                      | Item 3. Qualitative and Quantitative Disclosures About Market Risk      
|                                                                                      | Cautionary Language Concerning Forward-Looking Statements               
|PART II  Other Information                                                          
|SIGNATURE                                                                            
|EXHIBIT INDEX                                                                        
|EX-11 Computation of Earnings Per Common Share                                       
|EX-12 Computation of Ratio of Earnings                                               



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##### Table of Contents



TABLE OF CONTENTS

|        |  |                                                                                           |  |      |    | 
|------- |  | ----------------------------------------------------------------------------------------- |  | ---- | -- | 
|Item    |  |                                                                                           |  | Page
|        |  |                                                                                           |  |     
|PART I  |  |                                                                                           |  |     
|1.      |  | Financial Statements                                                                      |  |      | 3  | 
|        |  | Consolidated Statements of Income                                                         |  |      | 3  | 
|        |  | Consolidated Balance Sheets                                                               |  |      | 4  | 
|        |  | Consolidated Statements of Cash Flows                                                     |  |      | 5  | 
|        |  | Consolidated Statements of Shareholders
    Equity And Comprehensive Income              |  |      | 6  | 
|        |  | Notes to Consolidated Financial Statements                                                |  |      | 7  | 
|2.      |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations |  |      | 17 | 
|3.      |  | Qualitative and Quantitative Disclosures About
    Market Risk                            |  |      | 29 | 
|PART II |  |                                                                                           |  |     
|1.      |  | Legal Proceedings                                                                         |  |      | 31 | 
|4.      |  | Submission of Matters to a Vote of Security
    Holders                                   |  |      | 31 | 
|6.      |  | Exhibits and Reports on Form 8-K                                                          |  |      | 31 | 

2



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##### Table of Contents








PART I  Financial
Information




Item 1. Financial
Statements

BELLSOUTH CORPORATION






CONSOLIDATED STATEMENTS OF INCOME


| |            
| | -----------
| | (UNAUDITED)

(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)


|                                                                                       |                                     |                                                                       |                          |                |       |       |       |       |       |       |       |       |       |        |        |       |       |        | 
|-------------------------------------------------------------------------------------- | ----------------------------------- | --------------------------------------------------------------------- | ------------------------ | -------------- | ----- | ----- | ----- | ----- | ----- | ----- | ----- | ----- | ----- | ------ | ------ | ----- | ----- | ------ | 
|                                                                                       |                                     |                                                                       |                          |               
|                                                                                       |                                     | For the Three                                                         |                          | For the Six   
|                                                                                       |                                     | Months                                                                |                          | Months        
|                                                                                       |                                     | Ended June 30,                                                        |                          | Ended June 30,
|                                                                                       |                                     |                                                                       |                          |               
|                                                                                       |                                     | 2001                                                                  |                          | 2002           |       | 2001  |       | 2002 
|                                                                                       |                                     |                                                                       |                          |                |       |       |       |      
|Operating Revenues:                                                                    |                                     |                                                                       |                          |                |       |       |       |       |       |       |       |       |       |        |        |      
|                                                                                       | Communications group                |                                                                       | $                        | 4,764          |       |       | $     | 4,631 |       |       | $     | 9,429 |       |        | $      | 9,276 |      
|                                                                                       | Latin America                       |                                                                       |                          | 744            |       |       |       | 597   |       |       |       | 1,517 |       |        |        | 1,253 |      
|                                                                                       | Domestic advertising and publishing |                                                                       |                          | 436            |       |       |       | 538   |       |       |       | 870   |       |        |        | 754   |      
|                                                                                       | All other                           |                                                                       |                          | 41             |       |       |       | 14    |       |       |       | 88    |       |        |        | 31    |      
|                                                                                       |                                     |                                                                       |                          |                |       |       |       |       |       |       |       |       |       |        |        |      
|                                                                                       |                                     |                                                                       | Total Operating Revenues |                |       | 5,985 |       |       |       | 5,780 |       |       |       | 11,904 |        |       |       | 11,314 | 
|                                                                                       |                                     |                                                                       |                          |                |       |       |       |       |       |       |       |       |       |        |        |      
|Operating Expenses:                                                                    |                                     |                                                                       |                          |                |       |       |       |       |       |       |       |       |       |        |        |      
|                                                                                       | Operational and support expenses    |                                                                       |                          | 3,232          |       |       |       | 3,008 |       |       |       | 6,393 |       |        |        | 5,973 |      
|                                                                                       | Depreciation and amortization       |                                                                       |                          | 1,203          |       |       |       | 1,170 |       |       |       | 2,360 |       |        |        | 2,331 |      
|                                                                                       | Provision for restructuring         |                                                                       |                          |               |       |       |       | 357   |       |       |       |      |       |        |        | 357   |      
|                                                                                       |                                     |                                                                       |                          |                |       |       |       |       |       |       |       |       |       |        |        |      
|                                                                                       |                                     |                                                                       | Total Operating Expenses |                |       | 4,435 |       |       |       | 4,535 |       |       |       | 8,753  |        |       |       | 8,661  | 
|                                                                                       |                                     |                                                                       |                          |                |       |       |       |       |       |       |       |       |       |        |        |      
|Operating income                                                                       |                                     |                                                                       | 1,550                    |                |       |       | 1,245 |       |       |       | 3,151 |       |       |        | 2,653  |      
|Interest expense                                                                       |                                     |                                                                       | 334                      |                |       |       | 301   |       |       |       | 694   |       |       |        | 605    |      
|Gain (loss) on sale of operations, net                                                 |                                     |                                                                       |                         |                |       |       |      |       |       |       |      |       |       |        | 1,318  |      
|Net earnings of equity affiliates                                                      |                                     |                                                                       | 108                      |                |       |       | 176   |       |       |       | 190   |       |       |        | 341    |      
|Foreign currency transaction losses                                                    |                                     |                                                                       | 36                       |                |       |       | 355   |       |       |       | 64    |       |       |        | 645    |      
|Other income (expense), net                                                            |                                     |                                                                       | 116                      |                |       |       | (61   | )     |       |       | 228   |       |       |        | (436   | )    
|                                                                                       |                                     |                                                                       |                          |                |       |       |       |       |       |       |       |       |       |        |        |      
|Income Before Income Taxes and Cumulative Effect
    of Change in Accounting Principle |                                     |                                                                       | 1,404                    |                |       |       | 704   |       |       |       | 2,811 |       |       |        | 2,626  |      
|Provision for Income Taxes                                                             |                                     |                                                                       | 524                      |                |       |       | 411   |       |       |       | 1,040 |       |       |        | 1,178  |      
|                                                                                       |                                     |                                                                       |                          |                |       |       |       |       |       |       |       |       |       |        |        |      
|Income Before Cumulative Effect of Change in
    Accounting Principle                  |                                     |                                                                       | 880                      |                |       |       | 293   |       |       |       | 1,771 |       |       |        | 1,448  |      
|                                                                                       |                                     |                                                                       |                          |                |       |       |       |       |       |       |       |       |       |        |        |      
|Cumulative Effect of Change in Accounting
    Principle, Net of Tax                    |                                     |                                                                       |                         |                |       |       |      |       |       |       |      |       |       |        | (1,285 | )    
|                                                                                       |                                     |                                                                       |                          |                |       |       |       |       |       |       |       |       |       |        |        |      
|                                                                                       |                                     |                                                                       | Net Income               |                | $     | 880   |       |       | $     | 293   |       |       | $     | 1,771  |        |       | $     | 163    | 
|                                                                                       |                                     |                                                                       |                          |                |       |       |       |       |       |       |       |       |       |        |        |      
|Weighted-Average Common Shares Outstanding:                                            |                                     |                                                                       |                          |                |       |       |       |       |       |       |       |       |       |        |        |      
|                                                                                       |                                     | Basic                                                                 |                          |                | 1,874 |       |       |       | 1,875 |       |       |       | 1,873 |        |        |       | 1,877 |       
|                                                                                       |                                     | Diluted                                                               |                          |                | 1,886 |       |       |       | 1,882 |       |       |       | 1,886 |        |        |       | 1,885 |       
|Dividends Declared Per Common Share                                                    |                                     | $                                                                     | 0.19                     |                |       | $     | 0.20  |       |       | $     | 0.38  |       |       | $      | 0.39   |      
|Basic Earnings Per Share:                                                              |                                     |                                                                       |                          |                |       |       |       |       |       |       |       |       |       |        |        |      
|                                                                                       |                                     | Income Before Cumulative Effect of Change in
    Accounting Principle |                          | $              | 0.47  |       |       | $     | 0.16  |       |       | $     | 0.95  |        |        | $     | 0.77  |       
|                                                                                       |                                     | Net Income                                                            |                          | $              | 0.47  |       |       | $     | 0.16  |       |       | $     | 0.95  |        |        | $     | 0.09  |       
|Diluted Earnings Per Share:                                                            |                                     |                                                                       |                          |                |       |       |       |       |       |       |       |       |       |        |        |      
|                                                                                       |                                     | Income Before Cumulative Effect of Change in
    Accounting Principle |                          | $              | 0.47  |       |       | $     | 0.16  |       |       | $     | 0.94  |        |        | $     | 0.77  |       
|                                                                                       |                                     | Net Income                                                            |                          | $              | 0.47  |       |       | $     | 0.16  |       |       | $     | 0.94  |        |        | $     | 0.09  |       

The accompanying notes are an integral part of
these consolidated financial statements.

3



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##### Table of Contents



BELLSOUTH CORPORATION






CONSOLIDATED BALANCE SHEETS


(IN
MILLIONS, EXCEPT PER SHARE AMOUNTS)


|                                         |                                                                                              |                              |                            |                                            |        |        |        |        |        |        |        | 
|---------------------------------------- | -------------------------------------------------------------------------------------------- | ---------------------------- | -------------------------- | ------------------------------------------ | ------ | ------ | ------ | ------ | ------ | ------ | ------ | 
|                                         |                                                                                              | December 31,                 |                            | June 30,                                  
|                                         |                                                                                              | 2001                         |                            | 2002                                      
|                                         |                                                                                              |                              |                            |                                           
|                                         |                                                                                              |                              |                            | (Unaudited)                               
|ASSETS                                   |                                                                                              |                              |                            |                                            |        |        |        |       
|Current assets:                          |                                                                                              |                              |                            |                                            |        |        |        |       
|                                         | Cash and cash equivalents                                                                    |                              | $                          | 592                                        |        |        | $      | 1,842  |       
|                                         | Accounts receivable, net of allowance for
    uncollectibles of $466 and $441                |                              |                            | 4,989                                      |        |        |        | 4,270  |       
|                                         | Material and supplies                                                                        |                              |                            | 382                                        |        |        |        | 328    |       
|                                         | Other current assets                                                                         |                              |                            | 892                                        |        |        |        | 852    |       
|                                         |                                                                                              |                              |                            |                                            |        |        |        |       
|                                         |                                                                                              | Total current assets         |                            |                                            | 6,855  |        |        |        | 7,292  |       
|                                         |                                                                                              |                              |                            |                                            |        |        |        |       
|Investments and advances                 |                                                                                              |                              | 10,620                     |                                            |        |        | 9,866  |       
|                                         |                                                                                              |                              |                            |                                            |        |        |        |       
|Property, plant and equipment            |                                                                                              |                              | 64,332                     |                                            |        |        | 64,630 |       
|Less: accumulated depreciation           |                                                                                              |                              | 39,389                     |                                            |        |        | 40,383 |       
|                                         |                                                                                              |                              |                            |                                            |        |        |        |       
|                                         | Property, plant and equipment, net                                                           |                              |                            | 24,943                                     |        |        |        | 24,247 |       
|                                         |                                                                                              |                              |                            |                                            |        |        |        |       
|Deferred charges and other assets        |                                                                                              |                              | 5,122                      |                                            |        |        | 5,566  |       
|Goodwill                                 |                                                                                              |                              | 1,639                      |                                            |        |        | 358    |       
|Other intangible assets, net             |                                                                                              |                              | 2,867                      |                                            |        |        | 2,685  |       
|                                         |                                                                                              |                              |                            |                                            |        |        |        |       
|                                         |                                                                                              |                              |                            | Total assets                               |        | $      | 52,046 |        |        | $      | 50,014 | 
|                                         |                                                                                              |                              |                            |                                            |        |        |        |       
|LIABILITIES AND SHAREHOLDERS
    EQUITY |                                                                                              |                              |                            |                                            |        |        |        |       
|Current liabilities:                     |                                                                                              |                              |                            |                                            |        |        |        |       
|                                         | Debt maturing within one year                                                                |                              | $                          | 5,111                                      |        |        | $      | 5,406  |       
|                                         | Accounts payable                                                                             |                              |                            | 1,656                                      |        |        |        | 1,313  |       
|                                         | Other current liabilities                                                                    |                              |                            | 3,301                                      |        |        |        | 3,593  |       
|                                         |                                                                                              |                              |                            |                                            |        |        |        |       
|                                         |                                                                                              | Total current liabilities    |                            |                                            | 10,068 |        |        |        | 10,312 |       
|                                         |                                                                                              |                              |                            |                                            |        |        |        |       
|Long-term debt                           |                                                                                              |                              | 15,014                     |                                            |        |        | 12,635 |       
|                                         |                                                                                              |                              |                            |                                            |        |        |        |       
|Noncurrent liabilities:                  |                                                                                              |                              |                            |                                            |        |        |        |       
|                                         | Deferred income taxes                                                                        |                              |                            | 3,206                                      |        |        |        | 4,076  |       
|                                         | Other noncurrent liabilities                                                                 |                              |                            | 5,161                                      |        |        |        | 5,247  |       
|                                         |                                                                                              |                              |                            |                                            |        |        |        |       
|                                         |                                                                                              | Total noncurrent liabilities |                            |                                            | 8,367  |        |        |        | 9,323  |       
|                                         |                                                                                              |                              |                            |                                            |        |        |        |       
|Shareholders equity:                    |                                                                                              |                              |                            |                                            |        |        |        |       
|                                         | Common stock, $1 par value (8,650 shares
    authorized; 1,877 and 1,873 shares outstanding) |                              |                            | 2,020                                      |        |        |        | 2,020  |       
|                                         | Paid-in capital                                                                              |                              |                            | 6,875                                      |        |        |        | 6,878  |       
|                                         | Retained earnings                                                                            |                              |                            | 15,137                                     |        |        |        | 14,485 |       
|                                         | Accumulated other comprehensive loss                                                         |                              |                            | (294                                       | )      |        |        | (476   | )     
|                                         | Shares held in trust and treasury                                                            |                              |                            | (4,996                                     | )      |        |        | (5,104 | )     
|                                         | Guarantee of ESOP debt                                                                       |                              |                            | (145                                       | )      |        |        | (59    | )     
|                                         |                                                                                              |                              |                            |                                            |        |        |        |       
|                                         |                                                                                              |                              | Total shareholders equity |                                            |        | 18,597 |        |        |        | 17,744 |       
|                                         |                                                                                              |                              |                            |                                            |        |        |        |       
|                                         |                                                                                              |                              |                            | Total liabilities and shareholders equity |        | $      | 52,046 |        |        | $      | 50,014 | 
|                                         |                                                                                              |                              |                            |                                            |        |        |        |       

The accompanying notes are an integral part of
these consolidated financial statements.

4



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##### Table of Contents



BELLSOUTH CORPORATION






CONSOLIDATED STATEMENTS OF CASH FLOWS


(UNAUDITED)


(IN MILLIONS)


|                                                         |                                           |                                                           |        |        |       |   |        |        |        |  
|-------------------------------------------------------- | ----------------------------------------- | --------------------------------------------------------- | ------ | ------ | ----- | - | ------ | ------ | ------ | -
|                                                         |                                           |                                                          
|                                                         |                                           | For the Six Months                                       
|                                                         |                                           | Ended June 30,                                           
|                                                         |                                           |                                                          
|                                                         |                                           | 2001                                                      |        | 2002  
|                                                         |                                           |                                                           |        |       
|Cash Flows from Operating
    Activities:                |                                           |                                                           |        |        |       |   |        |       
|Net income                                               |                                           | $                                                         | 1,771  |        |       | $ | 163    |       
|Adjustments to net income:                               |                                           |                                                           |        |        |       |   |        |       
|                                                         |                                           | Depreciation and amortization                             |        |        | 2,360 |   |        |        | 2,331  |  
|                                                         |                                           | Provision for uncollectibles                              |        |        | 219   |   |        |        | 411    |  
|                                                         |                                           | Net earnings of equity affiliates                         |        |        | (190  | ) |        |        | (341   | )
|                                                         |                                           | Dividends received from equity affiliates                 |        |        | 214   |   |        |        |       |  
|                                                         |                                           | Minority interests in income of subsidiaries              |        |        | (10   | ) |        |        | (77    | )
|                                                         |                                           | Deferred income taxes                                     |        |        | 156   |   |        |        | 809    |  
|                                                         |                                           | Net losses on sale or impairment of equity
    securities |        |        | 50    |   |        |        | 388    |  
|                                                         |                                           | Postretirement benefit curtailment charge                 |        |        | 72    |   |        |        |       |  
|                                                         |                                           | Brazilian loan impairment                                 |        |        |      |   |        |        | 383    |  
|                                                         |                                           | A&P unbilled receivable adjustment                        |        |        |      |   |        |        | 163    |  
|                                                         |                                           | Provision for restructuring                               |        |        |      |   |        |        | 357    |  
|                                                         |                                           | Foreign currency transaction losses                       |        |        | 64    |   |        |        | 645    |  
|                                                         |                                           | Cumulative effect of change in accounting
    principle   |        |        |      |   |        |        | 1,285  |  
|                                                         |                                           | (Gain) loss on sale of operations                         |        |        |      |   |        |        | (1,318 | )
|Net change in:                                           |                                           |                                                           |        |        |       |   |        |       
|                                                         |                                           | Accounts receivable and other current assets              |        |        | (199  | ) |        |        | 86     |  
|                                                         |                                           | Accounts payable and other current liabilities            |        |        | (287  | ) |        |        | (582   | )
|                                                         |                                           | Deferred charges and other assets                         |        |        | (519  | ) |        |        | (455   | )
|                                                         |                                           | Other liabilities and deferred credits                    |        |        | 138   |   |        |        |       |  
|Other reconciling items, net                             |                                           |                                                           | 88     |        |       |   | (55    | )     
|                                                         |                                           |                                                           |        |        |       |   |        |       
|                                                         | Net cash provided by operating activities |                                                           |        | 3,927  |       |   |        | 4,193  |       
|                                                         |                                           |                                                           |        |        |       |   |        |       
|Cash Flows from Investing
    Activities:                |                                           |                                                           |        |        |       |   |        |       
|Capital expenditures                                     |                                           |                                                           | (3,357 | )      |       |   | (2,028 | )     
|Investments in and advances to equity affiliates         |                                           |                                                           | (160   | )      |       |   | (7     | )     
|Proceeds from sale of investment                         |                                           |                                                           | 1,018  |        |       |   | 1,454  |       
|Purchases of wireless licenses                           |                                           |                                                           | (10    | )      |       |   |       |       
|Proceeds from disposition of short-term
    investments  |                                           |                                                           | 108    |        |       |   | 2      |       
|Purchases of short-term investments                      |                                           |                                                           | (76    | )      |       |   |       |       
|Proceeds from repayment of loans and advances            |                                           |                                                           | 6      |        |       |   | 426    |       
|Investments in debt securities                           |                                           |                                                           | (176   | )      |       |   |       |       
|Other investing activities, net                          |                                           |                                                           | (42    | )      |       |   | 63     |       
|                                                         |                                           |                                                           |        |        |       |   |        |       
|                                                         | Net cash used for investing activities    |                                                           |        | (2,689 | )     |   |        | (90    | )     
|                                                         |                                           |                                                           |        |        |       |   |        |       
|Cash Flows from Financing
    Activities:                |                                           |                                                           |        |        |       |   |        |       
|Net borrowings (repayments) of short-term
    debt       |                                           |                                                           | (2,251 | )      |       |   | (1,393 | )     
|Proceeds from long-term debt                             |                                           |                                                           | 1,819  |        |       |   | 8      |       
|Repayments of long-term debt                             |                                           |                                                           | (547   | )      |       |   | (568   | )     
|Dividends paid                                           |                                           |                                                           | (712   | )      |       |   | (713   | )     
|Purchase of treasury shares                              |                                           |                                                           |       |        |       |   | (189   | )     
|Other financing activities, net                          |                                           |                                                           | 50     |        |       |   | 2      |       
|                                                         |                                           |                                                           |        |        |       |   |        |       
|                                                         | Net cash used for financing activities    |                                                           |        | (1,641 | )     |   |        | (2,853 | )     
|                                                         |                                           |                                                           |        |        |       |   |        |       
|Net increase (decrease) in cash and cash
    equivalents |                                           |                                                           | (403   | )      |       |   | 1,250  |       
|Cash and cash equivalents at beginning of period         |                                           |                                                           | 1,061  |        |       |   | 592    |       
|                                                         |                                           |                                                           |        |        |       |   |        |       
|Cash and cash equivalents at end of period               |                                           | $                                                         | 658    |        |       | $ | 1,842  |       
|                                                         |                                           |                                                           |        |        |       |   |        |       

The accompanying notes are an integral part of
these consolidated financial statements.

