##### Table of Contents



SECURITIES AND EXCHANGE
COMMISSION


WASHINGTON, D.C. 20549




---

FORM 10-K

|           |  |                                                                                             
|---------- |  | --------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                             
|          
|X          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934    
|           |  | FOR THE FISCAL YEAR ENDED DECEMBER 31,
    2003                                             
|           |  | OR                                                                                          
|           |  | 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                                                               

BELLSOUTH
CORPORATION

|                                                                                                           |  |                                              
|---------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------
|A GEORGIA CORPORATION                                                                                      |  | I.R.S. EMPLOYER
    NO. 58-1533433           
|1155 Peachtree Street, N.E., Room 15G03,
    Atlanta, Georgia 30309-3610
    Telephone number 404-249-2000
|SECURITIES REGISTERED PURSUANT TO SECTION
    12(b) OF THE ACT:                                           
|                                                                                                          
|TITLE OF EACH CLASS                                                                                        |  | NAME OF EACH EXCHANGE
    ON WHICH REGISTERED
|See Attachment.                                                                                            |  | See Attachment.                              
|SECURITIES REGISTERED PURSUANT TO SECTION
    12(g) OF THE ACT:None.                                      



---

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.    YesxNo

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

Indicate by check mark whether the registrant is
an accelerated filer (as defined in Exchange Act
Rule 12b-2).
YesxNo

At January 31, 2004, 1,831,522,713 shares of
Common Stock and Preferred Stock Purchase Rights were
outstanding.

At June 30, 2003, the aggregate market value
of the voting and non-voting stock held by nonaffiliates was
$49,193,148,101.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrants definitive
proxy statement dated March 10, 2004, issued in connection
with the 2004

annual meeting of shareholders (Part III).




---

TABLE OF CONTENTS



|                                                   |                                                           |                                                                                                              |  |  |  |  |  | 
|-------------------------------------------------- | --------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------ |  |  |  |  |  | 
|PART I                                            
|                                                   | Cautionary Language Concerning Forward-Looking Statements
|                                                   |                                                           | Business                                                                                                    
|                                                   |                                                           | Communications Group                                                                                        
|                                                   |                                                           | Domestic Wireless                                                                                           
|                                                   |                                                           | Latin America Group                                                                                         
|                                                   |                                                           | Advertising and Publishing Group                                                                            
|                                                   |                                                           | Intellectual Property                                                                                       
|                                                   |                                                           | Research and Development                                                                                    
|                                                   |                                                           | Employees                                                                                                   
|                                                   |                                                           | Properties                                                                                                  
|                                                   |                                                           | Legal Proceedings                                                                                           
|                                                   |                                                           | Submission of Matters to a Vote of Shareholders                                                             
|                                                   | Additional Information  Description of BellSouth Stock  
|                                                   | Executive Officers                                       
|                                                   | Website Access                                           
|PART II                                           
|                                                   |                                                           | Market for Registrants Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
|                                                   |                                                           | Selected Financial and Operating Data                                                                       
|                                                   |                                                           | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BELLSOUTH CORPORATION 
|                                                   |                                                           | Consolidated Results of Operations                                                                          
|                                                   |                                                           | Results by Segment                                                                                          
|                                                   |                                                           | Communications Group                                                                                        
|                                                   |                                                           | Domestic Wireless                                                                                           
|                                                   |                                                           | Latin America Group                                                                                         
|                                                   |                                                           | Advertising and Publishing Group                                                                            
|                                                   |                                                           | Liquidity and Financial Condition                                                                           
|                                                   |                                                           | Off-Balance Sheet Arrangements and Aggregate Contractual Obligations                                        
|                                                   |                                                           | Quantitative and Qualitative Disclosure About Market Risk                                                   
|                                                   |                                                           | Operating Environment                                                                                       
|                                                   |                                                           | Critical Accounting Policies                                                                                
|                                                   |                                                           | Cautionary Language Concerning Forward-Looking Statements                                                   
|                                                   |                                                           | REPORT OF MANAGEMENT BELLSOUTH CORPORATION                                                                  
|                                                   |                                                           | REPORT OF INDEPENDENT AUDITORS                                                                              
|                                                   |                                                           | 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                                                                  
|                                                   |                                                           | ITEM 9. CHANGES IN AND DISAGREEMENTS WITH AUDITORS ON ACCOUNTING AND FINANCIAL DISCLOSURE                   
|                                                   |                                                           | ITEM 9a. Controls and Procedures                                                                            
|PART III                                          
|                                                   |                                                           | ITEMS 10 THROUGH 13.                                                                                        
|PART IV                                           
|                                                   |                                                           | ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K                                    
|                                                   |                                                           | SIGNATURES                                                                                                  
|EX-10.Q15 AMENDMENT TO PERSONAL RETIREMENT ACCOUNT
|EX-10.R3 FIRST AMENDMENT TO BELLSOUTH CORPORATION 
|EX-10.R4 SECOND AMENDMENT TO BELLSOUTH CORPORATION
|EX-10.S3 FIRST AMENDMENT TO BELLSOUTH TELECOMMUNI.
|EX-10.S4 SECOND AMENDMENT TO BELLSOUTH TELECOMMUN.
|EX-10.T2 FIRST AMENDMENT TO BELLSOUTH CORPORATION 
|EX-10.T3 SECOND AMENDMENT TO BELLSOUTH CORPORATION
|EX-10.U2 FIRST AMENDMENT TO BELLSOUTH TELECOMMUNI.
|EX-10.U3 SECOND AMENDMENT TO BELLSOUTH TELECOMMUN.
|EX-10.W4 FOURTH AMENDMENT TO BELLSOUTH RETIREMENT 
|EX-10.KK AGREEMENT BETWEEN BSC AND MARK L. FEIDLER
|EX-10.LL FORM OF INDEMNITY AGREEMENT              
|EX-10.NN INVESTMENT AGREEMENT - BSC & SBC         
|EX-11 COMPUTATION OF EARNINGS PER SHARE           
|EX-12 COMPUTATON OF RATIO OF EARNINGS TO FIXED    
|EX-21 SUBSIDIARIES OF BELLSOUTH                   
|EX-23A CONSENT OF INDEPENDENT ACCOUNTANTS         
|EX-23B CONSENT OF INDEPENDENT AUDITOR             
|EX-24 POWERS OF ATTORNEY                          
|EX-31.A 302 CERTIFICATION OF F. DUANE ACKERMAN    
|EX-31.B 302 CERTIFICATION OF RONALD M. DYKES      
|EX-32 906 CERTIFICATIONS                          