5



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##### Table of Contents



BELLSOUTH CORPORATION






CONSOLIDATED STATEMENTS OF SHAREHOLDERS
EQUITY


AND COMPREHENSIVE INCOME


| |            
| | -----------
| | (UNAUDITED)

(IN MILLIONS)


|                                           |                                         |                                        |       |           |  |        |      |              |  |          |       |               |  |           |       |         |  |       |        |   |  |   |      |      |   |   |        |   |  |   |      |   |  |   |        |      |  
|------------------------------------------ | --------------------------------------- | -------------------------------------- | ----- | --------- |  | ------ | ---- | ------------ |  | -------- | ----- | ------------- |  | --------- | ----- | ------- |  | ----- | ------ | - |  | - | ---- | ---- | - | - | ------ | - |  | - | ---- | - |  | - | ------ | ---- | -
|                                           |                                         |                                       
|                                           |                                         | For the Six Months Ended June 30, 2001
|                                           |                                         |                                       
|                                           |                                         |                                        |       |          
|                                           |                                         | Number of Shares                       |       | Amount   
|                                           |                                         |                                        |       |          
|                                           |                                         |                                        |       | Shares    |  |        |      | Shares       |  |         
|                                           |                                         |                                        |       | Held in   |  |        |      | Accum. Other |  | Held in  |       | Guarantee     |  |          
|                                           |                                         | Common                                 |       | Trust and |  | Common |      | Paid-in      |  | Retained |       | Comprehensive |  | Trust and |       | of ESOP |  |      
|                                           |                                         | Stock                                  |       | Treasury  |  | Stock  |      | Capital      |  | Earnings |       | Income/(Loss) |  | Treasury  |       | Debt    |  | Total
|                                           |                                         |                                        |       |           |  |        |      |              |  |          |       |               |  |           |       |         |  |      
|                                           |                                         |                                        |       | (a)       |  |        |      |              |  |          |       |               |  | (a)       |       |         |  |      
|Balance at December 31, 2000               |                                         |                                        | 2,020 |           |  |        | (148 | )            |  | $        | 2,020 |               |  | $         | 6,740 |         |  | $     | 14,074 |   |  | $ | (488 | )    |   | $ | (5,222 | ) |  | $ | (212 | ) |  | $ | 16,912 |     
|Net income                                 |                                         |                                        |       |           |  |        |      |              |  |          |       |               |  |           |       |         |  |       | 1,771  |   |  |   |      |      |   |   |        |   |  |   |      |   |  |   | 1,771  |     
|Other comprehensive income, net of tax:    |                                         |                                        |       |           |  |        |      |              |  |          |       |               |  |           |       |         |  |       |        |   |  |   |      |      |   |   |        |   |  |   |      |   |  |   |        |     
|                                           | Foreign currency translation adjustment |                                        |       |           |  |        |      |              |  |          |       |               |  |           |       |         |  |       |        |   |  |   |      | (12  | ) |   |        |   |  |   |      |   |  |   |        | (12  | )
|                                           | Net unrealized losses on securities     |                                        |       |           |  |        |      |              |  |          |       |               |  |           |       |         |  |       |        |   |  |   |      | (236 | ) |   |        |   |  |   |      |   |  |   |        | (236 | )
|                                           | Net unrealized losses on derivatives    |                                        |       |           |  |        |      |              |  |          |       |               |  |           |       |         |  |       |        |   |  |   |      | (11  | ) |   |        |   |  |   |      |   |  |   |        | (11  | )
|                                           |                                         |                                        |       |           |  |        |      |              |  |          |       |               |  |           |       |         |  |       |        |   |  |   |      |      |   |   |        |   |  |   |      |   |  |   |        |     
|Total comprehensive income(b)              |                                         |                                        |       |           |  |        |      |              |  |          |       |               |  |           |       |         |  |       |        |   |  |   |      |      |   |   |        |   |  |   |      |   |  |   | 1,512  |     
|Dividends declared                         |                                         |                                        |       |           |  |        |      |              |  |          |       |               |  |           |       |         |  |       | (713   | ) |  |   |      |      |   |   |        |   |  |   |      |   |  |   | (713   | )   
|Share issuances for employee benefit plans |                                         |                                        |       |           |  |        | 2    |              |  |          |       |               |  |           | 3     |         |  |       | (32    | ) |  |   |      |      |   |   | 96     |   |  |   |      |   |  |   | 67     |     
|Tax benefit related to stock options       |                                         |                                        |       |           |  |        |      |              |  |          |       |               |  |           | 20    |         |  |       |        |   |  |   |      |      |   |   |        |   |  |   |      |   |  |   | 20     |     
|ESOP activities and related tax benefit    |                                         |                                        |       |           |  |        |      |              |  |          |       |               |  |           |       |         |  |       | 2      |   |  |   |      |      |   |   |        |   |  |   | 80   |   |  |   | 82     |     
|                                           |                                         |                                        |       |           |  |        |      |              |  |          |       |               |  |           |       |         |  |       |        |   |  |   |      |      |   |   |        |   |  |   |      |   |  |   |        |     
|Balance at June 30, 2001                   |                                         |                                        | 2,020 |           |  |        | (146 | )            |  | $        | 2,020 |               |  | $         | 6,763 |         |  | $     | 15,102 |   |  | $ | (747 | )    |   | $ | (5,126 | ) |  | $ | (132 | ) |  | $ | 17,880 |     
|                                           |                                         |                                        |       |           |  |        |      |              |  |          |       |               |  |           |       |         |  |       |        |   |  |   |      |      |   |   |        |   |  |   |      |   |  |   |        |     

|                                           |                                         |                                        |       |           |  |        |      |              |  |          |       |               |  |           |       |         |  |       |        |   |  |   |      |      |   |   |        |   |  |   |      |   |  |   |        |      |  
|------------------------------------------ | --------------------------------------- | -------------------------------------- | ----- | --------- |  | ------ | ---- | ------------ |  | -------- | ----- | ------------- |  | --------- | ----- | ------- |  | ----- | ------ | - |  | - | ---- | ---- | - | - | ------ | - |  | - | ---- | - |  | - | ------ | ---- | -
|                                           |                                         |                                       
|                                           |                                         | For the Six Months Ended June 30, 2002
|                                           |                                         |                                       
|                                           |                                         |                                        |       |          
|                                           |                                         | Number of Shares                       |       | Amount   
|                                           |                                         |                                        |       |          
|                                           |                                         |                                        |       | Shares    |  |        |      | Shares       |  |         
|                                           |                                         |                                        |       | Held in   |  |        |      | Accum. Other |  | Held in  |       | Guarantee     |  |          
|                                           |                                         | Common                                 |       | Trust and |  | Common |      | Paid-in      |  | Retained |       | Comprehensive |  | Trust and |       | of ESOP |  |      
|                                           |                                         | Stock                                  |       | Treasury  |  | Stock  |      | Capital      |  | Earnings |       | Income/(Loss) |  | Treasury  |       | Debt    |  | Total
|                                           |                                         |                                        |       |           |  |        |      |              |  |          |       |               |  |           |       |         |  |      
|                                           |                                         |                                        |       | (a)       |  |        |      |              |  |          |       |               |  | (a)       |       |         |  |      
|Balance at December 31, 2001               |                                         |                                        | 2,020 |           |  |        | (143 | )            |  | $        | 2,020 |               |  | $         | 6,875 |         |  | $     | 15,137 |   |  | $ | (294 | )    |   | $ | (4,996 | ) |  | $ | (145 | ) |  | $ | 18,597 |     
|Net income                                 |                                         |                                        |       |           |  |        |      |              |  |          |       |               |  |           |       |         |  |       | 163    |   |  |   |      |      |   |   |        |   |  |   |      |   |  |   | 163    |     
|Other comprehensive income, net of tax:    |                                         |                                        |       |           |  |        |      |              |  |          |       |               |  |           |       |         |  |       |        |   |  |   |      |      |   |   |        |   |  |   |      |   |  |   |        |     
|                                           | Foreign currency translation adjustment |                                        |       |           |  |        |      |              |  |          |       |               |  |           |       |         |  |       |        |   |  |   |      | (180 | ) |   |        |   |  |   |      |   |  |   |        | (180 | )
|                                           | Net unrealized losses on securities     |                                        |       |           |  |        |      |              |  |          |       |               |  |           |       |         |  |       |        |   |  |   |      | (26  | ) |   |        |   |  |   |      |   |  |   |        | (26  | )
|                                           | Net unrealized gains on derivatives(c)  |                                        |       |           |  |        |      |              |  |          |       |               |  |           |       |         |  |       |        |   |  |   |      | 24   |   |   |        |   |  |   |      |   |  |   |        | 24   |  
|                                           |                                         |                                        |       |           |  |        |      |              |  |          |       |               |  |           |       |         |  |       |        |   |  |   |      |      |   |   |        |   |  |   |      |   |  |   |        |     
|Total comprehensive income(b)              |                                         |                                        |       |           |  |        |      |              |  |          |       |               |  |           |       |         |  |       |        |   |  |   |      |      |   |   |        |   |  |   |      |   |  |   | (19    | )   
|Dividends declared                         |                                         |                                        |       |           |  |        |      |              |  |          |       |               |  |           |       |         |  |       | (734   | ) |  |   |      |      |   |   |        |   |  |   |      |   |  |   | (734   | )   
|Share issuances for employee benefit plans |                                         |                                        |       |           |  |        | 4    |              |  |          |       |               |  |           | 3     |         |  |       | (65    | ) |  |   |      |      |   |   | 109    |   |  |   |      |   |  |   | 47     |     
|Purchase of treasury stock                 |                                         |                                        |       |           |  |        | (8   | )            |  |          |       |               |  |           |       |         |  |       |        |   |  |   |      |      |   |   | (235   | ) |  |   |      |   |  |   | (235   | )   
|Purchase of stock by grantor trust         |                                         |                                        |       |           |  |        |      |              |  |          |       |               |  |           |       |         |  |       | (18    | ) |  |   |      |      |   |   | 18     |   |  |   |      |   |  |   |       |     
|ESOP activities and related tax benefit    |                                         |                                        |       |           |  |        |      |              |  |          |       |               |  |           |       |         |  |       | 2      |   |  |   |      |      |   |   |        |   |  |   | 86   |   |  |   | 88     |     
|                                           |                                         |                                        |       |           |  |        |      |              |  |          |       |               |  |           |       |         |  |       |        |   |  |   |      |      |   |   |        |   |  |   |      |   |  |   |        |     
|Balance at June 30, 2002                   |                                         |                                        | 2,020 |           |  |        | (147 | )            |  | $        | 2,020 |               |  | $         | 6,878 |         |  | $     | 14,485 |   |  | $ | (476 | )    |   | $ | (5,104 | ) |  | $ | (59  | ) |  | $ | 17,744 |     
|                                           |                                         |                                        |       |           |  |        |      |              |  |          |       |               |  |           |       |         |  |       |        |   |  |   |      |      |   |   |        |   |  |   |      |   |  |   |        |     






|    |                                                                                                                                                                                                                                                                                                                                   
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Trust and treasury shares are not considered to
    be outstanding for financial reporting purposes. As of
    June 30, 2001, there were approximately 36 shares held in
    trust and 110 shares held in treasury. As of June 30, 2002,
    there were approximately 37 shares held in trust and 110 shares
    held in treasury.



|    |                                                                                                                                  
|--- | ---------------------------------------------------------------------------------------------------------------------------------
|(b) | Total comprehensive income for second quarter
    2001 was $770. Total comprehensive income for second quarter
    2002 was $435.



|    |                                                                                         
|--- | ----------------------------------------------------------------------------------------
|(c) | Net unrealized gains on derivatives include an
    adjustment for realized gains of $31.

The accompanying notes are an integral part of
these consolidated financial statements.

6



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##### Table of Contents



BELLSOUTH CORPORATION






NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)


(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)


NOTE APREPARATION OF INTERIM FINANCIAL
STATEMENTS

In this report, BellSouth Corporation and its
subsidiaries are referred to as we or
BellSouth.

The accompanying unaudited consolidated financial
statements have been prepared based upon Securities and Exchange
Commission (SEC) rules that permit reduced disclosure for
interim periods. In our opinion, these statements include all
adjustments necessary for a fair presentation of the results of
the interim periods shown. All adjustments are of a normal
recurring nature unless otherwise disclosed. Revenues, expenses,
assets and liabilities can vary during each quarter of the year.
Therefore, the results and trends in these interim financial
statements may not be the same as those for the full year. For a
more complete discussion of our significant accounting policies
and other information, you should read this report in
conjunction with the consolidated financial statements included
in our latest annual report on Form 10-K.

Certain amounts within the prior years
information have been reclassified to conform to the current
years presentation.

NOTE BNEW ACCOUNTING
PRONOUNCEMENTS

GOODWILL AND OTHER INTANGIBLE ASSETS

On January 1, 2002, we adopted Statement of
Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets (SFAS No. 142). Under SFAS
No. 142, we ceased to amortize goodwill, embedded goodwill
related to equity investments and costs associated with
indefinite life wireless licenses. In addition, our net earnings
of equity affiliates reflect the impact of adopting this new
accounting standard on the operations of our equity investments
(the most significant of which is our investment in Cingular
Wireless). As required by SFAS No. 142, we reassessed the
expected useful lives of existing intangible assets. This
resulted in changes to the expected useful lives of some of our
Latin American wireless licenses.

Cingular has determined that the FCC wireless
licenses they own have an indefinite useful life because cash
flows are expected to continue indefinitely and historical
practice has shown that Cingular has been able to renew the
licenses at each expiration period. Under SFAS No. 142,
Cingular will not amortize these wireless licenses until
Cingular determines that the licenses have a finite life.

Summarized below are the major classes of
intangible assets that will continue to be amortized under SFAS
No. 142, as well as the carrying values of those intangible
assets, which will no longer be amortized:

|                                               |                      |                   |   |               |       |          |   |              |       |  |   |       |       |  |   |     |       | 
|---------------------------------------------- | -------------------- | ----------------- | - | ------------- | ----- | -------- | - | ------------ | ----- |  | - | ----- | ----- |  | - | --- | ----- | 
|                                               |                      |                   |   |              
|                                               |                      | December 31, 2001 |   | June 30, 2002
|                                               |                      |                   |   |              
|                                               |                      | Carrying          |   | Accumulated   |       | Carrying |   | Accumulated 
|                                               |                      | Amount            |   | Amortization  |       | Amount   |   | Amortization
|                                               |                      |                   |   |               |       |          |   |             
|Intangible assets subject to amortization:     |                      |                   |   |               |       |          |   |              |       |  |   |       |       |  |   |    
|                                               | Capitalized software |                   | $ | 2,208         |       |          | $ | 686          |       |  | $ | 2,316 |       |  | $ | 758 |      
|                                               | Wireless licenses    |                   |   | 897           |       |          |   | 284          |       |  |   | 897   |       |  |   | 300 |      
|                                               | Customer lists       |                   |   | 419           |       |          |   | 291          |       |  |   | 419   |       |  |   | 316 |      
|                                               | Other                |                   |   | 36            |       |          |   | 11           |       |  |   | 30    |       |  |   | 13  |      
|                                               |                      | Total             |   | $             | 3,560 |          |   | $            | 1,272 |  |   | $     | 3,662 |  |   | $   | 1,387 | 
|Intangible assets not subject to amortization: |                      |                   |   |               |       |          |   |              |       |  |   |       |       |  |   |    
|                                               | Wireless licenses    |                   | $ | 360           |       |          | $ | 22           |       |  | $ | 184   |       |  | $ | 15  |      

The table above does not include assets held for
sale, which represent Multichannel Multipoint Distribution
Service (MMDS) licenses. MMDS licenses held for sale represented
$267 gross and $241 net and are included in other intangibles,
net in the December 31, 2001 and June 30, 2002
consolidated balance sheets.

The following table presents current and expected
amortization expense of the existing intangible assets as of
June 30, 2002 for each of the following periods:

|                                                        |                                        |  |   |     | 
|------------------------------------------------------- | -------------------------------------- |  | - | --- | 
|Aggregate amortization expense:                         |                                        |  |   |    
|                                                        | For the six months ended June 30, 2002 |  | $ | 294 | 
|Expected amortization expense for the years
    ending: |                                        |  |   |    
|                                                        | 2003                                   |  |   | 567 | 
|                                                        | 2004                                   |  |   | 560 | 
|                                                        | 2005                                   |  |   | 557 | 
|                                                        | 2006                                   |  |   | 435 | 
|                                                        | 2007                                   |  |   | 432 | 

The following table shows our 2001 results
presented on a comparable basis to the 2002 results, adjusted to
exclude amortization expense related to goodwill and indefinite
lived wireless licenses. We expect the annual increase to
earnings for 2002 compared to 2001 to approximate $130, or $0.07
per share.

7



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##### Table of Contents



BELLSOUTH CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)


(UNAUDITED)

(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)




NOTE BNEW ACCOUNTING PRONOUNCEMENTS
(Continued)


|                                                                                                               |                            |                |       |                |  |      |     |      |  |   |       |      |  |   |       |      | 
|-------------------------------------------------------------------------------------------------------------- | -------------------------- | -------------- | ----- | -------------- |  | ---- | --- | ---- |  | - | ----- | ---- |  | - | ----- | ---- | 
|                                                                                                               |                            |                |       |               
|                                                                                                               |                            | For the Three  |       | For the Six   
|                                                                                                               |                            | Months         |       | Months        
|                                                                                                               |                            | Ended June 30, |       | Ended June 30,
|                                                                                                               |                            |                |       |               
|                                                                                                               |                            | 2001           |       | 2002           |  | 2001 |     | 2002
|                                                                                                               |                            |                |       |                |  |      |     |     
|Income before extraordinary item and cumulative
    effect of change in accounting principle  as
    reported |                            | $              | 1,404 |                |  | $    | 704 |      |  | $ | 2,811 |      |  | $ | 2,626 |     
|Add back: License amortization, net of tax                                                                     |                            |                | 2     |                |  |      |    |      |  |   | 4     |      |  |   |      |     
|Add back: Goodwill amortization, net of tax                                                                    |                            |                | 15    |                |  |      |    |      |  |   | 25    |      |  |   |      |     
|Add back: Equity method amortization, net of tax                                                               |                            |                | 15    |                |  |      |    |      |  |   | 30    |      |  |   |      |     
|                                                                                                               |                            |                |       |                |  |      |     |      |  |   |       |      |  |   |       |     
|Income before extraordinary item and cumulative
    effect of change in accounting principle  as adjusted     |                            | $              | 1,436 |                |  | $    | 704 |      |  | $ | 2,870 |      |  | $ | 2,626 |     
|                                                                                                               |                            |                |       |                |  |      |     |      |  |   |       |      |  |   |       |     
|Basic earnings per share:                                                                                      |                            |                |       |                |  |      |     |      |  |   |       |      |  |   |       |     
|                                                                                                               | Net income  as reported   |                | $     | 0.47           |  |      | $   | 0.16 |  |   | $     | 0.95 |  |   | $     | 0.09 | 
|                                                                                                               | Goodwill amortization      |                |       | 0.01           |  |      |     |     |  |   |       | 0.01 |  |   |       |     | 
|                                                                                                               | Equity method amortization |                |       | 0.01           |  |      |     |     |  |   |       | 0.02 |  |   |       |     | 
|                                                                                                               |                            |                |       |                |  |      |     |      |  |   |       |      |  |   |       |     
|                                                                                                               | Net income  as adjusted   |                | $     | 0.49           |  |      | $   | 0.16 |  |   | $     | 0.98 |  |   | $     | 0.09 | 
|                                                                                                               |                            |                |       |                |  |      |     |      |  |   |       |      |  |   |       |     
|Diluted earnings per share:                                                                                    |                            |                |       |                |  |      |     |      |  |   |       |      |  |   |       |     
|                                                                                                               | Net income  as reported   |                | $     | 0.47           |  |      | $   | 0.16 |  |   | $     | 0.94 |  |   | $     | 0.09 | 
|                                                                                                               | Goodwill amortization      |                |       | 0.01           |  |      |     |     |  |   |       | 0.01 |  |   |       |     | 
|                                                                                                               | Equity method amortization |                |       | 0.01           |  |      |     |     |  |   |       | 0.02 |  |   |       |     | 
|                                                                                                               |                            |                |       |                |  |      |     |      |  |   |       |      |  |   |       |     
|                                                                                                               | Net income  as adjusted   |                | $     | 0.49           |  |      | $   | 0.16 |  |   | $     | 0.97 |  |   | $     | 0.09 | 
|                                                                                                               |                            |                |       |                |  |      |     |      |  |   |       |      |  |   |       |     

As part of the adoption of SFAS No. 142, we
were required to perform initial valuations to determine if any
impairment of goodwill and indefinite-lived intangibles exists.
We will continue to test embedded goodwill related to equity
investments for impairment under accounting rules for equity
investments, which are based on comparisons between fair value
and carrying value.