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##### Table of Contents



ATTACHMENT


|                                                       |                                                                                               |                         |                        
|------------------------------------------------------ | --------------------------------------------------------------------------------------------- | ----------------------- | -----------------------
|                                                       |                                                                                               | Name of Each Exchange  
|Title of Each Class                                    |                                                                                               | On Which Registered    
|                                                      
|                                                      
|Common Stock (par value $1 per share)
    and          |                                                                                               |                        
|                                                       | Preferred Stock Purchase Rights                                                               |                         | New York Stock Exchange
|Debt Securities:                                       |                                                                                               | New York Stock Exchange
|Issued by BellSouth Capital Funding
    Corporation(a) |                                                                                               |                        
|                                                       | 7.12% Debentures due 2097                                                                     |                         |                        
|                                                       | 7 3/8% Quarterly Interest Bonds due 2039                                                      |                         |                        
|Issued by BellSouth Telecommunications, Inc.           |                                                                                               |                        
|                                                       | Fifteen Year 5 7/8% Debentures, due
    January 15, 2009                                      |                         |                        
|                                                       | Forty Year 6 3/4% Debentures, due
    October 15, 2033                                        |                         |                        
|                                                       | Forty Year 7 5/8% Debentures, due
    May 15, 2035                                            |                         |                        
|                                                       | Thirty Year 7% Debentures, due October 1,
    2025                                            |                         |                        
|                                                       | Fifty Year 5.85% Debentures, due
    November 15, 2045                                        |                         |                        
|                                                       | One Hundred Year 7% Debentures, due
    December 1, 2095                                      |                         |                        
|                                                       | Twenty Year 6.30% Amortizing Debentures, due
    December 15, 2015                            |                         |                        
|                                                       | Principal Amount of One Hundred Year 6.65%
    Zero-To-Full Debentures, due December 15, 2095 |                         |                        
|                                                       | Twelve Year 7% Notes, due February 1, 2005                                                    |                         |                        
|                                                       | Eleven Year 6 3/8% Notes, due June 15,
    2004                                               |                         |                        
|                                                       | Ten Year 6 1/2% Notes, due June 15, 2005                                                      |                         |                        
|                                                       | Thirty Year 6 3/8% Debentures, due
    June 1, 2028                                           |                         |                        

(a) Subsequently merged with and into
BellSouth Corporation.



BELLSOUTH
2003      1




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##### Table of Contents



TABLE OF CONTENTS


|                                                                                                                                                       |  |      |    | 
|------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---- | -- | 
|Item                                                                                                                                                   |  | Page
|                                                                                                                                                      
|                                                                                                                                                      
|PART I                                                                                                                                                 |  |      |    | 
|Cautionary Language Concerning
    Forward-Looking Statements                                                                                          |  |      | 3  | 
|1.    Business                                                                                                                                         |  |      | 3  | 
|Communications
    Group                                                                                                                               |  |      | 4  | 
|Domestic
    Wireless                                                                                                                                  |  |      | 10 | 
|Latin
    America Group                                                                                                                                |  |      | 13 | 
|Advertising
    and Publishing Group                                                                                                                   |  |      | 15 | 
|Intellectual
    Property                                                                                                                              |  |      | 16 | 
|Research
    and Development                                                                                                                           |  |      | 16 | 
|Employees                                                                                                                                              |  |      | 16 | 
|2.    Properties                                                                                                                                       |  |      | 16 | 
|3.    Legal
    Proceedings                                                                                                                            |  |      | 17 | 
|4.    Submission
    of Matters to
    a         Vote
    of Shareholders                                                                              |  |      | 18 | 
|Additional Information 
    Description of BellSouth Stock                                                                                            |  |      | 18 | 
|Executive Officers                                                                                                                                     |  |      | 20 | 
|Website Access                                                                                                                                         |  |      | 20 | 
|PART II                                                                                                                                                |  |      |    | 
|5.    Market
    for Registrants Common
    Equity,         Related
    Shareholder Matters
    and         Issuer
    Purchases of Equity Securities |  |      | 21 | 
|6.    Selected
    Financial and
    Operating         Data                                                                                            |  |      | 22 | 
|7.    Managements
    Discussion
    and         Analysis
    of Financial
    Condition         and
    Results of Operations                        |  |      | 23 | 
|Overview                                                                                                                                               |  |      | 23 | 
|Consolidated
    Results of Operations                                                                                                                 |  |      | 24 | 
|Results
    by Segment                                                                                                                                 |  |      | 29 | 
|Communications
    Group                                                                                                                               |  |      | 30 | 
|Domestic
    Wireless                                                                                                                                  |  |      | 33 | 
|Latin
    America Group                                                                                                                                |  |      | 36 | 
|Advertising
    and Publishing Group                                                                                                                   |  |      | 39 | 
|Liquidity
    and Financial Condition                                                                                                                  |  |      | 41 | 
|Off-Balance
    Sheet Arrangements
    and          Aggregate
    Contractual Obligations                                                              |  |      | 44 | 
|Quantitative
    and
    Qualitative          Disclosure
    About Market Risk                                                                         |  |      | 45 | 
|Operating
    Environment                                                                                                                              |  |      | 47 | 
|Critical
    Accounting Policies                                                                                                                       |  |      | 51 | 
|Cautionary
    Language
    Concerning          Forward-Looking
    Statements                                                                         |  |      | 52 | 
|8.    Consolidated
    Financial Statements                                                                                                            |  |      | 54 | 
|Report
    of Management                                                                                                                               |  |      | 54 | 
|Reports
    of Independent Auditors                                                                                                                    |  |      | 55 | 
|Consolidated
    Statements of Income                                                                                                                  |  |      | 56 | 
|Consolidated
    Balance Sheets                                                                                                                        |  |      | 57 | 
|Consolidated
    Statements of Cash Flows                                                                                                              |  |      | 58 | 
|Consolidated
    Statements          of
    Shareholders
    Equity          and
    Comprehensive Income                                             |  |      | 59 | 
|Notes
    to Consolidated
    Financial          Statements                                                                                            |  |      | 60 | 
|9.    Changes
    in and
    Disagreements          with
    Auditors on
    Accounting          and
    Financial Disclosure                          |  |      | 90 | 
|9a.    Controls
    and Procedures                                                                                                                     |  |      | 90 | 
|PART III                                                                                                                                               |  |      |    | 
|*10.    Directors
    and Executive
    Officers          of
    the Registrant                                                                        |  |      | 90 | 
|*11.    Executive
    Compensation                                                                                                                     |  |      | 90 | 
|*12.    Security
    Ownership of
    Certain          Beneficial
    Owners and
    Management          and
    Related Shareholder Matters           |  |      | 90 | 
|*13.    Certain
    Relationships
    and          Related
    Transactions                                                                            |  |      | 90 | 
|*14.    Principal
    Auditor
    Fees          and
    Services                                                                                       |  |      | 90 | 
|PART IV                                                                                                                                                |  |      |    | 
|15.    Exhibits,
    Financial Statement
    Schedules          and
    Reports on Form 8-K                                                            |  |      | 91 | 
|Signatures                                                                                                                                             |  |      | 95 | 



|  |                                                                                                                                                                                            
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | All or a portion of the referenced sections have
    been included in BellSouth Corporations definitive proxy
    statement dated March 10, 2004 and incorporated herein by
    reference.



2 BELLSOUTH
2003




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##### Table of Contents






PART I






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, in addition to those contained
throughout this document, 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 could affect demand for our services;                                                                                                                                                            
| |  | changes in US 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 pressures on the telecommunications
    industry from a financial, competitive and regulatory
    perspective;                                                                                                                                                                                                          
| |  | the intensity of competitive activity and its
    resulting impact on pricing strategies and new product offerings;                                                                                                                                                                                                               
| |  | changes in the federal and state regulations
    governing the terms on which we offer wholesale services to our
    competitors;                                                                                                                                                                                                 
| |  | continued successful penetration of the interLATA
    long distance market;                                                                                                                                                                                                                                                       
| |  | the unwillingness of banks or other lenders to
    lend to our international operations or to restructure existing
    debt, particularly in Latin America;                                                                                                                                                                       
| |  | consolidation in the wireline and wireless
    industries in which we operate;                                                                                                                                                                                                                                                    
| |  | 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;                                                                                                                                                                                                                                 
| |  | continued deterioration in foreign currencies
    relative to the US Dollar in foreign countries in which we
    operate, particularly in Latin America;                                                                                                                                                                          
| |  | the impact of terrorist attacks on our business;                                                                                                                                                                                                                                                                                  
| |  | the impact and the success of the wireless joint
    venture with SBC Communications, Inc., known as Cingular
    Wireless, including marketing and product development efforts,
    technological changes, financial capacity and closing and
    integration of the pending acquisition of AT&T Wireless
    Services, Inc.; and
| |  | Cingular Wireless failure to realize, in
    the amounts and within the timeframe contemplated, the capital
    and expense synergies and other financial benefits expected from
    its proposed acquisition of AT&T Wireless as a result of
    technical, logistical, regulatory and other factors.                           




Business

OVERVIEW

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

We are a Fortune 100 communications services
company headquartered in Atlanta, Georgia. We and our affiliates
serve over 45 million local, long distance, Internet and
wireless customers in the United States and 13 other countries.
We provide an array of voice, broadband data and e-commerce
solutions to business customers. In the residential market, we
offer digital subscriber line (DSL) high-speed Internet
access, advanced voice features and other services. We also
provide online and directory advertising services, including
BellSouth® Real PagesSM.com. We own
approximately 40 percent of Cingular Wireless (Cingular),
the nations second largest wireless company in terms of
customers, which provides wireless voice and data services. With
one of the largest shareholder bases in America, we have assets
of $50 billion and employ almost 76,000 individuals. Our
principal executive offices are located at 1155 Peachtree
Street, N.E., Atlanta, Georgia 30309-3610 (telephone number
404-249-2000). We are incorporated under the laws of the State
of Georgia.