During the second quarter 2002, we completed the
transitional impairment test required under SFAS No. 142.
In accordance with SFAS No. 142, goodwill was tested for
impairment by comparing the fair value of our reporting units to
their carrying values. Fair values were determined by the
assessment of future discounted cash flows. The fair values of
our Latin American reporting units were less than the carrying
value of these units. The allocation of fair values to
identifiable tangible and intangible assets resulted in an
implied valuation of the goodwill associated with these
reporting units of $118. As a result we recorded an impairment
loss of $1,277, with no income tax benefit. Additionally, our
equity investee, Cingular Wireless, adopted SFAS No. 142 in
the second quarter. These impairment losses are recorded as a
cumulative effect of change in accounting principle on the
income statement as of January 1, 2002.

The changes in the carrying amount of goodwill by
operating segment for the six months ended June 30, 2002
are as follows:

|                             |  |          |     |         |  |       |        |   |  |   |        |  
|---------------------------- |  | -------- | --- | ------- |  | ----- | ------ | - |  | - | ------ | -
|                             |  | Domestic |     | Latin   |  |      
|                             |  | Wireless |     | America |  | Total
|                             |  |          |     |         |  |      
|Balance at December 31, 2001 |  | $        | 244 |         |  | $     | 1,395  |   |  | $ | 1,639  |  
|SFAS No. 142 impairment      |  |          |    |         |  |       | (1,277 | ) |  |   | (1,277 | )
|Other                        |  |          | 6   |         |  |       | (10    | ) |  |   | (4     | )
|                             |  |          |     |         |  |       |        |   |  |   |        |  
|Balance at June 30, 2002     |  | $        | 250 |         |  | $     | 108    |   |  | $ | 358    |  
|                             |  |          |     |         |  |       |        |   |  |   |        |  

The $1,285 cumulative effect of change in
accounting principle in the consolidated income statements
includes $8 recorded through net earnings (losses) of
equity affiliates.

ASSET RETIREMENT OBLIGATIONS

In June 2001, the FASB issued SFAS No. 143,
Accounting for Asset Retirement Obligations. This
standard provides the accounting for the cost of legal
obligations associated with the retirement of long-lived assets.
SFAS No. 143 requires that companies recognize the fair
value of a liability for asset retirement obligations in the
period in which the obligations are incurred and capitalize that
amount as a part of the book value of the long-lived asset. That
cost is then depreciated over the remaining life of the
underlying long-lived asset. We are required to adopt SFAS
No. 143 effective January 1, 2003. We are currently
evaluating the impact this new standard will have on our future
results of operations or financial position.

NOTE CEARNINGS PER SHARE

Basic earnings per share is computed on the
weighted-average number of common shares outstanding during each
period. Diluted earnings per share is based on the
weighted-average number of common shares outstanding plus net
incremental shares arising out of employee stock options and
benefit plans. The following is a

8



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##### Table of Contents



BELLSOUTH CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)


(UNAUDITED)

(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)


NOTE CEARNINGS PER SHARE
(Continued)

reconciliation of the weighted-average share
amounts (in millions) used in calculating earnings per
share:

|                                                            |  |                |       |                |  |      |       |      |  |  |       |  |  |  |       | 
|----------------------------------------------------------- |  | -------------- | ----- | -------------- |  | ---- | ----- | ---- |  |  | ----- |  |  |  | ----- | 
|                                                            |  |                |       |               
|                                                            |  | For the Three  |       | For the Six   
|                                                            |  | Months         |       | Months        
|                                                            |  | Ended June 30, |       | Ended June 30,
|                                                            |  |                |       |               
|                                                            |  | 2001           |       | 2002           |  | 2001 |       | 2002
|                                                            |  |                |       |                |  |      |       |     
|Basic common shares outstanding                             |  |                | 1,874 |                |  |      | 1,875 |      |  |  | 1,873 |  |  |  | 1,877 | 
|Incremental shares from stock options and benefit
    plans |  |                | 12    |                |  |      | 7     |      |  |  | 13    |  |  |  | 8     | 
|                                                            |  |                |       |                |  |      |       |      |  |  |       |  |  |  |       | 
|Diluted common shares outstanding                           |  |                | 1,886 |                |  |      | 1,882 |      |  |  | 1,886 |  |  |  | 1,885 | 
|                                                            |  |                |       |                |  |      |       |      |  |  |       |  |  |  |       | 

The earnings amounts used for per-share
calculations are the same for both the basic and diluted
methods. Outstanding options to purchase 52 million shares
for the three months ended June 30, 2001 and
48 million shares for the six months ended June 30,
2001 were not included in the computation of diluted earnings
per share because the exercise price of these options was
greater than the average market price of the common stock.
Outstanding options to purchase 67 million shares for the
three months ended June 30, 2002 and 62 million shares
for the six months ended June 30, 2002 were not included in
the computation of diluted earnings per share because the
exercise price of these options was greater than the average
market price of the common stock.

NOTE DPURCHASE OF TREASURY
SHARES

We have announced our intention to purchase up
to $2 billion of our outstanding common stock over the next
18 months. During second quarter 2002, we purchased
7.6 million shares of our common stock in the open market
for approximately $235, which included $189 of cash payments and
$46 of purchases that settled in July.

NOTE EDIVESTITURES

Conversion of E-Plus Interest to KPN

In March 2002, we completed a transaction with
Dutch telecommunications provider Royal KPN N.V. (KPN) in
which we exchanged our 22.51% stake in E-Plus for
234.7 million KPN shares. After this exchange, we held
approximately 9.42% of KPNs outstanding shares. As part of
this transaction, we surrendered existing warrants to purchase
KPN shares and exchange rights with regard to KPN Mobile. We
recorded a gain of $1,335, or $854 after tax, representing the
difference in the fair value of the KPN shares received and
the carrying value of our investment in E-Plus. We sold the
234.7 million shares that we held in KPN in March 2002 for
$1,076 in proceeds and recognized a loss of $27, or $17 after
tax, on the sale.

We report our results on a calendar basis, except
for our international operations, including E-Plus, which we
reported on a one-month lag basis. As described above, we
disposed of our investment in E-Plus during March 2002.
Therefore, the lag basis of reporting was no longer applicable
to this investment. Accordingly, the gain resulting from this
transaction was recorded in our financial statements for the
period ended March 31, 2002.

As part of the agreement, KPN repaid $426 under a
loan facility provided by BellSouth and assumed approximately
2.13 billion Euro of BellSouth loans that were previously
extended to E-Plus. Concurrent with KPNs assumption of
loans, we unwound several foreign-currency forward contracts
associated with the original loans to E-Plus and recognized a
gain of $31, or $20 after tax. At the same time, we entered into
three foreign currency swap contracts to mitigate foreign
currency risk on the KPN loans. The swaps, which qualify as cash
flow hedges, lock-in the foreign exchange rate at an average of
Euro/USD of 0.8730 for the three payments of principal along
with the quarterly interest payments from KPN during 2002
through 2004.

NOTE FBRAZILIAN LOAN
IMPAIRMENT

We own equity interests in two wireless
communications companies in Brazil (BCP SA and BSE SA). In
addition to equity infusions, we have advanced these companies
an aggregate of $398 in the form of shareholder loans. In
January 2002, we guaranteed R$246 (approximately $108) of a BCP
debenture issuance. We have not guaranteed any other debt of
BCP. Our principal partner and we have been in discussions
regarding shareholder support for the funding requirements of
the respective operations and were not able to reach an
agreement prior to the March 2002 due date for a $375
principal payment that BCP owes its principal lenders. This
disagreement regarding shareholder support and BCPs
inability to meet the payment from its own operating cash flows
led to BCPs default on the $375 payment.

9



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##### Table of Contents



BELLSOUTH CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)


(UNAUDITED)

(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)




NOTE FBRAZILIAN LOAN IMPAIRMENT
(Continued)


BSE is experiencing similar difficulties in
paying its debt obligations from its operating cash flows.

As a result of default and inability to reach an
agreement, we recorded a contingent liability for the debt
guarantee, which increased our investment in Brazil. We also
evaluated the probability of collecting our outstanding loans to
these companies. In our assessment, given the companies
current capital structures, deterioration of credit measures and
the subordination of some of our loans to other third-party
debt, we determined that it was probable that the loans would
not be repaid. In determining the impairment, we compared the
book basis of our net investment, including the debt guarantee,
with the fair value of our interests in the companies. This
analysis indicated an impairment of approximately $383,
including $7 of accrued interest on the loans. Subsequent to the
impairment, our net investment in these companies is $50 at
June 30, 2002. Because our investment and net advances to
BCP have been reduced to zero and due to the fact we are no
longer committed to further financial support of the operation,
we have ceased recognizing losses related to this operation.

We continue to discuss alternatives with our
principal partner and these companies lenders. The parties
have not reached any agreement to date. There can be no
assurance that an agreement will be reached.

In the event of sale or liquidation of our
investment, we will recognize cumulative translation losses as
part of the gain or loss on sale or liquidation. The cumulative
foreign currency translation losses related to these investments
were $226 at June 30, 2002.

NOTE GFOREIGN CURRENCY TRANSACTION
LOSSES

In early 2002, the Argentine government announced
economic reforms, including a devaluation of its national
currency, the Peso. The Peso has lost over 70 percent of
its value as compared to the US Dollar since the beginning of
2002. Based on the current monetary liability position of this
operation, we recorded foreign currency transaction losses of
$353 in the second quarter of 2002. We recorded a 100% valuation
allowance, reserving against the tax benefits generated by these
losses due to the lack of clarity in the tax law and potentially
limited tax carryforward period in Argentina.

As a result of the cumulative devaluation, our
Argentine operation violated covenants on $350 of its
U.S. Dollar-denominated debt. The debt is classified as
current in the June 30, 2002 balance sheet. We are
currently working with lenders to resolve this matter. The
devaluation, resulting new laws and regulations instituted, and
the instability of the government makes it difficult to
anticipate the long-term impacts of the economic situation in
Argentina.

The second quarter 2002 includes $78 after tax in
foreign currency transaction losses related to the first quarter
of 2002. During June 2002, we discovered a miscalculation of
foreign currency transaction losses at our Argentine operation,
resulting in an understatement of the foreign currency
transaction losses reported in the first quarter of 2002.
Adjusted foreign currency transaction losses would have been
$282 for the first quarter of 2002 instead of the $204
originally reported. Our analysis indicates that: no reporting
period was materially misstated and operating trends were not
affected; no regulatory requirements have been affected; our
compliance with debt covenants were not affected by this error;
and the error did not result from an unlawful transaction.

NOTE HRESTRUCTURING AND
BENEFIT

CURTAILMENT CHARGES


In the fourth quarter 2001, we recorded a charge
of $232, or $143 after tax, reflecting restructuring actions
that were taken to reduce operating costs. As a result of these
reductions, we eliminated approximately 4,200 positions. The
charge, recorded in accordance with provisions of
SFAS No. 112, Employers Accounting for
Postemployment Benefits, consisted primarily of cash
severance and enhancements to post employment health benefits
under pre-existing separation pay plans.

In second quarter 2002, we recorded a
restructuring charge of $357, or $225 after tax, related to our
plans to reduce our workforce by approximately
5,000 positions to reduce operating costs in response to a
slow economy, increased competition and regulatory pricing
pressures. The charge, recorded in accordance with provisions of
SFAS No. 112, Employers Accounting for
Postemployment Benefits, consisted primarily of cash
severance and enhancements to post employment health benefits
under pre-existing separation plans. Since the offer included
both voluntary and involuntary separations, we will incur
further charges in the third

10



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##### Table of Contents



BELLSOUTH CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)


(UNAUDITED)

(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)




NOTE HRESTRUCTURING AND
BENEFIT


CURTAILMENT CHARGES (Continued)


quarter 2002 as acceptance of the voluntary
offers are received.

As of June 30, 2002, the aggregate liability
related to these restructuring charges, was $384. We expect to
complete the plans by the end of 2002.

In first quarter 2001, we recognized a
curtailment loss of $72 in accordance with provisions of SFAS
No. 106, Employers Accounting for
Postretirement Benefits Other Than Pensions. The loss
resulted from accelerated recognition of prior service cost in
excess of the decrease in our postretirement benefit obligation
for the wireless employees that were subsequently transferred to
and covered under Cingulars postretirement benefit plans.

NOTE IDEBT

In second quarter 2002, we redeemed $500 of our
outstanding debt and recognized a $4 loss on early
extinguishment of debt.

In April 2001, we privately sold $1,000 of
20-year annual put reset securities. In April 2002, the
notes were remarketed in accordance with the global notes
agreement at a rate of 4.105%. Annually, if the holders of the
put options on these securities do not require us to repurchase
the securities, the interest rates for these securities will be
reset.

NOTE JMARKETABLE SECURITIES

We have investments in marketable securities,
primarily common stocks, which are accounted for under the cost
method and are classified as available-for-sale under SFAS
No. 115. Under SFAS No. 115, available-for-sale
securities are required to be carried at their fair value, with
unrealized gains and losses, net of income taxes, recorded in
accumulated other comprehensive income (loss) in our statements
of changes in shareholders equity and comprehensive income.

The fair values of our investments in marketable
securities are determined based on market quotations. Equity
securities that are restricted for more than one year or are not
publicly traded are recorded at cost.

Qwest

At the beginning of 2001, we held
74.0 million shares of Qwest common stock. Since that time,
we have sold all of our shares for a total of $1.4 billion
in cash proceeds.

The following table summarizes our Qwest
transactions (in millions):

|                                                              |      |        |      |          |     |           |       |             |  |   |     |    |  |   |       |       | 
|------------------------------------------------------------- | ---- | ------ | ---- | -------- | --- | --------- | ----- | ----------- |  | - | --- | -- |  | - | ----- | ----- | 
|                                                              |      |        |      |          |     |           |       | Other-than-
|                                                              |      |        |      | Cash     |     | Losses on |       | temporary  
|                                                              |      | Shares |      | Proceeds |     | Sales     |       | Impairments
|                                                              |      |        |      |          |     |           |       |            
|12/31/00                                                      |      |        | 74.0 |          |     |           |       |             |  |   |     |    |  |   |       |      
|Less Sales:                                                   |      |        |      |          |     |           |       |             |  |   |     |    |  |   |       |      
|                                                              | 1Q01 |        |      | 22.2     |     |           | $     | 1,000       |  |   | $   | 52 |  |   | $     |      | 
|                                                              | 2Q01 |        |      | 0.1      |     |           |       | 2           |  |   |     | 1  |  |   |       |      | 
|                                                              | 3Q01 |        |      | 4.5      |     |           |       | 135         |  |   |     | 78 |  |   |       | 1,286 | 
|                                                              | 4Q01 |        |      | 1.7      | (a) |           |       |            |  |   |     |   |  |   |       | 231   | 
|                                                              | 1Q02 |        |      | 18.5     |     |           |       | 166         |  |   |     | 93 |  |   |       | 156   | 
|                                                              | 2Q02 |        |      | 18.5     |     |           |       | 116         |  |   |     | 36 |  |   |       | 51    | 
|                                                              | 3Q02 |        |      | 8.5      |     |           |       | 18          |  |   |     |   |  |   |       |      | 
|                                                              |      |        |      |          |     |           |       |             |  |   |     |    |  |   |       |      
|                                                              |      |        |     |          |     | $         | 1,437 |             |  | $ | 260 |    |  | $ | 1,724 |      
|                                                              |      |        |      |          |     |           |       |             |  |   |     |    |  |   |       |      
|                                                              |      |        |      |          |     |           |       |             |  |   |     |    |  |   |       |      
|(a) Shares exchanged for services (at book
    value of $81). |      |        |      |         

Other-than-temporary Impairments

Qwest stock has declined significantly since the
beginning of 2001. We concluded that the continuing difficulties
experienced by Qwest and other companies in the telecom sector
indicated that the decline was other than temporary and
therefore required an adjustment as reflected in the preceding
table. These charges are included in Other income (expense),
net, in our consolidated statements of income.

Telecentro Oeste Celular Participacoes SA
(TCO)

During first quarter 2002, we sold the American
Depositary Receipts representing nonvoting preferred stock that
we held in TCO. We received total proceeds of $90 and recognized
a gain of $22, or $14 after tax. The pretax gain is included in
Other income (expense), net, in our consolidated statement of
income.

11



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##### Table of Contents



BELLSOUTH CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)


(UNAUDITED)

(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)


NOTE KSEGMENT INFORMATION

We have four reportable operating segments:
(1) Communications group; (2) Domestic wireless;
(3) Latin America; and (4) Domestic advertising and
publishing.

The following table provides information for each
operating segment:

|                                                         |                |              |        |                |  |      |        |       |  |   |        |       |  |   |        |       | 
|-------------------------------------------------------- | -------------- | ------------ | ------ | -------------- |  | ---- | ------ | ----- |  | - | ------ | ----- |  | - | ------ | ----- | 
|                                                         |                |              |        |                |  |     
|                                                         |                | For the      |        |               
|                                                         |                | Three Months |        | For the       
|                                                         |                | Ended        |        | Six Months    
|                                                         |                | June 30,     |        | Ended June 30,
|                                                         |                |              |        |               
|                                                         |                | 2001         |        | 2002           |  | 2001 |        | 2002 
|                                                         |                |              |        |                |  |      |        |      
|Communications group                                     |                |              |        |                |  |      |        |       |  |   |        |       |  |   |        |      
|External revenues                                        |                | $            | 4,749  |                |  | $    | 4,631  |       |  | $ | 9,386  |       |  | $ | 9,276  |      
|Intersegment revenues                                    |                |              | 35     |                |  |      | 40     |       |  |   | 69     |       |  |   | 77     |      
|                                                         |                |              |        |                |  |      |        |       |  |   |        |       |  |   |        |      
|Total revenues                                           |                | $            | 4,784  |                |  | $    | 4,671  |       |  | $ | 9,455  |       |  | $ | 9,353  |      
|                                                         |                |              |        |                |  |      |        |       |  |   |        |       |  |   |        |      
|Operating income                                         |                | $            | 1,430  |                |  | $    | 1,287  |       |  | $ | 2,940  |       |  | $ | 2,650  |      
|                                                         |                |              |        |                |  |      |        |       |  |   |        |       |  |   |        |      
|Segment net income                                       |                | $            | 819    |                |  | $    | 729    |       |  | $ | 1,674  |       |  | $ | 1,499  |      
|                                                         |                |              |        |                |  |      |        |       |  |   |        |       |  |   |        |      
|Domestic wireless                                        |                |              |        |                |  |      |        |       |  |   |        |       |  |   |        |      
|External revenues                                        |                | $            | 1,414  |                |  | $    | 1,500  |       |  | $ | 2,724  |       |  | $ | 2,917  |      
|Intersegment revenues                                    |                |              |       |                |  |      |       |       |  |   |       |       |  |   |       |      
|                                                         |                |              |        |                |  |      |        |       |  |   |        |       |  |   |        |      
|                                                         | Total revenues |              | $      | 1,414          |  |      | $      | 1,500 |  |   | $      | 2,724 |  |   | $      | 2,917 | 
|                                                         |                |              |        |                |  |      |        |       |  |   |        |       |  |   |        |      
|Operating income                                         |                | $            | 303    |                |  | $    | 289    |       |  | $ | 508    |       |  | $ | 555    |      
|                                                         |                |              |        |                |  |      |        |       |  |   |        |       |  |   |        |      
|Net losses of equity affiliates                          |                | $            | (4     | )              |  | $    | (27    | )     |  | $ | (6     | )     |  | $ | (50    | )    
|                                                         |                |              |        |                |  |      |        |       |  |   |        |       |  |   |        |      
|Segment net income                                       |                | $            | 129    |                |  | $    | 99     |       |  | $ | 217    |       |  | $ | 191    |      
|                                                         |                |              |        |                |  |      |        |       |  |   |        |       |  |   |        |      
|Latin America                                            |                |              |        |                |  |      |        |       |  |   |        |       |  |   |        |      
|External revenues                                        |                | $            | 744    |                |  | $    | 597    |       |  | $ | 1,517  |       |  | $ | 1,253  |      
|Intersegment revenues                                    |                |              | 5      |                |  |      | 1      |       |  |   | 14     |       |  |   | 4      |      
|                                                         |                |              |        |                |  |      |        |       |  |   |        |       |  |   |        |      
|Total revenues                                           |                | $            | 749    |                |  | $    | 598    |       |  | $ | 1,531  |       |  | $ | 1,257  |      
|                                                         |                |              |        |                |  |      |        |       |  |   |        |       |  |   |        |      
|Operating (loss) income                                  |                | $            | 89     |                |  | $    | 80     |       |  | $ | 87     |       |  | $ | 143    |      
|                                                         |                |              |        |                |  |      |        |       |  |   |        |       |  |   |        |      
|Net losses of equity affiliates                          |                | $            | (7     | )              |  | $    | (2     | )     |  | $ | (20    | )     |  | $ | (8     | )    
|                                                         |                |              |        |                |  |      |        |       |  |   |        |       |  |   |        |      
|Segment net (loss) income                                |                | $            | (7     | )              |  | $    | 14     |       |  | $ | (70    | )     |  | $ | 18     |      
|                                                         |                |              |        |                |  |      |        |       |  |   |        |       |  |   |        |      
|Domestic advertising and publishing                      |                |              |        |                |  |      |        |       |  |   |        |       |  |   |        |      
|External revenues                                        |                | $            | 436    |                |  | $    | 538    |       |  | $ | 870    |       |  | $ | 917    |      
|Intersegment revenues                                    |                |              | 7      |                |  |      | 5      |       |  |   | 10     |       |  |   | 9      |      
|                                                         |                |              |        |                |  |      |        |       |  |   |        |       |  |   |        |      
|Total revenues                                           |                | $            | 443    |                |  | $    | 543    |       |  | $ | 880    |       |  | $ | 926    |      
|                                                         |                |              |        |                |  |      |        |       |  |   |        |       |  |   |        |      
|Operating income                                         |                | $            | 196    |                |  | $    | 239    |       |  | $ | 422    |       |  | $ | 411    |      
|                                                         |                |              |        |                |  |      |        |       |  |   |        |       |  |   |        |      
|Segment net income                                       |                | $            | 119    |                |  | $    | 146    |       |  | $ | 256    |       |  | $ | 250    |      
|                                                         |                |              |        |                |  |      |        |       |  |   |        |       |  |   |        |      
|Reconciliation to Consolidated Financial
    Information |                |              |        |                |  |      |        |       |  |   |        |       |  |   |        |      
|Operating Revenues                                       |                |              |        |                |  |      |        |       |  |   |        |       |  |   |        |      
|Total reportable segments                                |                | $            | 7,390  |                |  | $    | 7,312  |       |  | $ | 14,590 |       |  | $ | 14,453 |      
|Cingular proportional consolidation                      |                |              | (1,387 | )              |  |      | (1,455 | )     |  |   | (2,672 | )     |  |   | (2,841 | )    
|A&P unbilled receivable adjustment                       |                |              |       |                |  |      |       |       |  |   |       |       |  |   | (163   | )    
|Customer premises equipment revenues                     |                |              |       |                |  |      |       |       |  |   | 13     |       |  |   |       |      
|Florida gross receipts tax                               |                |              | 15     |                |  |      |       |       |  |   | 30     |       |  |   |       |      
|Corporate, eliminations and other                        |                |              | (33    | )              |  |      | (77    | )     |  |   | (57    | )     |  |   | (135   | )    
|                                                         |                |              |        |                |  |      |        |       |  |   |        |       |  |   |        |      
|Total consolidated                                       |                | $            | 5,985  |                |  | $    | 5,780  |       |  | $ | 11,904 |       |  | $ | 11,314 |      
|                                                         |                |              |        |                |  |      |        |       |  |   |        |       |  |   |        |      
|Net income                                               |                |              |        |                |  |      |        |       |  |   |        |       |  |   |        |      
|Total reportable segments                                |                | $            | 1,060  |                |  | $    | 988    |       |  | $ | 2,077  |       |  | $ | 1,958  |      
|Foreign currency transaction losses                      |                |              | (111   | )              |  |      | (354   | )     |  |   | (155   | )     |  |   | (558   | )    
|Brazilian loan impairments                               |                |              |       |                |  |      |       |       |  |   |       |       |  |   | (263   | )    
|Net gains on sales of operations                         |                |              |       |                |  |      |       |       |  |   |       |       |  |   | 857    |      
|A&P unbilled receivable adjustment                       |                |              |       |                |  |      |       |       |  |   |       |       |  |   | (101   | )    
|Net losses on sale or impairment of securities           |                |              |       |                |  |      | (124   | )     |  |   | (32    | )     |  |   | (274   | )    
|Provision for restructurings and asset impairments       |                |              |       |                |  |      | (225   | )     |  |   | (47    | )     |  |   | (225   | )    
|FAS 142 Impairment charge                                |                |              |       |                |  |      |       |       |  |   |       |       |  |   | (1,285 | )    
|Adjustment to ISP Accrual                                |                |              | (88    | )              |  |      |       |       |  |   | (88    | )     |  |   |       |      
|Corporate and other                                      |                |              | 19     |                |  |      | 8      |       |  |   | 16     |       |  |   | 54     |      
|                                                         |                |              |        |                |  |      |        |       |  |   |        |       |  |   |        |      
|Total consolidated                                       |                | $            | 880    |                |  | $    | 293    |       |  | $ | 1,771  |       |  | $ | 163    |      
|                                                         |                |              |        |                |  |      |        |       |  |   |        |       |  |   |        |      

NOTE LSUMMARY FINANCIAL INFORMATION FOR
EQUITY INVESTEES

The following table displays the summary combined
financial information of our equity method businesses. These
amounts are shown on a 100-percent basis.

|                 |  |               |       |              |  |      |       |      |  |   |       |  |  |   |       | 
|---------------- |  | ------------- | ----- | ------------ |  | ---- | ----- | ---- |  | - | ----- |  |  | - | ----- | 
|                 |  |               |       |             
|                 |  | For the Three |       | For the Six 
|                 |  | Months Ended  |       | Months Ended
|                 |  | June 30,      |       | June 30,    
|                 |  |               |       |             
|                 |  | 2001          |       | 2002         |  | 2001 |       | 2002
|                 |  |               |       |              |  |      |       |     
|Revenues         |  | $             | 4,695 |              |  | $    | 4,348 |      |  | $ | 9,106 |  |  | $ | 8,928 | 
|                 |  |               |       |              |  |      |       |      |  |   |       |  |  |   |       | 
|Operating income |  | $             | 812   |              |  | $    | 809   |      |  | $ | 1,283 |  |  | $ | 1,609 | 
|                 |  |               |       |              |  |      |       |      |  |   |       |  |  |   |       | 
|Net income       |  | $             | 233   |              |  | $    | 204   |      |  | $ | 351   |  |  | $ | 601   | 
|                 |  |               |       |              |  |      |       |      |  |   |       |  |  |   |       | 

12



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##### Table of Contents



BELLSOUTH CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)


(UNAUDITED)

(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)


NOTE MRELATED PARTY
TRANSACTIONS

We have made advances to Cingular that totaled
$3,816 at June 30, 2002. We earned $72 in the second
quarter of 2001 and $71 in the second quarter of 2002 and
$143 year-to-date 2001 and $141 year-to-date 2002 from
interest income on this advance. In addition, Cingular owed us
$82 at June 30, 2002, which represents receivables incurred
in the ordinary course of business, and is included in other
current assets. In addition, we generated revenues of
approximately $54 and $112 in second quarter 2001 and 2002,
respectively and $105 and $190 year-to-date 2001 and 2002,
respectively from the provision of local interconnect and long
distance services to Cingular.

NOTE NCONTINGENCIES

REGULATORY MATTERS

Beginning in late 1996, we operated under a price
regulation plan approved by the South Carolina Public Service
Commission under existing state laws. In April 1999, however,
the South Carolina Supreme Court invalidated this price
regulation plan. In July 1999, we elected to be regulated under
a new statute, adopted subsequent to the Commissions
approval of the earlier plan. The new statute allows telephone
companies in South Carolina to operate under price regulation
without obtaining approval from the Commission. The election
became effective during August 1999. The South Carolina Consumer
Advocate petitioned the Commission seeking review of the level
of our earnings during the 19961998 period when we
operated under the subsequently invalidated price regulation
plan. The Commission voted to dismiss the petition in November
1999 and issued orders confirming the vote in February and June
of 2000. In July 2000, the Consumer Advocate appealed the
Commissions dismissal of the petition. If the Consumer
Advocate prevails, the case could be remanded to the South
Carolina PSC which could, after considering evidence, order
refunds to customers in South Carolina. At this time, we are
unable to determine the impact, if any, this may have on future
earnings.

Also in 2000, the Florida Public Service
Commission issued a proposed agency action stating that our
change in 1999 from a late charge based on a percentage of the
amounts overdue to a flat rate fee plus an interest charge
violated the Florida price regulation statute and voted that
approximately $65 should be refunded. We protested the decision.
On August 30, 2001, the Commission issued an order adopting
its proposed action. We have appealed to the Florida Supreme
Court and continue to collect the charges subject to refund. The
total amount as of June 30, 2002 subject to potential
refund was approximately $100, including accrued interest. No
accrual has been recorded in these financial statements related
to this matter.

OTHER CLAIMS

On April 29, 2002 five African-American
employees filed a putative class action lawsuit, captioned
Gladys Jenkins et al. v. BellSouth Corporation,against
the Company in the United States District Court for the Northern
District of Alabama. The complaint alleges that BellSouth
discriminated against current and former African-American
employees with respect to compensation and promotions in
violation of Title VII of the Civil Rights Act of 1964 and 42
U.S.C. Section 1981. Plaintiffs purport to bring the claims on
behalf of two classes: a class of all African-American hourly
workers employed by the Company at any time since April 29,
1998, and a class of all African-American salaried workers
employed by the Company at any time since April 29, 1998 in
management positions at or below Job Grade 59/ Level C. The
plaintiffs are seeking unspecified amounts of back pay,
benefits, punitive damages and attorneys fees and costs,
as well as injunctive relief. At this early stage of the
litigation, the likely outcome of the case cannot be predicted,
nor can a reasonable estimate of the amount of loss, if any, be
made.

We are subject to claims arising in the ordinary
course of business involving allegations of personal injury,
breach of contract, anti-competitive conduct, employment law
issues, regulatory matters and other actions. BST is also
subject to claims attributable to pre-divestiture events
involving environmental liabilities, rates, taxes, contracts and
torts. Certain contingent liabilities for pre-divestiture events
are shared with AT&T Corp. While complete assurance cannot
be given as to the outcome of these claims, we believe that any
financial impact would not be material to our results of
operations, financial position or cash flows.

13



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##### Table of Contents



BELLSOUTH CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)


(UNAUDITED)

(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)


NOTE OSUBSIDIARY FINANCIAL
INFORMATION

We have fully and unconditionally guaranteed all
of the outstanding debt securities of BST that are subject to
the reporting requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934. BST is a 100% owned subsidiary
of BellSouth. In accordance with SEC rules, BST is no longer
subject to the reporting requirements of the Securities Exchange
Act of 1934, and we are providing the following condensed
consolidating financial information.

BST is listed separately because it has debt
securities, registered with the SEC, that we have guaranteed.
All other operating subsidiaries that do not have registered
securities guaranteed by us are presented in the Other column.
The Parent column is comprised of headquarter entities which
provide, among other services, executive management,
administrative support and financial management to operating
subsidiaries. The Parent column also reflects the equity in
earnings of all consolidated and unconsolidated subsidiaries.
The Adjustments column includes the necessary amounts to
eliminate the intercompany balances and transactions between
BST, Other and Parent to reconcile to our consolidated financial
information.

Condensed Consolidating Statements of
Income

|                                           |  |                                          |       |       |  |        |       |             |  |       |       |  |  |   |        |   |  |   |       | 
|------------------------------------------ |  | ---------------------------------------- | ----- | ----- |  | ------ | ----- | ----------- |  | ----- | ----- |  |  | - | ------ | - |  | - | ----- | 
|                                           |  |                                         
|                                           |  | For the Three Months Ended June 30, 2001
|                                           |  |                                         
|                                           |  | BST                                      |       | Other |  | Parent |       | Adjustments |  | Total
|                                           |  |                                          |       |       |  |        |       |             |  |      
|Total operating revenues                   |  | $                                        | 4,658 |       |  | $      | 1,604 |             |  | $     | 649   |  |  | $ | (926   | ) |  | $ | 5,985 | 
|Total operating expenses                   |  |                                          | 3,529 |       |  |        | 1,383 |             |  |       | 452   |  |  |   | (929   | ) |  |   | 4,435 | 
|                                           |  |                                          |       |       |  |        |       |             |  |       |       |  |  |   |        |   |  |   |       | 
|Operating income                           |  |                                          | 1,129 |       |  |        | 221   |             |  |       | 197   |  |  |   | 3      |   |  |   | 1,550 | 
|Interest expense                           |  |                                          | 164   |       |  |        | 79    |             |  |       | 179   |  |  |   | (88    | ) |  |   | 334   | 
|Net earnings (losses) of equity affiliates |  |                                          | 4     |       |  |        | 99    |             |  |       | 1,118 |  |  |   | (1,115 | ) |  |   | 106   | 
|Other income (expense), net                |  |                                          | 2     |       |  |        | 28    |             |  |       | 143   |  |  |   | (91    | ) |  |   | 82    | 
|                                           |  |                                          |       |       |  |        |       |             |  |       |       |  |  |   |        |   |  |   |       | 
|Income before income taxes                 |  |                                          | 971   |       |  |        | 269   |             |  |       | 1,279 |  |  |   | (1,115 | ) |  |   | 1,404 | 
|Provision for income taxes                 |  |                                          | 344   |       |  |        | 155   |             |  |       | 23    |  |  |   | 2      |   |  |   | 524   | 
|                                           |  |                                          |       |       |  |        |       |             |  |       |       |  |  |   |        |   |  |   |       | 
|Net income                                 |  | $                                        | 627   |       |  | $      | 114   |             |  | $     | 1,256 |  |  | $ | (1,117 | ) |  | $ | 880   | 
|                                           |  |                                          |       |       |  |        |       |             |  |       |       |  |  |   |        |   |  |   |       | 

|                                           |  |                                          |       |       |  |        |       |             |  |       |        |   |  |   |       |   |  |   |       |  
|------------------------------------------ |  | ---------------------------------------- | ----- | ----- |  | ------ | ----- | ----------- |  | ----- | ------ | - |  | - | ----- | - |  | - | ----- | -
|                                           |  |                                         
|                                           |  | For the Three Months Ended June 30, 2002
|                                           |  |                                         
|                                           |  | BST                                      |       | Other |  | Parent |       | Adjustments |  | Total
|                                           |  |                                          |       |       |  |        |       |             |  |      
|Total operating revenues                   |  | $                                        | 4,492 |       |  | $      | 1,538 |             |  | $     | 614    |   |  | $ | (864  | ) |  | $ | 5,780 |  
|Total operating expenses                   |  |                                          | 3,597 |       |  |        | 1,287 |             |  |       | 518    |   |  |   | (867  | ) |  |   | 4,535 |  
|                                           |  |                                          |       |       |  |        |       |             |  |       |        |   |  |   |       |   |  |   |       |  
|Operating income                           |  |                                          | 895   |       |  |        | 251   |             |  |       | 96     |   |  |   | 3     |   |  |   | 1,245 |  
|Interest expense                           |  |                                          | 121   |       |  |        | 40    |             |  |       | 197    |   |  |   | (57   | ) |  |   | 301   |  
|Net earnings (losses) of equity affiliates |  |                                          | 5     |       |  |        | 164   |             |  |       | (2,295 | ) |  |   | 2,302 |   |  |   | 176   |  
|Other income (expense), net                |  |                                          | (7    | )     |  |        | (459  | )           |  |       | 110    |   |  |   | (60   | ) |  |   | (416  | )
|                                           |  |                                          |       |       |  |        |       |             |  |       |        |   |  |   |       |   |  |   |       |  
|Income before income taxes                 |  |                                          | 772   |       |  |        | (84   | )           |  |       | (2,286 | ) |  |   | 2,302 |   |  |   | 704   |  
|Provision for income taxes                 |  |                                          | 283   |       |  |        | 119   |             |  |       | 15     |   |  |   | (6    | ) |  |   | 411   |  
|                                           |  |                                          |       |       |  |        |       |             |  |       |        |   |  |   |       |   |  |   |       |  
|Net income                                 |  | $                                        | 489   |       |  | $      | (203  | )           |  | $     | (2,301 | ) |  | $ | 2,308 |   |  | $ | 293   |  
|                                           |  |                                          |       |       |  |        |       |             |  |       |        |   |  |   |       |   |  |   |       |  

|                                           |  |                                        |       |       |  |        |       |             |  |       |       |   |  |   |        |   |  |   |        | 
|------------------------------------------ |  | -------------------------------------- | ----- | ----- |  | ------ | ----- | ----------- |  | ----- | ----- | - |  | - | ------ | - |  | - | ------ | 
|                                           |  |                                       
|                                           |  | For the Six Months Ended June 30, 2001
|                                           |  |                                       
|                                           |  | BST                                    |       | Other |  | Parent |       | Adjustments |  | Total
|                                           |  |                                        |       |       |  |        |       |             |  |      
|Total operating revenues                   |  | $                                      | 9,233 |       |  | $      | 3,180 |             |  | $     | 1,193 |   |  | $ | (1,702 | ) |  | $ | 11,904 | 
|Total operating expenses                   |  |                                        | 6,745 |       |  |        | 2,785 |             |  |       | 932   |   |  |   | (1,709 | ) |  |   | 8,753  | 
|                                           |  |                                        |       |       |  |        |       |             |  |       |       |   |  |   |        |   |  |   |        | 
|Operating income                           |  |                                        | 2,488 |       |  |        | 395   |             |  |       | 261   |   |  |   | 7      |   |  |   | 3,151  | 
|Interest expense                           |  |                                        | 331   |       |  |        | 168   |             |  |       | 367   |   |  |   | (172   | ) |  |   | 694    | 
|Net earnings (losses) of equity affiliates |  |                                        | 8     |       |  |        | 176   |             |  |       | 2,274 |   |  |   | (2,268 | ) |  |   | 190    | 
|Other income (expense), net                |  |                                        | 10    |       |  |        | 91    |             |  |       | 243   |   |  |   | (180   | ) |  |   | 164    | 
|                                           |  |                                        |       |       |  |        |       |             |  |       |       |   |  |   |        |   |  |   |        | 
|Income before income taxes                 |  |                                        | 2,175 |       |  |        | 494   |             |  |       | 2,411 |   |  |   | (2,269 | ) |  |   | 2,811  | 
|Provision for (benefit from) income taxes  |  |                                        | 783   |       |  |        | 293   |             |  |       | (39   | ) |  |   | 3      |   |  |   | 1,040  | 
|                                           |  |                                        |       |       |  |        |       |             |  |       |       |   |  |   |        |   |  |   |        | 
|Net income                                 |  | $                                      | 1,392 |       |  | $      | 201   |             |  | $     | 2,450 |   |  | $ | (2,272 | ) |  | $ | 1,771  | 
|                                           |  |                                        |       |       |  |        |       |             |  |       |       |   |  |   |        |   |  |   |        | 

|                                                                  |  |                                        |       |       |  |        |       |             |  |       |        |   |  |   |        |   |  |   |        |  
|----------------------------------------------------------------- |  | -------------------------------------- | ----- | ----- |  | ------ | ----- | ----------- |  | ----- | ------ | - |  | - | ------ | - |  | - | ------ | -
|                                                                  |  |                                       
|                                                                  |  | For the Six Months Ended June 30, 2002
|                                                                  |  |                                       
|                                                                  |  | BST                                    |       | Other |  | Parent |       | Adjustments |  | Total
|                                                                  |  |                                        |       |       |  |        |       |             |  |      
|Total operating revenues                                          |  | $                                      | 9,014 |       |  | $      | 2,769 |             |  | $     | 1,225  |   |  | $ | (1,694 | ) |  | $ | 11,314 |  
|Total operating expenses                                          |  |                                        | 6,905 |       |  |        | 2,511 |             |  |       | 945    |   |  |   | (1,700 | ) |  |   | 8,661  |  
|                                                                  |  |                                        |       |       |  |        |       |             |  |       |        |   |  |   |        |   |  |   |        |  
|Operating income                                                  |  |                                        | 2,109 |       |  |        | 258   |             |  |       | 280    |   |  |   | 6      |   |  |   | 2,653  |  
|Interest expense                                                  |  |                                        | 245   |       |  |        | 90    |             |  |       | 400    |   |  |   | (130   | ) |  |   | 605    |  
|Net earnings (losses) of equity affiliates                        |  |                                        | 8     |       |  |        | 328   |             |  |       | (1,152 | ) |  |   | 1,157  |   |  |   | 341    |  
|Other income (expense), net                                       |  |                                        | (11   | )     |  |        | (595  | )           |  |       | 981    |   |  |   | (138   | ) |  |   | 237    |  
|                                                                  |  |                                        |       |       |  |        |       |             |  |       |        |   |  |   |        |   |  |   |        |  
|Income before income taxes and change in
    accounting principle |  |                                        | 1,861 |       |  |        | (99   | )           |  |       | (291   | ) |  |   | 1,155  |   |  |   | 2,626  |  
|Provision for (benefit from) income taxes                         |  |                                        | 692   |       |  |        | 195   |             |  |       | 294    |   |  |   | (3     | ) |  |   | 1,178  |  
|Cumulative effect of change in accounting
    principle           |  |                                        |      |       |  |        |      |             |  |       | (1,285 | ) |  |   |       |   |  |   | (1,285 | )
|                                                                  |  |                                        |       |       |  |        |       |             |  |       |        |   |  |   |        |   |  |   |        |  
|Net income                                                        |  | $                                      | 1,169 |       |  | $      | (294  | )           |  | $     | (1,870 | ) |  | $ | 1,158  |   |  | $ | 163    |  
|                                                                  |  |                                        |       |       |  |        |       |             |  |       |        |   |  |   |        |   |  |   |        |  

14



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##### Table of Contents



BELLSOUTH CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)


(UNAUDITED)

(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)




NOTE OSUBSIDIARY FINANCIAL
INFORMATION (Continued)


NOTE OSUBSIDIARY FINANCIAL INFORMATION
(Continued)

Condensed Consolidating Balance
Sheets

|                                               |  |                   |        |               |  |        |        |             |  |       |        |     |  |       |        |        |  |             |        |       |  |   |        |  |  |   |        |  |  |   |        |   |  |   |        |   |  |   |        | 
|---------------------------------------------- |  | ----------------- | ------ | ------------- |  | ------ | ------ | ----------- |  | ----- | ------ | --- |  | ----- | ------ | ------ |  | ----------- | ------ | ----- |  | - | ------ |  |  | - | ------ |  |  | - | ------ | - |  | - | ------ | - |  | - | ------ | 
|                                               |  |                   |        |              
|                                               |  | December 31, 2001 |        | June 30, 2002
|                                               |  |                   |        |              
|                                               |  | BST               |        | Other         |  | Parent |        | Adjustments |  | Total |        | BST |  | Other |        | Parent |  | Adjustments |        | Total
|                                               |  |                   |        |               |  |        |        |             |  |       |        |     |  |       |        |        |  |             |        |      
|ASSETS                                         |  |                   |        |               |  |        |        |             |  |       |        |     |  |       |        |        |  |             |        |       |  |   |        |  |  |   |        |  |  |   |        |   |  |   |        |   |  |   |        | 
|Current assets:                                |  |                   |        |               |  |        |        |             |  |       |        |     |  |       |        |        |  |             |        |       |  |   |        |  |  |   |        |  |  |   |        |   |  |   |        |   |  |   |        | 
|Cash and cash equivalents                      |  | $                 | 111    |               |  | $      | 481    |             |  | $     |       |     |  | $     |       |        |  | $           | 592    |       |  | $ | 60     |  |  | $ | 635    |  |  | $ | 1,147  |   |  | $ |       |   |  | $ | 1,842  | 
|Accounts receivable,
    net                   |  |                   | 3,032  |               |  |        | 2,152  |             |  |       | 4,046  |     |  |       | (4,241 | )      |  |             | 4,989  |       |  |   | 2,769  |  |  |   | 1,749  |  |  |   | 3,448  |   |  |   | (3,696 | ) |  |   | 4,270  | 
|Other current assets                           |  |                   | 520    |               |  |        | 727    |             |  |       | 95     |     |  |       | (68    | )      |  |             | 1,274  |       |  |   | 386    |  |  |   | 679    |  |  |   | 225    |   |  |   | (110   | ) |  |   | 1,180  | 
|                                               |  |                   |        |               |  |        |        |             |  |       |        |     |  |       |        |        |  |             |        |       |  |   |        |  |  |   |        |  |  |   |        |   |  |   |        |   |  |   |        | 
|Total current assets                           |  |                   | 3,663  |               |  |        | 3,360  |             |  |       | 4,141  |     |  |       | (4,309 | )      |  |             | 6,855  |       |  |   | 3,215  |  |  |   | 3,063  |  |  |   | 4,820  |   |  |   | (3,806 | ) |  |   | 7,292  | 
|Investments and advances                       |  |                   | 287    |               |  |        | 5,801  |             |  |       | 8,117  |     |  |       | (3,585 | )      |  |             | 10,620 |       |  |   | 315    |  |  |   | 6,031  |  |  |   | 6,677  |   |  |   | (3,157 | ) |  |   | 9,866  | 
|Property, plant and
    equipment, net         |  |                   | 22,085 |               |  |        | 2,580  |             |  |       | 278    |     |  |       |       |        |  |             | 24,943 |       |  |   | 21,861 |  |  |   | 2,080  |  |  |   | 306    |   |  |   |       |   |  |   | 24,247 | 
|Deferred charges and other
    assets          |  |                   | 4,795  |               |  |        | 213    |             |  |       | 180    |     |  |       | (66    | )      |  |             | 5,122  |       |  |   | 5,106  |  |  |   | 214    |  |  |   | 294    |   |  |   | (48    | ) |  |   | 5,566  | 
|Intangible assets, net                         |  |                   | 1,122  |               |  |        | 3,081  |             |  |       | 288    |     |  |       | 15     |        |  |             | 4,506  |       |  |   | 1,163  |  |  |   | 2,817  |  |  |   | (937   | ) |  |   |       |   |  |   | 3,043  | 
|                                               |  |                   |        |               |  |        |        |             |  |       |        |     |  |       |        |        |  |             |        |       |  |   |        |  |  |   |        |  |  |   |        |   |  |   |        |   |  |   |        | 
|Total assets                                   |  | $                 | 31,952 |               |  | $      | 15,035 |             |  | $     | 13,004 |     |  | $     | (7,945 | )      |  | $           | 52,046 |       |  | $ | 31,660 |  |  | $ | 14,205 |  |  | $ | 11,160 |   |  | $ | (7,011 | ) |  | $ | 50,014 | 
|                                               |  |                   |        |               |  |        |        |             |  |       |        |     |  |       |        |        |  |             |        |       |  |   |        |  |  |   |        |  |  |   |        |   |  |   |        |   |  |   |        | 
|LIABILITIES AND
    SHAREHOLDERS EQUITY       |  |                   |        |               |  |        |        |             |  |       |        |     |  |       |        |        |  |             |        |       |  |   |        |  |  |   |        |  |  |   |        |   |  |   |        |   |  |   |        | 
|Current liabilities:                           |  |                   |        |               |  |        |        |             |  |       |        |     |  |       |        |        |  |             |        |       |  |   |        |  |  |   |        |  |  |   |        |   |  |   |        |   |  |   |        | 
|Debt maturing within one year                  |  | $                 | 3,468  |               |  | $      | 794    |             |  | $     | 4,261  |     |  | $     | (3,412 | )      |  | $           | 5,111  |       |  | $ | 4,272  |  |  | $ | 882    |  |  | $ | 3,177  |   |  | $ | (2,925 | ) |  | $ | 5,406  | 
|Other current liabilities                      |  |                   | 3,063  |               |  |        | 1,568  |             |  |       | 1,182  |     |  |       | (856   | )      |  |             | 4,957  |       |  |   | 2,971  |  |  |   | 1,255  |  |  |   | 1,497  |   |  |   | (817   | ) |  |   | 4,906  | 
|                                               |  |                   |        |               |  |        |        |             |  |       |        |     |  |       |        |        |  |             |        |       |  |   |        |  |  |   |        |  |  |   |        |   |  |   |        |   |  |   |        | 
|Total current liabilities                      |  |                   | 6,531  |               |  |        | 2,362  |             |  |       | 5,443  |     |  |       | (4,268 | )      |  |             | 10,068 |       |  |   | 7,243  |  |  |   | 2,137  |  |  |   | 4,674  |   |  |   | (3,742 | ) |  |   | 10,312 | 
|                                               |  |                   |        |               |  |        |        |             |  |       |        |     |  |       |        |        |  |             |        |       |  |   |        |  |  |   |        |  |  |   |        |   |  |   |        |   |  |   |        | 
|Long-term debt                                 |  |                   | 7,353  |               |  |        | 2,313  |             |  |       | 8,450  |     |  |       | (3,102 | )      |  |             | 15,014 |       |  |   | 5,482  |  |  |   | 1,426  |  |  |   | 8,280  |   |  |   | (2,553 | ) |  |   | 12,635 | 
|                                               |  |                   |        |               |  |        |        |             |  |       |        |     |  |       |        |        |  |             |        |       |  |   |        |  |  |   |        |  |  |   |        |   |  |   |        |   |  |   |        | 
|Noncurrent liabilities:                        |  |                   |        |               |  |        |        |             |  |       |        |     |  |       |        |        |  |             |        |       |  |   |        |  |  |   |        |  |  |   |        |   |  |   |        |   |  |   |        | 
|Deferred income taxes                          |  |                   | 2,907  |               |  |        | 1,080  |             |  |       | (840   | )   |  |       | 59     |        |  |             | 3,206  |       |  |   | 3,347  |  |  |   | 1,419  |  |  |   | (705   | ) |  |   | 15     |   |  |   | 4,076  | 
|Other noncurrent liabilities                   |  |                   | 3,330  |               |  |        | 1,436  |             |  |       | 492    |     |  |       | (97    | )      |  |             | 5,161  |       |  |   | 3,327  |  |  |   | 1,116  |  |  |   | 853    |   |  |   | (49    | ) |  |   | 5,247  | 
|                                               |  |                   |        |               |  |        |        |             |  |       |        |     |  |       |        |        |  |             |        |       |  |   |        |  |  |   |        |  |  |   |        |   |  |   |        |   |  |   |        | 
|Total noncurrent liabilities                   |  |                   | 6,237  |               |  |        | 2,516  |             |  |       | (348   | )   |  |       | (38    | )      |  |             | 8,367  |       |  |   | 6,674  |  |  |   | 2,535  |  |  |   | 148    |   |  |   | (34    | ) |  |   | 9,323  | 
|                                               |  |                   |        |               |  |        |        |             |  |       |        |     |  |       |        |        |  |             |        |       |  |   |        |  |  |   |        |  |  |   |        |   |  |   |        |   |  |   |        | 
|Shareholders equity                           |  |                   | 11,831 |               |  |        | 7,844  |             |  |       | (541   | )   |  |       | (537   | )      |  |             | 18,597 |       |  |   | 12,261 |  |  |   | 8,107  |  |  |   | (1,942 | ) |  |   | (682   | ) |  |   | 17,744 | 
|                                               |  |                   |        |               |  |        |        |             |  |       |        |     |  |       |        |        |  |             |        |       |  |   |        |  |  |   |        |  |  |   |        |   |  |   |        |   |  |   |        | 
|Total liabilities and
    shareholders equity |  | $                 | 31,952 |               |  | $      | 15,035 |             |  | $     | 13,004 |     |  | $     | (7,945 | )      |  | $           | 52,046 |       |  | $ | 31,660 |  |  | $ | 14,205 |  |  | $ | 11,160 |   |  | $ | (7,011 | ) |  | $ | 50,014 | 
|                                               |  |                   |        |               |  |        |        |             |  |       |        |     |  |       |        |        |  |             |        |       |  |   |        |  |  |   |        |  |  |   |        |   |  |   |        |   |  |   |        | 

15



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##### Table of Contents



BELLSOUTH CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)


(UNAUDITED)

(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)




NOTE OSUBSIDIARY FINANCIAL
INFORMATION (Continued)


NOTE OSUBSIDIARY FINANCIAL
INFORMATION

(Continued)


Condensed Consolidating Cash Flow
Statements

|                                     |  |                                        |        |       |  |        |      |             |  |       |      |   |  |   |        |   |  |   |        |  
|------------------------------------ |  | -------------------------------------- | ------ | ----- |  | ------ | ---- | ----------- |  | ----- | ---- | - |  | - | ------ | - |  | - | ------ | -
|                                     |  |                                       
|                                     |  | For the Six Months Ended June 30, 2001
|                                     |  |                                       
|                                     |  | BST                                    |        | Other |  | Parent |      | Adjustments |  | Total
|                                     |  |                                        |        |       |  |        |      |             |  |      
|Cash flows from operating activities |  | $                                      | 3,217  |       |  | $      | 599  |             |  | $     | (165 | ) |  | $ | 276    |   |  | $ | 3,927  |  
|Cash flows from investing activities |  |                                        | (2,859 | )     |  |        | (301 | )           |  |       | (704 | ) |  |   | 1,175  |   |  |   | (2,689 | )
|Cash flows from financing activities |  |                                        | (317   | )     |  |        | (327 | )           |  |       | 454  |   |  |   | (1,451 | ) |  |   | (1,641 | )
|                                     |  |                                        |        |       |  |        |      |             |  |       |      |   |  |   |        |   |  |   |        |  
|Net increase (decrease) in cash      |  | $                                      | 41     |       |  | $      | (29  | )           |  | $     | (415 | ) |  | $ |       |   |  | $ | (403   | )
|                                     |  |                                        |        |       |  |        |      |             |  |       |      |   |  |   |        |   |  |   |        |  

|                                     |  |                                        |        |       |  |        |      |             |  |       |        |   |  |   |        |   |  |   |        |  
|------------------------------------ |  | -------------------------------------- | ------ | ----- |  | ------ | ---- | ----------- |  | ----- | ------ | - |  | - | ------ | - |  | - | ------ | -
|                                     |  |                                       
|                                     |  | For the Six Months Ended June 30, 2002
|                                     |  |                                       
|                                     |  | BST                                    |        | Other |  | Parent |      | Adjustments |  | Total
|                                     |  |                                        |        |       |  |        |      |             |  |      
|Cash flows from operating activities |  | $                                      | 3,601  |       |  | $      | 595  |             |  | $     | 1,203  |   |  | $ | (1,206 | ) |  | $ | 4,193  |  
|Cash flows from investing activities |  |                                        | (1,765 | )     |  |        | (146 | )           |  |       | 1,317  |   |  |   | 504    |   |  |   | (90    | )
|Cash flows from financing activities |  |                                        | (1,887 | )     |  |        | (295 | )           |  |       | (1,373 | ) |  |   | 702    |   |  |   | (2,853 | )
|                                     |  |                                        |        |       |  |        |      |             |  |       |        |   |  |   |        |   |  |   |        |  
|Net increase (decrease) in cash      |  | $                                      | (51    | )     |  | $      | 154  |             |  | $     | 1,147  |   |  | $ |       |   |  | $ | 1,250  |  
|                                     |  |                                        |        |       |  |        |      |             |  |       |        |   |  |   |        |   |  |   |        |  

NOTE PDOMESTIC ADVERTISING AND
PUBLISHING

During first quarter 2002, we determined that the
unbilled receivable balance at our advertising and publishing
subsidiary was overstated. As a result, we recorded a reduction
to advertising and publishing revenues of $163 million, or
$101 million after tax, to adjust the unbilled receivable
balance. Based on our analysis of this matter, we have concluded
that the overstatement was caused by a number of customer
adjustments that were not properly posted to the general ledger.
Our analysis indicates that: this issue occurred over an
extended period of time; no one period was materially misstated
and operating trends were not affected; no regulatory
requirements have been affected; we do not have any debt or any
covenants with which to comply that are affected by this error;
and the error did not result from an unlawful transaction.

NOTE QGUATEMALA

As a result of continuing poor economic
conditions in Latin America and increasing competition, the
long-term value of our equity investment in Guatemala has
declined significantly. Our review indicated the declines in
fair value below carrying value were other-than-temporary and,
accordingly, we recorded an impairment loss of $62 with no tax
benefit. This charge reduced the carrying amount of our
investment to its fair value.

16



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##### Table of Contents



Item 2. Managements Discussion
and Analysis of Financial Condition and Results of
Operations

BELLSOUTH CORPORATION




MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION


AND RESULTS OF OPERATIONS


(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS
AND AS OTHERWISE INDICATED)


For a more complete understanding of our
industry, the drivers of our business and our current period
results, you should read the following Managements
Discussion and Analysis of Financial Condition and Results of
Operations in conjunction with our latest annual report on
Form 10-K, our previous quarterly report on Form 10-Q,
and our other filings with the SEC.







Consolidated Results of Operations





Key financial and operating data for the second
quarter 2001 and 2002 and the respective year-to-date periods
are as follows. All references to earnings per share are on a
diluted basis:

|                                                        |                            |                      |        |        |  |                    |        |        |  |      |       |        |   |   |        |        |  |   |        |        |  |  |       |       |  
|------------------------------------------------------- | -------------------------- | -------------------- | ------ | ------ |  | ------------------ | ------ | ------ |  | ---- | ----- | ------ | - | - | ------ | ------ |  | - | ------ | ------ |  |  | ----- | ----- | -
|                                                       
|                                                       
|                                                        |                            |                      |        |        |  |                    |        |       
|                                                        |                            | For the Three Months |        |        |  | For the Six Months |        |       
|                                                        |                            | Ended June 30,       |        |        |  | Ended June 30,     |        |       
|                                                        |                            |                      |        | %      |  |                    |        | %     
|                                                        |                            | 2001                 |        | 2002   |  | Change             |        | 2001   |  | 2002 |       | Change
|                                                       
|                                                       
|Results of operations:                                  |                            |                      |        |        |  |                    |        |        |  |      |       |        |   |   |        |        |  |   |        |        |  |  |       |      
|Operating revenues                                      |                            | $                    | 5,985  |        |  | $                  | 5,780  |        |  |      | (3.4  | )      |   | $ | 11,904 |        |  |   | 11,314 |        |  |  | (5.0  | )    
|Operating expenses                                      |                            |                      | 4,435  |        |  |                    | 4,535  |        |  |      | 2.3   |        |   |   | 8,753  |        |  |   | 8,661  |        |  |  | (1.1  | )    
|Operating income                                        |                            |                      | 1,550  |        |  |                    | 1,245  |        |  |      | (19.7 | )      |   |   | 3,151  |        |  |   | 2,653  |        |  |  | (15.8 | )    
|Interest expense                                        |                            |                      | 334    |        |  |                    | 301    |        |  |      | (9.9  | )      |   |   | 694    |        |  |   | 605    |        |  |  | (12.8 | )    
|Gain on sale of operations                              |                            |                      |       |        |  |                    |       |        |  |      | N/M   | *      |   |   |       |        |  |   | 1,318  |        |  |  | N/M   |      
|Net earnings of equity affiliates                       |                            |                      | 108    |        |  |                    | 176    |        |  |      | 63.0  |        |   |   | 190    |        |  |   | 341    |        |  |  | 79.5  |      
|Other income (expense), net                             |                            |                      | 80     |        |  |                    | (416   | )      |  |      | N/M   |        |   |   | 164    |        |  |   | (1,081 | )      |  |  | N/M   |      
|Provision for income taxes                              |                            |                      | 524    |        |  |                    | 411    |        |  |      | (21.6 | )      |   |   | 1,040  |        |  |   | 1,178  |        |  |  | 13.3  |      
|Cumulative effect of change in accounting
    principle |                            |                      |       |        |  |                    |       |        |  |      | N/M   |        |   |   |       |        |  |   | (1,285 | )      |  |  | N/M   |      
|Net income                                              |                            | $                    | 880    |        |  | $                  | 293    |        |  |      | (66.7 | )      |   | $ | 1,771  |        |  | $ | 163    |        |  |  | (90.8 | )    
|Earnings per share                                      |                            | $                    | 0.47   |        |  | $                  | 0.16   |        |  |      | (66.0 | )      |   | $ | 0.94   |        |  | $ | 0.09   |        |  |  | (90.4 | )    
|Cash flow data:                                         |                            |                      |        |        |  |                    |        |        |  |      |       |        |   |   |        |        |  |   |        |        |  |  |       |      
|Cash provided by operating activities                   |                            | $                    | 2,254  |        |  | $                  | 2,128  |        |  |      | (5.6  | )      |   | $ | 3,927  |        |  | $ | 4,193  |        |  |  | 6.8   |      
|Cash (used for) provided by investing activities        |                            | $                    | (1,749 | )      |  | $                  | (835   | )      |  |      | 52.3  |        |   | $ | (2,689 | )      |  | $ | (90    | )      |  |  | N/M   |      
|Cash used for financing activities                      |                            | $                    | (559   | )      |  | $                  | (1,512 | )      |  |      | N/M   |        |   | $ | (1,641 | )      |  | $ | (2,853 | )      |  |  | (73.9 | )    
|Other:                                                  |                            |                      |        |        |  |                    |        |        |  |      |       |        |   |   |        |        |  |   |        |        |  |  |       |      
|Effective tax rate                                      |                            |                      | 37.3   | %      |  |                    | 58.4   | %      |  |      | N/M   |        |   |   | 37.0   | %      |  |   | 44.9   | %      |  |  | N/M   |      
|Average debt balances:                                  |                            |                      |        |        |  |                    |        |        |  |      |       |        |   |   |        |        |  |   |        |        |  |  |       |      
|                                                        | Short-term debt            |                      | $      | 6,039  |  |                    | $      | 5,256  |  |      |       | (13.0  | ) |   | $      | 6,281  |  |   | $      | 4,948  |  |  |       | (21.2 | )
|                                                        | Long-term debt             |                      | $      | 13,431 |  |                    | $      | 13,606 |  |      |       | 1.3    |   |   | $      | 13,197 |  |   | $      | 14,213 |  |  |       | 7.7   |  
|                                                        | Total average debt balance |                      | $      | 19,470 |  |                    | $      | 18,862 |  |      |       | (3.1   | ) |   | $      | 19,478 |  |   | $      | 19,161 |  |  |       | (1.6  | )
|                                                       

|  |               
|- | --------------
|* | Not Meaningful

17



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##### Table of Contents









Overview of Consolidated Results of
Operations





The following events impacted operating revenues
and

expenses during the six months ended June 30:


|                                                                       |  |                             |      |           |  |        |     |        |  |   |      |   |  |   |      |  
|---------------------------------------------------------------------- |  | --------------------------- | ---- | --------- |  | ------ | --- | ------ |  | - | ---- | - |  | - | ---- | -
|                                                                       |  |                            
|                                                                       |  | Impact on Reported Results
|                                                                       |  | Increase (Decrease)        
|                                                                       |  |                            
|                                                                       |  |                             |      | Income    |  |       
|                                                                       |  | Operating                   |      | Operating |  | Before |     | Net   
|                                                                       |  | Revenues                    |      | Expense   |  | Taxes  |     | Income
|                                                                       |  |                             |      |           |  |        |     |       
|2001                                                                   |  |                             |      |           |  |        |     |        |  |   |      |   |  |   |      |  
|Postretirement benefit expense for former
    wireless employees       |  | $                           |     |           |  | $      | 72  |        |  | $ | (72  | ) |  | $ | (47  | )
|Adjustment to ISP accrual                                              |  |                             |     |           |  |        | 143 |        |  |   | (143 | ) |  |   | (88  | )
|                                                                       |  |                             |      |           |  |        |     |        |  |   |      |   |  |   |      |  
|                                                                       |  | $                           |     |           |  | $      | 215 |        |  | $ | (215 | ) |  | $ | (135 | )
|                                                                       |  |                             |      |           |  |        |     |        |  |   |      |   |  |   |      |  
|2002                                                                   |  |                             |      |           |  |        |     |        |  |   |      |   |  |   |      |  
|Domestic advertising and publishing unbilled
    receivable adjustment |  | $                           | (163 | )         |  | $      |    |        |  | $ | (163 | ) |  | $ | (101 | )
|Workforce reduction                                                    |  |                             |     |           |  |        | 357 |        |  |   | (357 | ) |  |   | (225 | )
|                                                                       |  |                             |      |           |  |        |     |        |  |   |      |   |  |   |      |  
|                                                                       |  | $                           | (163 | )         |  | $      | 357 |        |  | $ | (520 | ) |  | $ | (326 | )
|                                                                       |  |                             |      |           |  |        |     |        |  |   |      |   |  |   |      |  

Postretirement benefit expense for former
wireless employees The
amount shown represents expense for changes in postretirement
medical benefit obligations for the wireless employees that were
transitioned to Cingular.