We were incorporated and became a publicly traded
company in December 1983 as a result of the breakup of the Bell
System. The breakup also created several other local exchange
companies, which are referred to as Baby Bells in this document.
From January 1984 through February 1996, the services that we
and the other Baby Bells could offer were governed by the terms
of the 1982 settlement of the antitrust suit that led to the
breakup of the Bell System. Under the terms of that settlement,
we could provide local exchange, network access, information
access (such as data transport) and long distance
telecommunications services within assigned geographical
territories, termed Local Access and Transport Areas (LATAs).
Although prohibited from providing wireline service between
LATAs, we were allowed to provide network access services that
linked our customers telephone or other equipment in one
of our LATAs to the transmission facilities of other,
nonaffiliated carriers. This resulted in the availability of
telecommunications services between LATAs.


The Telecommunications Act of 1996 superseded the
governing terms of the 1982 settlement and provided for the
development of competition in local telecommunica-




BELLSOUTH
2003      3




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##### Table of Contents



tions markets and the conditions under which the
Baby Bells can provide interLATA wireline telecommunications and
other services. Our ability to offer the services previously
proscribed to us by the terms of the 1982 settlement, including
the provision of interLATA long distance services, is subject to
compliance with the Telecommunications Act of 1996 and the
regulations of the Federal Communications Commission (FCC).
During 2002, we received FCC permission to provide interLATA
long distance services in each of the nine southeastern states
that we serve.


We are subject to increasing competition in all
areas of our business. Regulatory, legislative and judicial
actions and technological developments have expanded the types
of available services and products and the number of companies
that may offer them. Increasingly, this competition is from
large companies as well as small, specialized companies and
joint ventures that have substantial capital, technological and
marketing resources and are subject to fewer regulatory
constraints.


We have four operating segments that are the
focus of our business:




| |   |                                  
| | - | ---------------------------------
| |  | Communications Group;            
| |  | Domestic Wireless;               
| |  | Latin America Group; and         
| |  | Advertising and Publishing Group.

See Note O to our consolidated financial
statements for financial data on each of our segments.




Communications Group

OVERVIEW

We are the predominant telecommunications service
provider in the southeastern US, serving substantial portions of
the population within Alabama, Florida, Georgia, Kentucky,
Louisiana, Mississippi, North Carolina, South Carolina and
Tennessee. BellSouth Telecommunications, Inc. (BST), a wholly
owned subsidiary, provides wireline communications services,
including local exchange, network access, intraLATA long
distance services and Internet services. BellSouth Long Distance
(BSLD), our long distance subsidiary, provides intraLATA and
interLATA long distance services in our nine southeastern
states, wholesale long distance primarily to wireless
communications providers, smaller wireline telecommunications
providers and unaffiliated long distance providers, and prepaid
calling card services through agreements with unaffiliated long
distance providers. Communications Group operations generated
81% of our total operating revenues for 2003 and 2002 and 79%
for 2001.

While we provide telecommunications service to
the majority of the metropolitan areas in our region, there are
many localities and sizable geographic areas within the region
that are served by nonaffiliated telecommunications carriers. In
addition, there is increasing competition within our territory
from other telecommunications carriers, long distance carriers,
cable television operators, voice over Internet protocol (VoIP)
providers and wireless carriers. We have organized our marketing
efforts to parallel our major customer bases: consumer, small
business, large business, and interconnection services.




| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Consumer.This unit
    serves the largest segment of the market within our region, the
    residential customer. While traditional local and long distance
    telephone service remains the core of this market, customer
    demands are rapidly broadening to include an expanded range of
    services, from convenience features such as caller ID, call
    forwarding and voice mail, to dial-up access to the Internet,
    high-speed DSL and video services. During 2003, the consumer
    unit represented 43% of Communications Group revenues.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| | Small Business.This
    unit focuses on providing, in addition to traditional local and
    long distance voice services, advanced voice, data, Internet and
    networking solutions to small and medium-sized businesses. It
    offers a full selection of standard and customized
    communications services to this market. During 2003, the small
    business unit represented 12% of Communications Group revenues.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| | Large Business.This
    unit provides a wide range of standard and highly specialized
    services and products to large and complex business customers.
    In addition to traditional local and long distance voice
    services, product and service offerings to these customers
    include Internet access, private networks, high-speed data
    equipment and transmission, conferencing and industry specific
    communications arrangements for industries such as banking,
    healthcare and manufacturing. During 2003, the large business
    unit represented 18% of Communications Group revenues.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| | Interconnection Services.This unit provides interconnection to
    our network and other related wholesale services to
    telecommunications carriers for use in providing services to
    their customers. Interconnection refers to the link between our
    telecommunications network and the telecommunications network of
    other telecommunications carriers, such as AT&T, Sprint, MCI
    (formerly known as WorldCom) and other long distance and
    competitive local exchange carriers. In addition to
    interconnection services, we provide services such as voice and
    data transport services. During 2003, the interconnection
    services unit represented 24% of Communications Group revenue
    and generated 48% of our reported data revenues. The unit
    provides services to both affiliated and nonaffiliated customers
    in six different carrier markets: wireless service providers,
    competitive local exchange carriers, competitive switched and
    special access providers, long distance carriers, information
    service providers and public payphone service providers.

BUSINESS STRATEGY

Our business strategy is to solidify BellSouth as
the leading choice of customers in the southeast for an
expanding array of voice, data and Internet services and to meet
our customers needs through teaming or wholesale service
arrangements with other companies.