Adjustment to ISP
accrual Represents the
adjustment of the accrual for prior claims from competitive
local exchange carriers regarding reciprocal compensation for
ISP traffic.

Domestic advertising and publishing unbilled
receivable adjustment
During first quarter 2002, BellSouth determined that the
unbilled receivable balance was overstated. As a result,
BellSouth recorded a reduction to advertising and publishing
revenues.

Workforce
reduction The amount shown
represents the expense to reduce our workforce by approximately
5,000 positions. We are eliminating these positions in an effort
to reduce operating costs in response to a slow economy,
increased competition and regulatory pricing pressures. See note
H to our consolidated financial statements for further
discussion.

Operating Revenues

Operating revenues decreased $205 in second
quarter 2002 and $590 for the year-to-date period as compared to
the same periods in 2001. Excluding the impact of the preceding
items, revenues decreased $427 for the year-to-date period as
compared to the same period in 2001. The remaining decreases
reflect:



|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | A decline in communications group revenues due
    to: continuing weak demand intensified by business failures,
    including failures in the telecommunications industry, and
    continued market share losses, most notably in the wholesale and
    business markets; loss of retail access lines, specifically in
    the small business and mid-market segments; and unfavorable
    impacts from the movement of wholesale customers from a resale
    basis to lower-priced unbundled network elements. Revenue growth
    was also impacted by product substitution and, to a lesser
    degree, by the discontinuation of our payphone business and
    lower collocation rents. These decreases were offset by growth
    in retail digital and data revenues, in wholesale long distance
    revenues and, to a lesser degree, in calling features and the
    impact of SAB 101.
| 
| | A decline in revenues at the Latin America group.
    Revenues in this segment were negatively impacted by the effect
    of foreign currency exchange rates.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| 
| | An increase in revenues in the second quarter and
    in the year-to-date period from the domestic advertising and
    publishing group driven by timing of directory publishing
    schedules.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| 
| | An other revenues decrease for the second quarter
    and year-to-date period, respectively, due to the loss of
    wireless handset captive insurance revenues.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

Operating Expenses

Total operating expenses increased $100 during
the second quarter 2002 and decreased $92 for the year-to-date
period as compared to the same periods in 2001. Excluding the
impact of the preceding events, total operating expenses
decreased $114 during the second quarter 2002 and decreased $234
for the year-to-date period as compared to the same periods in
2001.



|  |                                                                                                                                                                                                                                                                                                                                                                 
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Operational and support expenses decreased $224
    during the second quarter 2002 and $420 in the year-to-date
    period 2002. Excluding the impact of the previously discussed
    items, operational and support expenses decreased $81 for the
    second quarter 2002 and decreased $205 for the year-to-date as
    compared to the same periods in 2001.



| |   |                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Expenses in the communications group increased in
    the second quarter 2002 and in the year-to-date period as a
    result of higher volumes in

18



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##### Table of Contents



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | BellSouths wholesale long distance
    businesses, higher uncollectibles due to bankruptcies of telecom
    sector customers and continued economic slowing, and higher
    employee benefit costs driven primarily by higher pension and
    retiree benefits and increasing medical costs and the impact of
    SAB 101, offset by lower salary and wages and employee expenses
    due to force reductions.
|
| |  | Expenses in the Latin America segment decreased
    in the second quarter 2002 and for the year-to-date period
    driven primarily by changes in foreign currency exchange rates.                                                                                                                                                                                                                             
|
| |  | Other contributing factors include decreases in
    headquarters related expenses, which include a reduction in
    expenses related to the exit of the wireless entertainment
    business.                                                                                                                                                                                                                   



|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Depreciation and amortization decreased $33 in
    second quarter 2002 and $29 in the year-to-date period. These
    decreases are due to a decline in expenses in the Latin America
    segment for second quarter 2002 and for the year-to-date period,
    reflecting the effect of foreign currency exchange rates, the
    cessation of amortization of goodwill due to the adoption of
    SFAS No. 142 and revisions to depreciation at the Colombian
    operations, which resulted in lower depreciation expense in
    first quarter 2002. The decreases were partially offset by
    increases at the communications group reflecting additional
    deployment of capitalized software and investment in the network.

Interest expense

Interest expense decreased $33 during second
quarter 2002 and $89 for the year-to-date period as compared to
the same periods in 2001. Lower short-term interest rates and
lower average principal amounts outstanding on short-term and
long-term borrowings drove the decrease.

Gain on sale of operations

Gain on sale of operations for year-to-date 2002
includes a gain of $1,335 related to the conversion of our
ownership interest in E-Plus and a loss of $17 associated with
the exit of one of our Brazilian advertising and publishing
companies.

Net earnings of equity affiliates

Earnings from our unconsolidated businesses
increased $68 in second quarter 2002 and $151 for the
year-to-date period compared to the same periods in 2001. The
increases were attributable to no longer recording losses for
our investment in BCP. Losses not recorded were $69 for the
second quarter and the year-to-date 2002, and a decrease in
losses from our former wireless subsidiary in Germany of $20 in
second quarter 2002 and $45 for year-to-date 2002. These
increases were slightly offset by decreases in equity in
earnings from Cingular of $52 and $45 for the second quarter and
year-to-date period, respectively.

Other income (expense), net

Other income (expense), net includes interest
income, gains (losses) on disposition of assets, foreign
currency gains (losses), gains (losses) on the sale and
impairments of investments and miscellaneous nonoperating income.

The quarter over quarter decrease of $177 is
primarily driven by: a $36 increase in losses associated with
the sale of Qwest shares; $51 of expense in second quarter 2002
to reduce our remaining investment in Qwest to market value; and
a $62 loss related to an impairment of our investment in
BellSouth Guatemala.

The year over year decrease of $664 is primarily
driven by: $275 of expense in first quarter 2002 from the
recognition of an impairment on shareholder loans to our
Brazilian equity investments; $108 of expense in first quarter
2002 for the recognition of a guarantee on a portion of the
Brazilian operations debt; a $266 increase in losses
associated with the sale and impairment of Qwest shares; and $62
for an impairment of our investment in BellSouth Guatemala.
These expenses and losses were partially offset by a $67
increase in minority interests at our Latin American operations.

Foreign currency transaction losses

Foreign currency transaction losses, which relate
primarily to U.S. dollar denominated debt in Latin America,
increased $319 and $581 for the second quarter and year-to-date
period, respectively, compared to comparable periods in 2001.
The majority of the losses in 2002 were driven by the
devaluation of the Argentinean peso.

Provision for income taxes

The provision for income taxes decreased $113 in
second quarter 2002 and increased $138 year-to-date as
compared to comparable periods in the prior year. The effective
tax rate increased from 37.3% in second quarter 2001 to 58.4% in
second quarter 2002 and from 37.0% in year to 2001 to 44.9% in
year-to-date 2002. The increases in the effective tax rate were
driven by recording a 100% foreign tax valuation allowance,
reserving against the tax benefits generated by losses at our
operations in Argentina. The valuation allowance is necessary
due to the lack of clarity in the tax law and potentially
limited tax carry-forward period.

19



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##### Table of Contents



Cumulative effect of change in accounting
principle

This amount reflects a one-time charge related to
the adoption of new accounting rules for goodwill, known as
Statement of Financial Accounting Standard No. 142 (SFAS
No. 142). The non-cash charge reduced the value of goodwill
on the companys balance sheet by approximately
$1.3 billion. The effect of SFAS No. 142 was recorded
as a cumulative effect of accounting change as of
January 1, 2002 to BellSouths first quarter 2002
results. See note B to our consolidated financial
statements for further discussion.







Results by Segment





Our reportable segments reflect strategic
business units that offer similar products and services and/or
serve similar customers. We have four reportable operating
segments:



| |   |                                     
| | - | ------------------------------------
| |  | Communications group;               
|
| |  | Domestic wireless;                  
|
| |  | Latin America; and                  
|
| |  | Domestic advertising and publishing.

We have included the operations of all other
businesses falling below the reporting threshold in the
All other businesses segment.

Management evaluates the performance of each
business unit based on net income, exclusive of internal charges
for use of intellectual property and adjustments for unusual
items that may arise. Unusual items are transactions or events
that are included in reported consolidated results but are
excluded from segment results due to their nonrecurring or
nonoperational nature. In addition, when changes in our business
affect the comparability of current versus historical results,
we will adjust historical operating information to reflect the
current business structure. See Note K to the consolidated
financial statements for a reconciliation of segment results to
the consolidated financial information.

The following discussion highlights our
performance in the context of these segments. For a more
complete understanding of our industry, the drivers of our
business, and our current period results, you should read this
discussion in conjunction with our consolidated financial
statements, including the related notes.







Communications Group





The communications group includes our core
domestic businesses including: all domestic wireline voice,
data, broadband, e-commerce, long distance, Internet services
and advanced voice features. The group provides these services
to an array of customers, including residential, business and
wholesale.

20



---



##### Table of Contents



|                                            |                                  |                       |                                  |       |  |                    |        |       |  |       |       |        |   |      |        |        |        |        |        |        |        |        |       |       |       |      |  
|------------------------------------------- | -------------------------------- | --------------------- | -------------------------------- | ----- |  | ------------------ | ------ | ----- |  | ----- | ----- | ------ | - | ---- | ------ | ------ | ------ | ------ | ------ | ------ | ------ | ------ | ----- | ----- | ----- | ---- | -
|                                           
|                                           
|                                            |                                  |                       |                                  |       |  |                    |        |      
|                                            |                                  | For the Three Months  |                                  |       |  | For the Six Months |        |      
|                                            |                                  | Ended June 30,        |                                  |       |  | Ended June 30,     |        |      
|                                            |                                  |                       |                                  | %     |  |                    |        | %    
|                                            |                                  | 2001                  |                                  | 2002  |  | Change             |        | 2001  |  | 2002  |       | Change
|                                           
|                                           
|Results of Operations                       |                                  |                       |                                  |       |  |                    |        |       |  |       |       |        |   |      |        |        |        |        |        |        |        |        |       |      
|Segment operating revenues:                 |                                  |                       |                                  |       |  |                    |        |       |  |       |       |        |   |      |        |        |        |        |        |        |        |        |       |      
|                                            | Local service                    |                       | $                                | 2,952 |  |                    | $      | 2,939 |  |       |       | (0.4   | ) |      | $      | 5,850  |        |        | $      | 5,880  |        |        |       | 0.5   |      
|                                            | Network access                   |                       |                                  | 1,224 |  |                    |        | 1,182 |  |       |       | (3.4   | ) |      |        | 2,459  |        |        |        | 2,387  |        |        |       | (2.9  | )    
|                                            | Long distance                    |                       |                                  | 175   |  |                    |        | 213   |  |       |       | 21.7   |   |      |        | 346    |        |        |        | 418    |        |        |       | 20.8  |      
|                                            | Other communications             |                       |                                  | 434   |  |                    |        | 337   |  |       |       | (22.4  | ) |      |        | 801    |        |        |        | 668    |        |        |       | (16.6 | )    
|                                            |                                  |                       | Total segment operating revenues |       |  | 4,785              |        |       |  | 4,671 |       |        |   | (2.4 | )      |        |        | 9,456  |        |        |        | 9,353  |       |       |       | (1.1 | )
|Segment operating expenses:                 |                                  |                       |                                  |       |  |                    |        |       |  |       |       |        |   |      |        |        |        |        |        |        |        |        |       |      
|                                            | Operational and support expenses |                       |                                  | 2,342 |  |                    |        | 2,361 |  |       |       | 0.8    |   |      |        | 4,527  |        |        |        | 4,665  |        |        |       | 3.0   |      
|                                            | Depreciation and amortization    |                       |                                  | 1,013 |  |                    |        | 1,023 |  |       |       | 1.0    |   |      |        | 1,989  |        |        |        | 2,038  |        |        |       | 2.5   |      
|                                            |                                  |                       | Total segment operating expenses |       |  | 3,355              |        |       |  | 3,384 |       |        |   | 0.9  |        |        |        | 6,516  |        |        |        | 6,703  |       |       |       | 2.9  |  
|Segment operating income                    |                                  |                       | 1,430                            |       |  |                    | 1,287  |       |  |       | (10.0 | )      |   |      | 2,940  |        |        |        | 2,650  |        |        |        | (9.9  | )    
|Segment net income                          |                                  | $                     | 819                              |       |  | $                  | 729    |       |  |       | (11.0 | )      |   | $    | 1,674  |        |        | $      | 1,499  |        |        |        | (10.5 | )    
|Key Indicators                              |                                  |                       |                                  |       |  |                    |        |       |  |       |       |        |   |      |        |        |        |        |        |        |        |        |       |      
|Access line counts:                         |                                  |                       |                                  |       |  |                    |        |       |  |       |       |        |   |      |        |        |        |        |        |        |        |        |       |      
|                                            | Access lines(1):                 |                       |                                  |       |  |                    |        |       |  |       |       |        |   |      |        |        |        |        |        |        |        |        |       |       |      
|                                            |                                  | Residential retail    |                                  |       |  |                    |        |       |  |       |       |        |   |      |        |        | 16,520 |        |        |        | 15,777 |        |       |       | (4.5  | )   
|                                            |                                  | Residential wholesale |                                  |       |  |                    |        |       |  |       |       |        |   |      |        |        | 605    |        |        |        | 988    |        |       |       | 63.3  |     
|                                            |                                  | Business retail       |                                  |       |  |                    |        |       |  |       |       |        |   |      |        |        | 7,795  |        |        |        | 7,517  |        |       |       | (3.6  | )   
|                                            |                                  | Business wholesale    |                                  |       |  |                    |        |       |  |       |       |        |   |      |        |        | 517    |        |        |        | 662    |        |       |       | 28.0  |     
|                                            |                                  | Other                 |                                  |       |  |                    |        |       |  |       |       |        |   |      |        |        | 229    |        |        |        | 194    |        |       |       | (15.3 | )   
|                                            |                                  |                       | Total access lines               |       |  |                    |        |       |  |       |       |        |   |      |        |        |        | 25,666 |        |        |        | 25,138 |       |       |       | (2.1 | )
|                                            | Access line equivalents(2)       |                       |                                  |       |  |                    |        |       |  |       |       |        |   |      |        | 33,993 |        |        |        | 42,766 |        |        |       | 25.8  |      
|                                            |                                  |                       | Total equivalent access lines    |       |  |                    |        |       |  |       |       |        |   |      |        |        |        | 59,659 |        |        |        | 67,904 |       |       |       | 13.8 |  
|Resold lines and unbundled network elements |                                  |                       |                                  |       |  |                    |        |       |  |       |       |        |   |      | 1,501  |        |        |        | 2,070  |        |        |        | 37.9  |      
|DSL customers                               |                                  |                       |                                  |       |  |                    |        |       |  |       |       |        |   |      | 381    |        |        |        | 803    |        |        |        | 110.8 |      
|Access minutes of use (millions)            |                                  |                       | 27,986                           |       |  |                    | 25,073 |       |  |       | (10.4 | )      |   |      | 56,416 |        |        |        | 50,656 |        |        |        | (10.2 | )    
|Toll messages (millions)                    |                                  |                       | 111                              |       |  |                    | 97     |       |  |       | (12.6 | )      |   |      | 222    |        |        |        | 193    |        |        |        | (13.1 | )    
|Digital and data services revenues          |                                  | $                     | 1,014                            |       |  | $                  | 1,075  |       |  |       | 6.0   |        |   | $    | 1,982  |        |        | $      | 2,179  |        |        |        | 9.9   |      
|Calling feature revenues                    |                                  | $                     | 573                              |       |  | $                  | 589    |       |  |       | 2.8   |        |   | $    | 1,136  |        |        | $      | 1,181  |        |        |        | 4.0   |      
|Capital expenditures                        |                                  | $                     | 1,417                            |       |  | $                  | 918    |       |  |       | (35.2 | )      |   | $    | 2,894  |        |        | $      | 1,840  |        |        |        | (36.4 | )    
|                                           
|                                           



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Access lines includes an adjustment to convert
    ISDN lines to a switched access line basis for comparability
    purposes.                                                                                                                                                                                                                                                                                                                                                                                     
|   
|(2) | Access line equivalents represent a conversion of
    non-switched data circuits to a switched access line basis and
    are presented for comparability purposes. Equivalents are
    calculated by converting high-speed/high-capacity data circuits
    to the equivalent of a switched access line based on transport
    capacity. While the revenues generated by access line
    equivalents have a directional relationship with these counts,
    growth rates cannot be compared on an equivalent basis.

Segment operating revenues

Local service

Local service revenues decreased $13 in the
second quarter 2002 and increased $30 for the year-to-date
period when compared to the same periods in 2001. The
year-to-date increases are attributable to strong growth in
digital and data revenues and, to a lesser extent, by our
marketing of calling features. The impact of net SAB 101 revenue
deferrals increased revenues $54 in the second quarter and $89
in the year-to-date period. These increases were offset by
corresponding increases in expenses. Those increases were
substantially offset by a decrease in basic and extended area
service revenues.

The core business was affected by a slowing
economy, competitive impacts related to over 300 active
carriers authorized to provide telecommunications services in
our region and technological changes manifested in the shifting
of customers from wireline to wireless and second line customers
to high-speed access service.

Residential access lines decreased 2.1% and
business access lines decreased 1.6%. We continue to experience
a shift in retail to wholesale mix of access lines.

At June 30, 2002, we provided
2.1 million wholesale lines to competitors, on both a
resale and unbundled network elements (UNE) basis. At
June 30, 2002, UNEs accounted for approximately 74% of our
wholesale lines versus at June 30, 2001 when they
represented 51%. Because of the larger discounts associated with
UNEs versus resale, this shift to UNEs is negatively impacting
our revenue growth. We also estimate that we have lost an
additional 2.3 million lines to facilities-based
competitors.

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Revenues from optional calling features such as
caller ID, call waiting, call return and voicemail service
increased $16, or 2.8%, during second quarter 2002 and $45, or
4.0%, for the year-to-date period when compared to the same
periods in 2001. These increases were driven by growth in
calling feature usage through our Complete Choice® Package,
a one-price bundled offering of over 20 calling features.

Network access

Network access revenues decreased $42 in the
second quarter of 2002 when compared to the same 2001 period,
and $72 year over year. Revenues from dedicated
high-capacity data line offerings grew approximately $29 quarter
over quarter and $61 year over year as high-capacity users
increased their use of our network. These increases were offset
by a $70 decline in the second quarter and $138 decline for the
year-to-date period in revenues derived from switched access
services resulting from a 10.4% decrease quarter over quarter
and 10.2% decrease year over year in access minutes-of-use
volumes and a shift in the basis of wholesale line sales from
resale to UNEs, which do not provide switched access revenues.
These volumes continue to be negatively impacted by migration of
minutes to dedicated digital and data services offerings which
are fixed-charge based rather than minute-of-use based,
competition from competitive local exchange carriers whose
traffic completely bypasses our network, and the effect of
alternative services such as wireless and Internet e-mail.

Long distance

Long distance revenues increased $38
quarter-over-quarter and $72 for the year-to-date period. Strong
growth of $47 quarter over quarter and $107 year over year
in wholesale long distance and prepaid long distance cards was
partially offset by $9 of losses quarter over quarter and $35 of
losses year over year in intraLATA toll revenues as toll
messages declined 12.6% for the quarter and 13.1% for the year.
Growth in wholesale long distance was driven by increased sales
to second and third tier long distance carriers and higher
volumes related to Cingular driven by proliferation of free long
distance plans. IntraLATA toll losses are driven by the
expansion of our local calling areas and the increased demand
for Area Plus services, which are included in local service.

During the second quarter 2002, we obtained the
right to provide interLATA services in Georgia and Louisiana.
While this did not significantly impact reported amounts for the
second quarter 2002, we expect increases in future periods.

Other communications

Other communications revenue decreased $97 during
second quarter 2002 and $133 for the year-to-date period.
Reductions in payphone and collocation rent were the primary
drivers of the decrease. BellSouth continues to transition out
of the payphone business by year-end 2003.

Segment operating expenses

Operational and support expenses

Operational and support expenses increased $19
during second quarter 2002 and $138 for the year-to-date period.

Higher volumes in the wholesale long distance
business contributed to an increase in expense of $39 in the
second quarter and $82 for the year-to-date period. The
provision for uncollectibles expense increased $86 and $127 in
the second quarter and year-to-date periods due to bankruptcies
of telecom sector customers and continued weak economic
conditions. Employee benefit costs were up in both periods as
pension income, net of postretirement benefit costs, was $25
lower in the second quarter and $50 lower for the year-to-date
period. Increased medical and prescription drug claim costs also
contributed to the increase.

The impact of net SAB 101 expense deferrals
increased expenses $54 in the second quarter and $89 in the
year-to-date period. These increases were offset by
corresponding increases in revenues.

These cost increases were partially offset by
work force reductions and lower overtime for network repair and
maintenance activity, primarily as a result of reduced business
volumes, that resulted in decreased expenses of $70 and $141 in
the second quarter and year-to-date periods, respectively. Other
employee-related expenses such as travel, training and
conferences decreased $26 in the second quarter and $55 for the
year-to-date period. Non-employee related expenses such as
contract services, commissions, rents and materials and supplies
costs decreased $86 in the second quarter and $95 for the
year-to-date period in response to lower demand and the current
competitive environment.

Depreciation and amortization

Depreciation and amortization expense increased
$10 during second quarter 2002 and $49 for the year-to-date
period when compared to the same periods in 2001. The increases
are primarily attributable to amortization of capitalized
software and depreciation resulting from higher levels of net
property, plant and equipment partially offset by declines in
the overall composite depreciation rate.

22



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##### Table of Contents









Domestic Wireless





During fourth quarter 2000, we contributed our
domestic wireless operations to a joint venture with SBC
Communications, forming the second largest wireless carrier in
the U.S., Cingular. We own an approximate 40% economic interest
in the venture and share control with SBC. We account for the
investment under the equity method. For management purposes, we
evaluate our domestic wireless segment based on our
proportionate share of Cingulars results. Accordingly,
results for our domestic wireless segment reflect the
proportional consolidation of approximately 40% of
Cingulars results. Customers and related revenues for the
periods ended June 30, 2001 do not reflect SBCs
September 2001 contribution of over 500,000 customers in
their Puerto Rico operations. Excluding the impact of these
customers on our results for the three and six months ended
June 30, 2002, our domestic wireless segment revenue growth
was 4.2% and 5.2% for the three and six months ended
June 30, 2002, respectively.

|                                     |                                  |                                  |     |       |       |                    |     |       |       |      |       |        |     |   |       |       |       |   |       |       |       |  |       |      |     | 
|------------------------------------ | -------------------------------- | -------------------------------- | --- | ----- | ----- | ------------------ | --- | ----- | ----- | ---- | ----- | ------ | --- | - | ----- | ----- | ----- | - | ----- | ----- | ----- |  | ----- | ---- | --- | 
|                                    
|                                    
|                                     |                                  |                                  |     |       |       |                    |     |      
|                                     |                                  | For the Three Months             |     |       |       | For the Six Months |     |      
|                                     |                                  | Ended June 30,                   |     |       |       | Ended June 30,     |     |      
|                                     |                                  |                                  |     | %     |       |                    |     | %    
|                                     |                                  | 2001                             |     | 2002  |       | Change             |     | 2001  |       | 2002 |       | Change
|                                    
|                                    
|Segment operating revenues:          |                                  |                                  |     |       |       |                    |     |       |       |      |       |        |     |   |       |       |       |   |       |       |       |  |       |     
|                                     | Service revenues                 |                                  | $   | 1,312 |       |                    | $   | 1,398 |       |      |       | 6.6    |     |   | $     | 2,517 |       |   | $     | 2,724 |       |  |       | 8.2  |    
|                                     | Equipment revenues               |                                  |     | 102   |       |                    |     | 102   |       |      |       | 0.0    |     |   |       | 207   |       |   |       | 193   |       |  |       | (6.8 | )  
|                                     |                                  | Total segment operating revenues |     |       | 1,414 |                    |     |       | 1,500 |      |       |        | 6.1 |   |       |       | 2,724 |   |       |       | 2,917 |  |       |      | 7.1 | 
|Segment operating expenses:          |                                  |                                  |     |       |       |                    |     |       |       |      |       |        |     |   |       |       |       |   |       |       |       |  |       |     
|                                     | Operational and support expenses |                                  |     | 921   |       |                    |     | 1,028 |       |      |       | 11.6   |     |   |       | 1,846 |       |   |       | 1,999 |       |  |       | 8.3  |    
|                                     | Depreciation and amortization    |                                  |     | 190   |       |                    |     | 183   |       |      |       | (3.7   | )   |   |       | 370   |       |   |       | 363   |       |  |       | (1.9 | )  
|                                     |                                  | Total segment operating expenses |     |       | 1,111 |                    |     |       | 1,211 |      |       |        | 9.0 |   |       |       | 2,216 |   |       |       | 2,362 |  |       |      | 6.6 | 
|Segment operating income             |                                  |                                  | 303 |       |       |                    | 289 |       |       |      | (4.6  | )      |     |   | 508   |       |       |   | 555   |       |       |  | 9.3   |     
|Segment net income                   |                                  | $                                | 127 |       |       | $                  | 99  |       |       |      | (22.0 | )      |     | $ | 217   |       |       | $ | 191   |       |       |  | (12.0 | )   
|Customers (000s)                     |                                  |                                  |     |       |       |                    |     |       |       |      |       |        |     |   | 8,258 |       |       |   | 8,873 |       |       |  | 7.4   |     
|Average monthly revenue per customer |                                  | $                                | 53  |       |       | $                  | 52  |       |       |      | (1.9  | )      |     | $ | 52    |       |       | $ | 51    |       |       |  | (1.9  | )   







Segment operating revenues

The rate of customer growth was impacted by churn
reflecting management initiatives to migrate analog customers to
digital services and reduce the mix of prepaid and reseller
customers in Cingulars subscriber base.

These initiatives include the following:



| |   |                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------
| |  | increasing pricing for postpaid analog customers;                                                       
|
| |  | reducing the subsidy for handsets sold to prepaid
    customers;                                        
|
| |  | shortening the expiration date of new prepaid
    cards to 90 days from 180 days from the date of issue;
|
| |  | removing from our count of resale customers those
    who were inactive for 60 days or longer; and      
|
| |  | deterioration in the reseller customer segment.                                                         

Cingulars focus over the past several
quarters on digital contract customers, who typically experience
lower churn rates and generate higher revenues, but which entail
higher acquisition costs, is reflected in their second quarter
results. Net customer additions for this group in the second
quarter 2002 were 248 thousand, offset by net decreases of 107
thousand analog, prepaid and reseller customers.

Segment operating revenues grew $86 during second
quarter 2002 and $193 for the year-to-date period when compared
to the same 2001 periods. Service revenues increased $86 quarter
over quarter and $207 year over year, primarily as a result
of higher local service revenues associated with growth in the
customer base and the adoption of new national rate plans which
offer larger numbers of included minutes and bundling of roaming
and long distance offerings. Although service revenues increased
for the quarter and year-to-date, the growth rate continues to
decline. This decline reflects economic slowdown, higher
penetration levels and increasing competition in all markets.

Revenues derived from the first quarter 2002
addition of a wireless handset captive insurance subsidiary
contributed $16 to the increase for the quarter and $29 to the
increase for the year. These increases were offset by declines
in roaming and long distance revenues reflecting the migration
of customers to the new national plans. Roaming revenues derived
from the provision of access to customers of competitors
declined as competitors continue to negotiate and pay lower
rates as

23



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##### Table of Contents



well as build out their networks and reduce the
need of their customers to roam on Cingulars network.
Equipment revenues decreased as a result of fewer gross customer
additions quarter over quarter.


Average monthly usage by customers increased
during the first quarter reflecting the impact of the new
customer plans. However, increases in revenues driven by growth
in minutes of use were partially offset by lower per-minute
pricing.

Segment operating expenses

Operational and support expenses

Operational and support expenses increased $107
during second quarter 2002 and $153 for the year-to-date period
when compared to the same 2001 periods. Cingulars expense
growth was driven by increased service costs resulting from a
rise in minutes of use, higher long distance costs driven by the
bundling of long distance offerings in new rate plans, and high
customer acquisition costs per customer attributable to increase
in post-pay digital customer adds. Also impacting expense growth
for the second quarter, selling, general and administrative
costs increased $72, or 15.1% compared to second quarter 2001.
The increase was attributable to higher residual and upgrade
commissions, higher billing and system development costs and
costs associated with the launch of service in New York City.
Slightly offsetting these increases were declines in branding
expenses associated with the introduction of the Cingular brand
name last year and lower interconnection costs and efficiencies
attributable to greater digital usage.

Depreciation and amortization

Depreciation and amortization decreased during
second quarter 2002 and year-to-date 2002 3.7% and 1.9%,
respectively, when compared to the same 2001 periods.
Depreciation expense attributable to higher levels of gross
property, plant and equipment was largely offset by decreases
associated with the contribution of network assets to a joint
venture. Amortization expense declined $20 quarter over quarter
and $39 year over year as a result of the cessation of
amortization of licenses and goodwill due to the implementation
of SFAS No. 142. Amortization decreases exceeded
depreciation increases for the quarter and the year-to-date
compared to same periods in the prior year.




Latin America





The Latin America segment is comprised of our
investments in wireless businesses in eleven countries in Latin
America. Consolidated operations include our businesses in
Argentina, Chile, Colombia, Ecuador, Nicaragua, Peru and
Venezuela. All other businesses, the most significant being the
wireless operations in Brazil, are accounted for under the
equity method, and accordingly their results are reported as Net
earnings (losses) of equity affiliates.

|                                             |                                     |                                  |    |      |     |                    |    |      |     |      |       |        |       |   |       |       |       |   |       |       |       |  |       |       |       |  
|-------------------------------------------- | ----------------------------------- | -------------------------------- | -- | ---- | --- | ------------------ | -- | ---- | --- | ---- | ----- | ------ | ----- | - | ----- | ----- | ----- | - | ----- | ----- | ----- |  | ----- | ----- | ----- | -
|                                            
|                                            
|                                             |                                     |                                  |    |      |     |                    |    |     
|                                             |                                     | For the Three Months             |    |      |     | For the Six Months |    |     
|                                             |                                     | Ended June 30,                   |    |      |     | Ended June 30,     |    |     
|                                             |                                     |                                  |    | %    |     |                    |    | %   
|                                             |                                     | 2001                             |    | 2002 |     | Change             |    | 2001 |     | 2002 |       | Change
|                                            
|                                            
|Segment operating revenues:                  |                                     |                                  |    |      |     |                    |    |      |     |      |       |        |       |   |       |       |       |   |       |       |       |  |       |      
|                                             | Service revenues                    |                                  | $  | 629  |     |                    | $  | 481  |     |      |       | (23.5  | )     |   | $     | 1,271 |       |   | $     | 1,027 |       |  |       | (19.2 | )    
|                                             | Equipment revenues                  |                                  |    | 97   |     |                    |    | 98   |     |      |       | 1.0    |       |   |       | 236   |       |   |       | 208   |       |  |       | (11.9 | )    
|                                             | Advertising and publishing revenues |                                  |    | 23   |     |                    |    | 19   |     |      |       | (17.4  | )     |   |       | 24    |       |   |       | 22    |       |  |       | (8.3  | )    
|                                             |                                     | Total segment operating revenues |    |      | 749 |                    |    |      | 598 |      |       |        | (20.0 | ) |       |       | 1,531 |   |       |       | 1,257 |  |       |       | (17.9 | )
|Operating expenses:                          |                                     |                                  |    |      |     |                    |    |      |     |      |       |        |       |   |       |       |       |   |       |       |       |  |       |      
|                                             | Operational and support expenses    |                                  |    | 505  |     |                    |    | 400  |     |      |       | (20.8  | )     |   |       | 1,135 |       |   |       | 878   |       |  |       | (22.6 | )    
|                                             | Depreciation and amortization       |                                  |    | 155  |     |                    |    | 118  |     |      |       | (23.9  | )     |   |       | 309   |       |   |       | 236   |       |  |       | (23.6 | )    
|                                             |                                     | Total operating expenses         |    |      | 660 |                    |    |      | 518 |      |       |        | (21.5 | ) |       |       | 1,444 |   |       |       | 1,114 |  |       |       | (22.9 | )
|Operating income                             |                                     |                                  | 89 |      |     |                    | 80 |      |     |      | (10.1 | )      |       |   | 87    |       |       |   | 143   |       |       |  | 64.4  |      
|Net losses of equity affiliates              |                                     |                                  | (7 | )    |     |                    | (2 | )    |     |      | N/M   | *      |       |   | (20   | )     |       |   | (8    | )     |       |  | N/M   |      
|Segment net income (loss)                    |                                     | $                                | (7 | )    |     | $                  | 14 |      |     |      | N/M   |        |       | $ | (70   | )     |       | $ | 18    |       |       |  | N/M   |      
|Customers(a)(000s)                           |                                     |                                  |    |      |     |                    |    |      |     |      |       |        |       |   | 8,008 |       |       |   | 7,840 |       |       |  | (2.1  | )    
|Average monthly revenue per customer
    (a) |                                     | $                                | 26 |      |     | $                  | 20 |      |     |      | (23.1 | )      |       | $ | 27    |       |       | $ | 22    |       |       |  | (18.5 | )    
|                                            

|  |               
|- | --------------
|* | Not Meaningful



|    |                                                                                                                                  
|--- | ---------------------------------------------------------------------------------------------------------------------------------
|(a) | The amounts shown are for our consolidated
    properties and do not include customer data for our
    unconsolidated properties.

Segment operating revenues

Segment operating revenues decreased $151
compared to second quarter 2001 and $274 compared to
year-to-date 2001 due to the continued weakening of our Latin
American operations local currencies against the U.S.
Dollar. Significant economic challenges continue in Argentina
and Venezuela, two of BellSouths largest Latin

24



---



##### Table of Contents



American markets. The currency devaluations that
began during the first quarter worsened in the second. At the
end of the second quarter reporting period, the Argentine Peso
had devalued approximately 72 percent relative to the U.S.
dollar, and the Venezuelan Bolivar had depreciated approximately
34 percent. If foreign currency exchange rates had remained
constant with the comparable periods in 2001, Latin America
group revenues would have increased $62 for the quarter and $69
for the year-to-date period.


These decreases in Argentina and Venezuela were
partially offset by increases in service revenues totaling $40
for the second quarter and $70 year-to-date at our operations in
Colombia and Ecuador, attributable to growth in the customer
bases of those operations. Revenues from complementary business
ventures in Venezuela, primarily wholesale long distance voice,
data access and transport and Internet access also increased by
$34 in second quarter 2002 and $61 in the year-to-date period.

Segment operating expenses

Operational and support expenses

Operational and support expenses in the Latin
America segment decreased $105 in the second quarter 2002 and
$257 for the year-to-date period driven primarily by changes in
foreign currency exchange rates. If foreign currency exchange
rates had remained constant with the comparable periods in 2001,
these expenses would have increased by $28 for the quarter and
decreased by $37 for the year-to-date period. The remaining
year-to-date reduction in expenses is primarily attributable to
a 9.8% decline in gross customer additions and targeted
reductions in administrative costs.

Depreciation and amortization

Depreciation expense decreased $8 quarter over
quarter and $26 year over year as a result of lower
depreciation in Colombia due to a true-up of depreciation on
network assets. Amortization expense decreased $29 quarter over
quarter and $47 year over year as a result of the cessation
of amortization of goodwill due to the adoption of SFAS
No. 142.

Net losses of equity affiliates

Net losses from our Latin America equity
affiliates improved $5 to $(2) in second quarter 2002 and
improved $12 to $(8) for the year-to-date period.



---

Domestic Advertising and Publishing





Our domestic advertising and publishing segment
is comprised of companies in the U.S. that publish, print, sell
advertising in and perform related services concerning
alphabetical and classified telephone directories and electronic
product offerings.

|                            |                                  |                                  |     |      |     |              |     |      |     |      |      |        |      |   |     |     |     |   |     |     |     |  |      |      |      | 
|--------------------------- | -------------------------------- | -------------------------------- | --- | ---- | --- | ------------ | --- | ---- | --- | ---- | ---- | ------ | ---- | - | --- | --- | --- | - | --- | --- | --- |  | ---- | ---- | ---- | 
|                           
|                           
|                            |                                  |                                  |     |      |     |              |     |     
|                            |                                  | For the Three                    |     |      |     | For the Six  |     |     
|                            |                                  | Months Ended                     |     |      |     | Months Ended |     |     
|                            |                                  | June 30,                         |     |      |     | June 30,     |     |     
|                            |                                  |                                  |     | %    |     |              |     | %   
|                            |                                  | 2001                             |     | 2002 |     | Change       |     | 2001 |     | 2002 |      | Change
|                           
|                           
|Segment operating revenues  |                                  | $                                | 443 |      |     | $            | 543 |      |     |      | 22.6 |        |      | $ | 880 |     |     | $ | 926 |     |     |  | 5.2  |     
|Segment operating expenses: |                                  |                                  |     |      |     |              |     |      |     |      |      |        |      |   |     |     |     |   |     |     |     |  |      |     
|                            | Operational and support expenses |                                  |     | 241  |     |              |     | 296  |     |      |      | 22.8   |      |   |     | 445 |     |   |     | 501 |     |  |      | 12.6 |     
|                            | Depreciation and amortization    |                                  |     | 6    |     |              |     | 8    |     |      |      | 33.3   |      |   |     | 13  |     |   |     | 14  |     |  |      | 7.7  |     
|                            |                                  | Total segment operating expenses |     |      | 247 |              |     |      | 304 |      |      |        | 23.1 |   |     |     | 458 |   |     |     | 515 |  |      |      | 12.4 | 
|Segment operating income    |                                  |                                  | 196 |      |     |              | 239 |      |     |      | 21.9 |        |      |   | 422 |     |     |   | 411 |     |     |  | (2.6 | )   
|Segment net income          |                                  | $                                | 119 |      |     | $            | 146 |      |     |      | 22.7 |        |      | $ | 256 |     |     | $ | 250 |     |     |  | (2.3 | )   
|                           

Segment operating revenues

Revenues increased $100 during second quarter
2002 and $46 for the year-to-date period when compared to the
same 2001 periods. The increases are principally a result of the
net change in the timing of directory publications. The timing
of these directory publications was changed for many reasons
including in response to competitive pressures and to streamline
and maximize the efficiency of the selling and publication
schedules. Absent these factors and other adjustments, revenues
for the segment would have decreased 0.3% for the quarter and
0.8% for the year. Negative growth is attributable to continued
weak economic conditions.

Segment operating expenses

Operational and support expenses increased $55 in
second quarter 2002 and $56 for the year-to-date period. This
increase is primarily due to higher bad debt expense of $62 and
$72 for the second quarter and the year-to-date, respectfully,
partially offset by lower printing and distribution costs.