We intend to:



|  |                                                                                                           
|- | ----------------------------------------------------------------------------------------------------------
| | optimize our portfolio of retail and wholesale
    products and services by utilizing marketing approaches



4 BELLSOUTH
2003




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##### Table of Contents



|  |                                                                                                                                                                                                                           
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  | targeted to our different customer segments, by
    providing superior service and by offering flexible packages of
    voice, data and multimedia applications through improved
    distribution channels and systems;   
| | become the leading provider of local
    broadband/Internet Protocol (IP) services in the southeast
    by deploying new broadband/IP platforms that support both voice
    and data services as well as applications; and
| | reduce our cost structure by managing the
    utilization of existing assets and redirecting spending to focus
    new investment on high-growth products and services.                                                   

BUSINESS OPERATIONS

VOICE
SERVICES

Voice services include basic dial-tone telephone
service and switching services provided through the regular
switched network. In addition, we offer various standard
convenience features, such as caller ID, call waiting, call
return and 3-way calling on a monthly subscription or for some,
on a per-use basis. Additional voice related revenues are
derived from charges for inside wire maintenance contracts,
voice messaging services, directory assistance and operator
services. Voice revenues also include amounts received from the
universal service fund for support of high cost areas.

We offer our voice services on a wholesale basis
to other competitive local carriers for resale to their
customers. Competitors primarily utilize our local network under
two methods: resale and, to a greater extent, through the use of
unbundled network elements (UNEs). Lines provided on a resale
basis include all of the components necessary for a wholesale
customer to provide complete service delivery to an end-user.
UNEs represent components of our network that wholesale
customers may combine with components of their own networks, or
with other UNEs purchased from us to allow complete service
delivery to an end-user. See  Regulatory
Environment  Federal Regulatory Matters 
FCC Interconnection Rules for a discussion of UNE pricing.


We provide network access and interconnection
services by connecting the equipment and facilities of our
customers with the communications networks of long distance
carriers, competitive switched and special access providers, and
wireless providers, including Cingular. Similarly, we provide
access and interconnection services to competitive local
exchange carriers so their subscribers can reach ours and vice
versa. As a result of access reform, the revenues that we derive
from these services have diminished over the past several years.
See  Regulatory Environment  Federal
Regulatory Matters  Access Charge Reform for a
discussion of this matter.


As described above in Business 
Overview, BellSouth was historically permitted to provide
long distance services only within, but not between, certain
areas (referred to as LATAs) that were defined at the time of
the Bell System divestiture. Legislation was enacted in 1996
that allowed BellSouth, upon approval by the Federal
Communications Commission, to provide interLATA services.
BellSouth received that approval for all nine states in its
region during 2002. We were the first Baby Bell to receive
approval for all of its territory.


As a consequence of the long distance approval
described above, BellSouth has aggressively entered the
interLATA long distance market in its nine state region.
BellSouths entry has addressed both the mass and complex
markets. On the mass market side, BellSouth offers a wide array
of calling plans to both its residential and business customers.
Many of these long distance offers have been packaged with the
Companys local, data and wireless offerings so as to
present a bundle of services to its customers. These
bundles allow customers to purchase services at
prices lower than they would have paid if they had bought the
underlying services on a stand alone basis. As of
December 31, 2003, BellSouth has achieved a long distance
market penetration of 28% among its residential local customers
and 39% among its mass market business local customers.


Voice services provided approximately 56% of
BellSouths total operating revenues for 2003 and 2002 and
54% for 2001.


BROADBAND AND DATA
SERVICES

As use of the Internet grows and as corporate
data applications increase in sophistication and scope, the
market for broadband and data services is expanding and
evolving. BellSouth will continue to expand its capabilities in
order to maintain a leadership position in the broadband and
data communications market. Investment in service infrastructure
is strategically managed to enable delivery of services offering
increasing capacity and functionality. In parallel, we continue
to use new advances in digital technology to bolster the
broadband capabilities of our entire network. The emergence of
high-performance broadband and digital infrastructure offers the
ability to use these networks for real-time communications
including voice and video using various technologies such as
softswitches (software-based switching platforms) and voice over
Internet protocol (VoIP).

We offer a wide range of data services serving
the retail as well as the wholesale markets. Revenues from
retail offerings such as FastAccess® (DSL), ISDN,
Frame Relay, Lightgate and SmartRing accounted for 51% of total
data revenues in 2003 while wholesale offerings accounted for
the remaining 49%.


DSL service is an important broadband service for
BellSouth. Over 70% of the households in our franchises are
qualified to receive DSL from BellSouth, and we ended 2003 with
over 1.46 million DSL subscribers. BellSouth participates
in the DSL market in two significant ways. We offer DSL
transport products to Internet service providers and other
carriers, which, in turn, provide information services, such as
Internet access, to their end users. We also offer our own
retail DSL-based high speed Internet service that we market
under the name BellSouth® FastAccess® DSL.


We continue to deploy new DSL products with the
introduction in 2003 of FastAccess® DSL Lite, a new
lower speed residential product that offers download speeds up
to 256 Kbps as compared to download speeds up to
1.5 Mbps for standard FastAccess®. This new
Lite product was designed to reach and convert current dial
Internet customers to broadband. We introduced
FastAccess® Lite




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at a monthly rate that was $10 less than standard
FastAccess®. In 2004, BellSouth expects to begin
offering a higher speed version of FastAccess® that
will have download speeds of up to 3 Mbps. We expect to be
in a strong position to offer a full range of Internet access
products, ranging from dial-up access to 3 Mbps services that
also include many state of the art features such as Parental
Controls and virus scanning.


Through a resale arrangement with Qwest
Communications Corporation, we are able to offer data services
to meet the needs of sophisticated business purchasers of long
distance services. These complex services are offered to
enterprise business customers not just in our nine state region,
but throughout the United States.


Broadband and data services generated
approximately 19% of BellSouths total operating revenues
for 2003 and 2002 and 17% for 2001.