25



---



##### Table of Contents






All Other Businesses





All other businesses primarily consist of a
captive insurance subsidiary and equity investments in wireless
operations in Israel, Denmark and our former operations in
Germany.

|                                  |  |               |    |      |  |              |     |      |  |      |       |        |  |   |     |   |  |   |     |   |  |  |       |  
|--------------------------------- |  | ------------- | -- | ---- |  | ------------ | --- | ---- |  | ---- | ----- | ------ |  | - | --- | - |  | - | --- | - |  |  | ----- | -
|                                 
|                                 
|                                  |  |               |    |      |  |              |     |     
|                                  |  | For the Three |    |      |  | For the Six  |     |     
|                                  |  | Months Ended  |    |      |  | Months Ended |     |     
|                                  |  | June 30,      |    |      |  | June 30,     |     |     
|                                  |  |               |    | %    |  |              |     | %   
|                                  |  | 2001          |    | 2002 |  | Change       |     | 2001 |  | 2002 |       | Change
|                                 
|                                 
|Segment operating revenues        |  | $             | 34 |      |  | $            | 25  |      |  |      | (26.5 | )      |  | $ | 67  |   |  | $ | 50  |   |  |  | (25.4 | )
|Segment operating expenses        |  |               | 27 |      |  |              | 15  |      |  |      | (44.4 | )      |  |   | 54  |   |  |   | 30  |   |  |  | (44.4 | )
|Segment operating income          |  |               | 7  |      |  |              | 10  |      |  |      | 42.9  |        |  |   | 13  |   |  |   | 20  |   |  |  | 53.8  |  
|Net earnings of equity affiliates |  |               | (9 | )    |  |              | 14  |      |  |      | N/M   | *      |  |   | (29 | ) |  |   | 26  |   |  |  | N/M   |  
|Segment net income (loss)         |  | $             | (4 | )    |  | $            | (34 | )    |  |      | N/M   |        |  | $ | (21 | ) |  | $ | (15 | ) |  |  | 28.6  |  
|                                 

|  |               
|- | --------------
|* | Not Meaningful

Segment operating results

Revenues and expenses were derived primarily from
the sale of insurance on customer premises equipment and
amortization of deferred revenues related to a transaction with
Crown Castle to monetize wireless towers in 1999. The decrease
in operating revenues and expenses is attributable to the
discontinuance of sales of insurance on wireless handsets
effective first quarter 2002.

Net earnings of equity affiliates increased $23
quarter over quarter and $55 year over year, attributable to
improved operating results at our former German operation as
well as higher income from the operations in both Denmark and
Israel.




Liquidity and Financial Condition





Cash flows from operations are our primary source
of cash for funding existing operations, capital expenditures,
debt interest and principal payments, and dividend payments to
shareholders. Should the need arise, however, we believe we are
well positioned to raise capital in the public debt markets. At
June 30, 2002, our corporate debt rating was Aa3 from
Moodys Investor Service and A+ from Standard and
Poors. Our short-term credit rating at June 30, 2002
was P-1 from Moodys and A-1 from Standard and Poors.
Our commercial paper program as of June 30, 2002 was
$8.0 billion, with $1.8 billion outstanding. We
believe that we have ready access to the commercial paper market
in the event funding in excess of our operating cash flows is
needed. Furthermore, we have $2.1 billion in unused
committed back-up lines of credit available in case we are
unable to access the commercial paper market. We also have a
registration statement on file with the SEC under which
$2.3 billion of long-term debt securities could be issued.
While current liabilities exceed current assets, our sources of
funds  primarily from operations and, to the extent
necessary, from readily available external financing
arrangements  are sufficient to meet all current
obligations on a timely basis. We believe that these sources of
funds will be sufficient to meet the needs of our business for
the next twelve months.

Net cash provided by (used for):

|                     |  |                    |        |      |  |        |        |   |  |   |        |   |  |  |       |   
|-------------------- |  | ------------------ | ------ | ---- |  | ------ | ------ | - |  | - | ------ | - |  |  | ----- | --
|                    
|                    
|                     |  |                    |        |     
|                     |  | For the Six Months |        |     
|                     |  | Ended June 30,     |        |     
|                     |  |                    |        |     
|                     |  | 2001               |        | 2002 |  | Change |        |  
|                    
|                    
|Operating activities |  | $                  | 3,927  |      |  | $      | 4,193  |   |  | $ | 266    |   |  |  | 6.8   | % 
|Investing activities |  | $                  | (2,689 | )    |  | $      | (90    | ) |  | $ | 2,599  |   |  |  | N/M   | * 
|Financing activities |  | $                  | (1,641 | )    |  | $      | (2,853 | ) |  | $ | (1,212 | ) |  |  | (73.9 | )%
|                    

|  |               
|- | --------------
|* | Not Meaningful

Net cash provided by operating
activities

Cash generated by operations increased $266 in
2002 compared to 2001. The increase was driven primarily by
working capital changes. These working capital impacts, which
improved current year-to-date operating cash flows in comparison
to comparable period in 2001, were slightly off-set by decreases
in operating income and related margins.

Net cash used for investing
activities

During 2002, we generated proceeds of $1,880 from
the sale of our investment in KPN and Qwest and portions of our
investment in TCO as well as proceeds

26



---



##### Table of Contents



from the repayment of our loan to KPN. Offsetting
these proceeds were the investment of $2,028 for capital
expenditures to support our wireline and wireless networks, to
promote the introduction of new products and services and to
increase operating efficiency and productivity.


Net cash used for financing
activities

During 2002 we reduced our short-term borrowings
by almost $1.4 billion and long-term notes by $568 and paid
dividends of $.38 per share totaling $713. Our debt to
total capitalization ratio of 50.3% at June 30, 2002
decreased from 52.0% at December 31, 2001.

Market Risk

For a complete discussion of our market risks,
you should refer to the caption Quantitative and
Qualitative Disclosure About Market Risk in our 2001
annual report on Form 10-K. Our primary exposure to market
risks relates to unfavorable movements in interest rates and
foreign currency exchange rates. We do not anticipate any
significant changes in our objectives and strategies with
respect to managing such exposures.







Operating Environment and Trends of the
Business





Domestic Economic Trends

On average, the economy of our nine-state region
tends to closely track the U.S. economy. Real GDP growth
for 2002 is expected to be 2.7 percent, increasing to
4 percent in 2003. Growth in the first half of the year was
driven largely by consumer spending and by restocking of
inventories. Business spending on plant and equipment is not
expected to contribute significantly until well into the second
half of the year when corporate profits begin to improve.
Employment growth in the region, which has been closely
correlated with various measures of BellSouths business
performance in the past, is expected to gather pace in the
second half of 2002. We expect 2002 employment growth in our
region to be below one percent, but improving to 3 percent
next year.

Real personal income growth in our nine-state
region is expected to average 3.3 percent in 2002 and
3 percent in 2003. Residential construction activity, which
did not slump in the recession, is expected to stay at a strong
pace. Housing starts are expected to top 450 thousand in
both 2002 and 2003. Historically, our business has generally
followed the timing of the cycle in the overall economy, so we
expect to see signs of recovery in our operations. Those signs
have not appeared yet and may not appear at all this year.

Latin American Economic Trends

Poor economic conditions continued in most of the
region during the first half of 2002. Growth is expected to
be sluggish to modest in much of the region this year. We expect
Latin America to grow at a faster pace in 2003 if the recession
has ended in the United States by the end of 2002. However,
Argentina and Venezuela are likely to be exceptions. In the wake
of its financial crisis, Argentinas economy is expected to
contract sharply this year, perhaps as much as 10 percent.
No recovery is in sight and the countrys troubles are
expected to extend into 2003 before the downturn ends. Following
Venezuelas currency devaluation this winter, the economy
is expected to contract in 2002 with a return to moderate growth
in 2003. High oil prices should help to keep the economy afloat.
However, recent political events in the country have
significantly increased the downside risk to this forecast. We
believe inflation rates upward of 20 percent are likely in
both Argentina and Venezuela this year.

Colombias civil war remains a drain on its
economy, resulting in outflows of both money and human capital.
Sluggish growth of 2 percent is expected this year,
improving in 2003 to over 3 percent.

Argentina.In early
2002, the Argentine government announced economic reforms,
including a devaluation of the peso. As a result of the
devaluation, our Argentine operation violated covenants on $350
of its U.S. Dollar-denominated debt. The debt is classified as
current in the June 30, 2002 balance sheet. We are
currently working with the lenders to resolve this matter. The
devaluation, resulting new laws and regulations instituted, and
the instability of the government make it difficult to
anticipate the long-term impacts of the economic situation in
Argentina. Due to the rapidly changing environment, we are
closely monitoring the situation and cannot anticipate the
ultimate outcome.

Brazil.In
March 2002, BCP, one of our Brazilian investments,
defaulted on a principal payment. We continue to discuss
alternatives with our principal partner and BCPs lenders.
The parties have not reached any agreement to date. There can be
no assurance that an agreement will be reached. In addition,
BSE, another of our Brazilian investments, is experiencing
difficulties in meeting its debt obligations from its operating
cash flows. See note F to our consolidated interim
financial statements for further discussion of this investment.

27



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##### Table of Contents



Venezuela.On
February 12, 2002, Venezuelas government floated its
currency, ending a five-year-old regime that permitted the
bolivar to trade only within a fixed-band against the
U.S. Dollar. As a result, devaluation occurred. It is
uncertain what the long-term impacts of the devaluation will
have on our operations. Based on the current monetary position
of this operation, we recorded a loss of $14, or $7 after taxes
and minority partner interests, in second quarter 2002 and a
benefit of $13, or $7 after taxes and minority partner
interests, for year-to-date 2002.

Regulatory Developments

Beginning in late 1996, we operated under a price
regulation plan approved by the South Carolina Public Service
Commission under existing state laws. In April 1999,
however, the South Carolina Supreme Court invalidated this price
regulation plan. In July 1999, we elected to be regulated
under a new statute, adopted subsequent to the Commissions
approval of the earlier plan. The new statute allows telephone
companies in South Carolina to operate under price regulation
without obtaining approval from the Commission. The election
became effective during August 1999. The South Carolina
Consumer Advocate petitioned the Commission seeking review of
the level of our earnings during the 1996  1998
period when we operated under the subsequently invalidated price
regulation plan. The Commission voted to dismiss the petition in
November 1999 and issued orders confirming the vote in
February and June of 2000. In July 2000, the Consumer
Advocate appealed the Commissions dismissal of the
petition. If the Consumer Advocate prevails, the case could be
remanded to the South Carolina PSC, which could, after
considering evidence, order refunds to customers in South
Carolina. At this time, we are unable to determine the impact,
if any, this may have on future earnings.

Also in 2000, the Florida Public Service
Commission issued a proposed agency action stating that our
change in 1999 from a late charge based on a percentage of the
amounts overdue to a flat rate fee plus an interest charge
violated the Florida price regulation statute and voted that
approximately $65 should be refunded. We protested the decision.
On August 30, 2001, the Commission issued an order adopting
its proposed action. We have appealed to the Florida Supreme
Court and continue to collect the charges subject to refund. The
total amount as of June 30, 2002 subject to potential
refund was approximately $100, including accrued interest. No
accrual has been recorded in these financial statements related
to this matter.

Following applications that were filed in October
2001 and refiled in February 2002, the FCC on May 15, 2002
granted our applications to provide long distance in Georgia and
Louisiana. On June 20, 2002, we filed applications at the
FCC to provide long distance in Alabama, Kentucky, Mississippi,
North Carolina and South Carolina. The state commission for each
state had earlier endorsed our seeking such authority. A
decision on those applications is due on or before
September 18, 2002. We have dockets pending before the
state commissions in Florida and Tennessee that consider our
potential requests for long distance authority in those states,
and we expect to file applications with the FCC for those states
at an appropriate point in the state commissions
consideration. We do not know whether future approvals will be
conditioned on changes in interconnection obligations or
operating systems. Any changes could result in significant
additional expense or a significant increase in customer loss to
CLECs.

We are involved in numerous other legal
proceedings associated with state and federal regulatory
matters. While complete assurance cannot be given as to the
outcome of these matters, we believe that any financial impact
would not be material to our results of operations, financial
position or cash flows. See note N to our consolidated
interim financial statements.

Foreign Risks

Our reporting currency is the U.S. Dollar.
However, most of our international revenues are generated in the
currencies of the countries in which we operate. In addition,
many of our international operations and equity investees hold
U.S. Dollar-denominated short- and long-term debt. The
currencies of many Latin American countries have experienced
substantial volatility and depreciation in the past. Declines in
the value of the local currencies in which we are paid relative
to the U.S. Dollar will cause revenues in U.S. Dollar terms to
decrease and dollar-denominated liabilities to increase in local
currency. Where we consider it to be economically feasible, we
attempt to limit our exposure to exchange rate fluctuations by
using foreign currency forward exchange contracts or similar
instruments as a vehicle for hedging; however, a substantial
amount of our exposures are unhedged.

The impact of devaluation or depreciating
currency on an entity depends on the residual effect on the
local economy and the ability of an entity to raise prices
and/or reduce expenses. Our ability to raise prices is limited
in many instances by government regulation of tariff rates and
competitive constraints. Due to our constantly changing currency
exposure and the potential substantial volatility of currency
exchange rates, we cannot predict the effect of exchange rate
fluctuations on our business.

28



---



##### Table of Contents



Economic, social and political conditions in
Latin America are, in some countries, unfavorable and volatile,
which may impair our operations. These conditions could make it
difficult for us to continue development of our business,
generate revenues or achieve or sustain profitability.
Historically, recessions and volatility have been primarily
caused by: monetary, exchange rate and/or fiscal policies;
currency devaluations; significant governmental influence over
many aspects of local economies; political and economic
instability; unexpected changes in regulatory requirements;
social unrest or violence; slow or negative economic growth;
imposition of trade barriers; and wage and price controls. Our
Latin American business could be materially adversely affected
if the recent political and economic crisis in Argentina and
Venezuela worsen, continue for a sustained period or spread to
other Latin American countries.

Most or all of these factors have occurred at
various times in the last two decades in our core Latin American
markets. We have no control over these matters. Economic
conditions in Latin America are generally less attractive than
those in the U.S., and poor social, political and economic
conditions may limit use of our services which may adversely
impact our business.

New Accounting Pronouncements

See note B to our consolidated interim
financial statements.







Item 3.     Qualitative
and Quantitative Disclosures About Market Risk

See the caption labeled Market Risk
in Managements Discussion and Analysis of Financial
Condition and Results of Operations.

29



---



##### Table of Contents






Cautionary Language Concerning Forward-Looking Statements

In addition to historical information, this
document contains forward-looking statements regarding events,
financial trends and critical accounting policies that may
affect our future operating results, financial position and cash
flows. These statements are based on our assumptions and
estimates and are subject to risks and uncertainties. For these
statements, we claim the protection of the safe harbor for
forward-looking statements provided by the Private Securities
Litigation Reform Act of 1995.

There are possible developments that could cause
our actual results to differ materially from those forecast or
implied in the forward-looking statements. You are cautioned not
to place undue reliance on these forward-looking statements,
which are current only as of the date of this filing. We
disclaim any intention or obligation to update or revise any
forward-looking statements, whether as a result of new
information, future events or otherwise.

While the below list of cautionary statements is
not exhaustive, some factors that could affect future operating
results, financial position and cash flows and could cause
actual results to differ materially from those expressed in the
forward-looking statements are:



|  |                                                                                                                                                                                                                                                                         
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a change in economic conditions in domestic or
    international markets where we operate or have material
    investments which would affect demand for our services;                                                                                                  
| 
| | changes in U.S. or foreign laws or regulations,
    or in their interpretations, which could result in the loss, or
    reduction in value, of our licenses, concessions or markets, or
    in an increase in competition, compliance costs or capital
    expenditures;
| 
| | continued pressure in the telecommunications
    industry from a financial, competitive, and regulatory
    perspective;                                                                                                                                                
| 
| | a decrease in the growth rate of demand for the
    services which we offer;                                                                                                                                                                                            
| 
| | the intensity of competitive activity and its
    resulting impact on pricing strategies and new product offerings;                                                                                                                                                     
| 
| | protracted delay in our entry into the interLATA
    long distance market;                                                                                                                                                                                              
| 
| | significant deterioration in foreign currencies
    relative to the U.S. Dollar in foreign countries in which we
    operate;                                                                                                                                           
| 
| | the potential unwillingness or inability of our
    partners to fund their obligations to our international joint
    ventures due to deteriorating economic conditions or other facts;                                                                                 
| 
| | the potential unwillingness of banks or other
    lenders to lend to our international joint ventures due to
    deteriorating economic conditions and tightening credit
    standards;                                                                                 
| 
| | higher than anticipated start-up costs or
    significant up-front investments associated with new business
    initiatives;                                                                                                                                            
| 
| | the outcome of pending litigation;                                                                                                                                                                                                                                      
| 
| | unanticipated higher capital spending from, or
    delays in, the deployment of new technologies;                                                                                                                                                                       
| 
| | the impact of terrorist attacks on our business;
    and                                                                                                                                                                                                                
| 
| | the impact and the success of the wireless joint
    venture with SBC Communications, known as Cingular Wireless,
    including marketing and product development efforts,
    technological change and financial capacity.                                             

30



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##### Table of Contents






PART II  Other
Information

Item 1. Legal Proceedings

On April 29, 2002 five African-American
employees filed a putative class action lawsuit, captioned
Gladys Jenkins et al. v. BellSouth Corporation,against
the Company in the United States District Court for the Northern
District of Alabama. The complaint alleges that BellSouth
discriminated against current and former African-American
employees with respect to compensation and promotions in
violation of Title VII of the Civil Rights Act of 1964 and
42 U.S.C. Section 1981. Plaintiffs purport to bring the
claims on behalf of two classes: a class of all African-American
hourly workers employed by the Company at any time since
April 29, 1998, and a class of all African-American
salaried workers employed by the Company at any time since
April 29, 1998 in management positions at or below Job
Grade 59/Level C. The plaintiffs are seeking unspecified amounts
of back pay, benefits, punitive damages and attorneys fees
and costs, as well as injunctive relief. At this early stage of
the litigation, the likely outcome of the case cannot be
predicted, nor can a reasonable estimate of the amount of loss,
if any, be made.

Item 4. Submission of Matters to a Vote
of Security Holders

Our annual meeting of shareholders was held on
April 22, 2002. The voting results were as follows:

Number of Shares Outstanding as of Record Date:
1,914,843,211 
 Number of Shares Present: 1,547,502,340 
 Percent of Shares Present: 80.82%

Proposal 1 
 Election of Directors

|                      |  |     |               |          |  |  |            | 
|--------------------- |  | --- | ------------- | -------- |  |  | ---------- | 
|                      |  | For |               | Withheld
|                      |  |     |               |         
|F. Duane Ackerman     |  |     | 1,514,799,665 |          |  |  | 32,702,675 | 
|Reuben V. Anderson    |  |     | 1,510,059,325 |          |  |  | 37,443,015 | 
|Kathleen F. Feldstein |  |     | 1,515,903,909 |          |  |  | 31,598,431 | 

The terms of the following directors continued
after the meeting.

James H. Blanchard 
 J. Hyatt Brown 
 Armando Codina 
 James P. Kelly 
 Joseph M. Magliochetti 
 Leo F. Mullin 
 Eugene F. Murphy 
 Robin B. Smith 
 William S. Stavropoulos

Proposal 2: 
 Ratification of Independent Accountants

|    |               |         |  |         |            |  |  |  |            | 
|--- | ------------- | ------- |  | ------- | ---------- |  |  |  | ---------- | 
|For |               | Against |  | Abstain
|    |               |         |  |        
|    | 1,491,894,708 |         |  |         | 40,259,505 |  |  |  | 15,348,087 | 

Item 6. Exhibits and Reports on
Form 8-K

(a) Exhibits:

|        |    |  |  |                                                                                                                                                                                                                                                                                        
|------- | -- |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    | 
|Number  |    | 
|        |    | 
|        | 4a |  |  | No instrument which defines the rights of holders
    of our long- and intermediate-term debt is filed herewith
    pursuant to Regulation S-K, Item 601(b)(4)(iii)(A).
    Pursuant to this regulation, we agree to furnish a copy of any
    such instrument to the SEC upon request.
|        | 11 |  |  | Computation of Earnings Per Common Share.                                                                                                                                                                                                                                              
|        | 12 |  |  | Computation of Ratio of Earnings to Fixed Charges.                                                                                                                                                                                                                                     

(b) Reports on Form 8-K:

None.

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SIGNATURE

Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned thereunto duly
authorized.



| |                      
| | ---------------------
| | BELLSOUTH CORPORATION



| |    |                       
| | -- | ----------------------
| | By | /s/ W. PATRICK SHANNON

| |                               
| | ------------------------------
| |                               
| | W. Patrick Shannon            
| | Vice PresidentFinance        
| | (Principal Accounting Officer)

August 2, 2002


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EXHIBIT INDEX

|        |    |  |  |                                                   
|------- | -- |  |  | --------------------------------------------------
|Exhibit |    | 
|Number  |    | 
|        |    | 
|        | 11 |  |  | Computation of Earnings Per Common Share.         
|        | 12 |  |  | Computation of Ratio of Earnings to Fixed Charges.

33