OTHER COMMUNICATIONS GROUP
REVENUES

Other Communications Group revenues are comprised
primarily of charges for billing and collection services for
long distance carriers, enhanced white pages listings, customer
late payment fees and customer premises equipment sales and
maintenance services. Other revenue also includes charges for
permitting our competitors to set up their equipment in our
facilities (referred to as collocation). Historically, revenues
from local payphone services were included in this category. By
the end of 2003, we had ceased offering local payphone services
through a separate subsidiary of BST. Due to our gradual
phase-out of the business, we do not expect any material
financial impact on results of operations with respect to
exiting this business. BellSouth also provides wholesale long
distance services, primarily to wireless communications
providers and smaller wireline telecommunications providers, as
well as to unaffiliated long distance providers, and we offer
prepaid calling card services through agreements with an
unaffiliated long distance provider. Other Communications Group
services provided approximately 6% of BellSouths total
operating revenues for 2003 and 8% for 2002 and 2001.

REGULATORY
ENVIRONMENT

Our wireline business is regulated by the FCC and
state public commissions.

FEDERAL REGULATORY
MATTERS

The FCC regulates rates and other aspects of our
provision of interstate telecommunications services. In
addition, pursuant to the Telecommunications Act of 1996, the
FCC has authority to establish policies for pricing and terms of
interconnection between local exchange carriers such as
BellSouth. Prior to 1996, this activity had been mostly the
exclusive jurisdiction of the state regulatory commissions. The
states now set the rates and establish terms for interconnection
within the policy framework ordered by the FCC. We expect the
FCC to continue policies that promote local service competition.

FCC interconnection
rules

Under the 1996 Act, the FCC is obliged to
consider the extent to which we must make elements of our
network available to other providers of local service. The FCC
can require access to proprietary network elements only when
necessary. For non-proprietary elements, the FCC can order
access only when failure to do so will impair the ability of the
requesting carrier to provide services.

The FCC issued its most recent set of rules
governing the provision of elements with local competitors in
August 2003. The order establishing the rules is referred to as
the Triennial Review Order. The previous two sets of rules were
vacated by the courts. The most recent set of rules generally
presume that carriers will be impaired without access to our
unbundled switching when the competitor is serving a mass market
customer. The new rules also presume that competitors will not
be impaired without such access if they are serving medium to
large business customers. These presumptions have the effect of
requiring us to continue offering the unbundled network
platform, or UNE-P, for our competitors to use in serving mass
market customers for at least a 27 month transition
specified in the rules. The rules make other presumptions about
our transport and high capacity loop elements. These
presumptions are subject to proceedings that the FCC has
delegated to the state commissions. Under the new rules, the
states are required to (1) conduct proceedings, all of
which are to be completed by July 2, 2004,
(2) determine the elements that the carriers subject to the
rules will have to provide, and (3) specify the markets in
which they will be provided.


The FCCs order establishing the rules has
been appealed and is pending before the DC Circuit Court of
Appeals. Some carriers, including BellSouth, have challenged the
Triennial Review Order as requiring too much unbundling of their
networks and delegating authority to the states that should be
exercised by the FCC. Other carriers, mostly new entrants since
the 1996 Act, have appealed the rules, contending that they
provide too little unbundling of our network. State commissions
have also challenged the order as being an illegal restriction
on their powers. Arguments in the case occurred in late January
and we expect a decision during the first half of 2004. While
the appeal is pending, we continue to participate in the state
proceedings required by the rule.


In addition, we asked the FCC to reconsider
certain different portions of its Triennial Review Order related
to the regulation of broadband facilities. We asked the FCC to
expand the unbundling freedom its Order provides to some
broadband facilities. Other parties have sought reconsideration
of many other portions of the Order.


If the appeal, reconsideration or state decisions
require us to increase the number or scope of elements we must
provide, or if the appeal, reconsideration or state decisions
allow competitors greater ability to substitute unbundled
elements for special access services, or contain other negative
features, we could experience a material adverse effect on
revenues and results of operation.


Pricing of network
elements

The FCC also establishes the pricing policy for
elements. The policy currently in effect is TELRIC (an acronym
for



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Total Element Long-Run Incremental Cost), which
assumes a hypothetical, least cost, most efficient network for
purposes of establishing prices for elements. The states have
set prices for elements under this policy since 1996.


The FCC has established a proceeding to consider
modification of TELRIC. We are participating in that proceeding,
pursuant to which the FCC may modify TELRIC to require
reflection of the costs of an actual network. However, the final
regulations could arbitrarily exclude certain actual costs which
could result in an adverse effect on revenues and results of
operations.


Price regulation

The FCC regulates interstate prices using a price
regulation plan, generally known as a price cap
plan. The FCCs price cap plan limits aggregate price
changes to the rate of inflation, minus productivity offset,
plus or minus other cost changes recognized by the FCC. The
productivity factor can vary among services. Interstate prices
have been decreasing over the last few years as a result of low
inflation in the US economy.

Access charge reform

The FCC has favored access reform, through which
the historical subsidy for residential local service contained
in network access charges paid by long distance carriers is
funded instead by the end-user, by universal service funds, or
both. As a result of a May 2000 FCC order implementing access
charge reform (referred to as the CALLS order), we have reduced
the interstate network access charges paid by long distance
carriers and increased interstate subscriber line charges paid
by end-users. These rate changes better align our cost recovery
with the way in which we incur costs.

We continue to participate in FCC examinations of
further access reform. The FCC has undertaken a comprehensive
examination of intercarrier compensation  the
payments among telecommunications carriers resulting from use of
their respective interconnecting networks. In general, there are
two classes of intercarrier compensation: (1) reciprocal
compensation that applies to local calls; and (2) access
charges that apply to long distance calls. The objective of the
FCCs comprehensive examination is to examine existing
rules pertaining to intercarrier compensation and explore
alternative forms of intercarrier compensation. This examination
could lead to permanent changes in the way carriers compensate
one another and in the way carriers receive compensation from
their end-user customer. One alternative under consideration is
bill and keep, a policy that requires carriers to
exchange traffic freely with each other and to recover from
end-user customers the costs of transmitting traffic. Either in
this proceeding or in a separate proceeding, the FCC will
reconsider its methodology and rates for reciprocal
compensation. See  Reciprocal
Compensation below.


There are other aspects of access charges and
universal fund contribution requirements that continue to be
considered by state and federal commissions that could result in
greater expense levels or reduced revenues.


Universal service

Historically, network access charges paid by
other carriers were set at levels that subsidized the cost of
providing local residential service. The Telecommunications Act
of 1996 requires that the FCC identify and remove the historical
implicit local service subsidy from network access rates,
arrange for a universal service fund to ensure the continuation
of service to high-cost, low-income service areas and develop
the arrangements for payments into that fund by all carriers.
The FCCs universal service order established funding
mechanisms for high-cost and low-income service areas. We began
contributing to the new funds in 1998 and are recovering our
contributions through increased interstate charges to retail
end-users.

The FCCs universal service mechanism for
non-rural carriers serving high-cost, low-income areas is
designed to ensure that customers in those areas receive
telephone service at affordable rates. BellSouth is receiving
high-cost support for service to residents in Alabama, Kentucky
and Mississippi.


The universal service order also established
significant discounts to be provided to eligible schools and
libraries for all telecommunications services, internal
connections and Internet access. Further, it established support
for rural health care providers so that they may pay rates
comparable to those that urban health care providers pay for
similar services. Industry-wide annual costs of the program,
estimated at approximately $6 billion, are to be funded out
of the universal service fund. Local, long distance and wireless
carriers contributions to the education and health care
funds are assessed by the fund administrator on the basis of the
carriers interstate end-user revenues.


Number portability

In 1996, the FCC ordered certain local number
portability requirements for both wireline and wireless
carriers. The order required wireline carriers to enable
customers remaining in the same location to choose a different
wireline carrier while retaining their same telephone number.
This wireline requirement was implemented in 1997. Wireless
number portability received several extensions, and was
implemented in November 2003.

During 1998, the FCC adopted an order that
allowed incumbent local exchange carriers to recover over five
years their carrier-specific costs of implementing long-term
number portability. The 1998 order permitted cost recovery in
the form of a surcharge to customers to whom number portability
is available.


Current portability capabilities now allow
wireline customers to select wireless service and keep their old
wireline number. Subject to current technical limitations,
wireless customers may switch their wireless number to wireline
service. Because the 1998 cost recovery order did not include
the costs of implementing wireless number portability, we filed
a petition with the FCC to recover approximately
$38 million in costs for that implementation. The
implementation of wireless number portability could negatively
impact our wireline operations, as customers are able to
transfer their residential or business telephone number to a
wireless telephone, and because the ability to transfer wireless
numbers to wireline service is technically




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limited. The expanded number portability could
also increase the rate of Cingulars churn.


Reciprocal
compensation

Following the enactment of the 1996 Act, our
telephone company subsidiary, BST, and various competitive local
exchange carriers entered into interconnection agreements
providing for, among other things, the payment of reciprocal
compensation for local calls initiated by the customers of one
carrier that are completed on the network of the other carrier.
These agreements were the subject of litigation before various
regulatory commissions. After an FCC ruling in April 2001
prescribing new rates, BellSouth settled its claims with
competitors for traffic occurring through mid-June 2001, and
entered into agreements that contained the FCC rates for traffic
occurring from mid-June 2001 forward. The District of Columbia
Circuit Court of Appeals, in the second quarter of 2002,
remanded the ruling to the FCC to implement a rate methodology
consistent with the Courts opinion. The FCCs
previous rules and rates remain in effect while it reconsiders
them. A change in the rules or rates could increase our expenses.

Broadband regulation

In the Triennial Review Order, the FCC eliminated
the high frequency portion of the loop (HFPL) as a
UNE. Competitive local exchange carriers have used the HFPL to
provide DSL over the same loop on which the incumbent local
exchange carrier provides voice services. This is known as Line
Sharing. The FCC grandfathered existing Line Sharing
arrangements, and allowed new Line Sharing arrangements to exist
for one additional year. The FCC also clarified that packet
switching is not a UNE.

BellSouth does not provide
FastAccess® (DSL) when an end user obtains voice
services from a third party voice provider. The FCC examined
this practice in connection with BellSouths request for
long distance approval and determined that we had no obligation
to provide FastAccess® (DSL) over a competitive
carriers leased facilities. The public service commissions
in Florida, Georgia, Kentucky and Louisiana, however, have each
ordered BellSouth to discontinue that practice in their
respective states. BellSouth appealed each of these orders.
BellSouth also filed a petition with the FCC asking the FCC to
find that state commissions are preempted from requiring that
BellSouth provide DSL-based services to competitive local
exchange carrier UNE voice customers.


The FCC has a pending docket in which it is
considering the regulatory classification of broadband service.
Specifically, it is looking at whether broadband service should
be deemed a regulated telecommunications service or a
non-regulated information service.


The FCC and various state public service
commissions are considering what rules and regulations should
apply to voice over Internet protocol services. We are unable to
predict what the outcome will be from these proceedings.


STATE REGULATORY
MATTERS

We are subject to regulation of our local and
intrastate long distance services by a state authority in each
state where we provide intrastate telecommunications services.
Such regulation covers prices, services, competition and other
issues.

Price regulation

We currently operate under price regulation plans
in all states in our wireline territory. Under these plans, the
state regulatory commissions or state legislatures have
established maximum prices that can be charged for certain
telecommunications services. While such plans limit the amount
of increases in prices for specific services, they enhance our
ability to adjust prices and service options to respond more
effectively to changing market conditions and competition. Price
regulation also provides an opportunity to benefit more fully
from productivity enhancements. The majority of these plans have
limitations on raising prices for basic local exchange services
during the early years with provisions for inflation-based price
increases in later years.

While some plans are not subject to either review
or renewal, other plans contain specified termination dates
and/or review periods. Upon review or renewal, a regulatory
commission could attempt to require substantial modifications to
prices and other terms of these plans. During 2003, our plan in
Louisiana was renewed. A review of our Kentucky plan is pending.
We also expect reviews of our plans in Alabama, Mississippi and
North Carolina during 2004.


Beginning in 1996, we operated under a price
regulation plan approved by the South Carolina Public Service
Commission (PSC) 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 state statute, adopted subsequent to the PSC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 PSC. The election became
effective during August 1999. The South Carolina Consumer
Advocate petitioned the PSC seeking review of the level of our
earnings during the 1996-1998 period when we operated under the
subsequently invalidated price regulation plan. The PSC
dismissed 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 PSCs dismissal of the
petition. In January 2004, the court hearing the appeal affirmed
the PSCs decision. An appeal of this decision to the South
Carolina Supreme Court is probable. If the Consumer Advocate
eventually prevails, the case could be remanded to the PSC,
which could, after considering evidence, order refunds to
customers in South Carolina, which in the aggregate may be
material to the company. At this time, we are unable to predict
the outcome of this probable appeal and, therefore, cannot
determine the impact, if any, this matter may have on future
earnings.




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Other state regulatory
matters

In each of our states, we are subject to
performance measurement plans that measure our service
performance to competitors against certain benchmarks and our
own retail performance. When we do not meet the relevant
standards, we make payments to the competitors or the
States treasury. In some states, if we continuously fail
to meet certain criteria, we also would suspend our marketing
and sale of long distance services. We made payments in all
states in 2002 and 2003, and likely will make payments in 2004.
The plans are reviewed regularly for necessary changes.

COMPETITION

We face significant competition from traditional
telecommunications providers. Further, we are increasingly
seeing competition from wireless, cable and other providers that
have not historically competed with us for telecommunications
customers.

TRADITIONAL
TELECOMMUNICATION SERVICE PROVIDERS

The state public service commissions with
jurisdiction over our services have granted numerous
applications to competitive local exchange carriers for
authority to offer local telephone service. As a result,
substantial competition has developed in the marketplace. We
compete for customers based principally on service offerings,
price and customer service. Increasing competition has resulted
in innovative packaging and services that strive to simplify the
customers experience. Pricing pressures in the market have
increased resulting in opportunities for the customer to
purchase value based packages and services. Competitive
pressures across the board have resulted in an increase in
advertising and promotional spending. Competitors, including
major carriers, resell our local services, use separate
unbundled network elements (UNE) or provide services over
their own facilities.

Wholesale UNE prices are based on a
forward-looking cost model and the premise of a most efficient,
least cost network design. Because the pricing is not based on
actual cost, certain costs that exist in todays network
are not adequately addressed in the calculations. A
competitors use of UNEs and the UNE platform results in
lower revenue per access line and has a detrimental impact on
our margins as we are not allowed to charge UNE competitors for
the actual level of costs to maintain and service the access
line. The impact is amplified due to competitors
fashioning service bundles that target high valued customers. In
addition, revenues from non-UNE sources, such as access to our
switches and calling features as well as complementary services
such as inside wire maintenance, operator services and in some
cases directory assistance, are lost to UNE provisioned lines.
As a result of regulated wholesale prices and highly competitive
pricing, our competitors have been effective in gaining market
share, primarily in metropolitan areas. At December 31,
2003, we had provisioned approximately 2.7 million resale
and UNE lines to competing carriers, an increase of 34% since
December 31, 2002.


Companies compete with us for long distance
services by reselling long distance services obtained at bulk
rates from us or from other carriers, or by providing long
distance services over their own facilities. In addition, we are
increasingly competing for long distance customers with wireless
providers that offer a bucket of minutes without differentiating
between local and long distance services.


FCC rules require us to offer expanded
interconnection for interstate special and switched network
access transport. As a result, we must permit competitive
carriers to terminate their transmission lines on our facilities
in our central office buildings and other locations through
collocation arrangements. The effects of the rules are to
increase competition for network access transport. Furthermore,
long distance carriers are increasingly connecting their lines
directly to their customers facilities, bypassing our
networks and thereby avoiding network access charges entirely.


Although our competitors vary by state and
market, we believe that at December 31, 2003 our most
significant local service competitors include AT&T, MCI and
Supra and our most significant long distance competitors include
AT&T, MCI and Sprint.


BROADBAND SERVICE
PROVIDERS

We continue to face intense competition from
cable broadband providers who are not subject to the same
rigorous regulatory scrutiny for their broadband services.
Recent state regulatory rulings requiring BellSouth to provide
FastAccess® (DSL) over UNE lines adds costs and
complexity to delivery of service that inhibits our efforts to
compete with cable on a level playing field.

OTHER TYPES OF
COMPETITORS

An increasing number of voice and data
communications networks utilizing fiber optic lines have been
constructed by communications providers in all major
metropolitan areas throughout our wireline service territory.
Furthermore, wireless voice and paging services increasingly
compete with wireline communications services to provide both
voice and data services. In addition, technological developments
have made it feasible for cable television networks to carry
data and voice communications. We are seeing new competition as
a result of the development of commercial applications using
Internet Protocol technology. This medium could attract
substantial traffic because of its lower cost structure due to
the fact that FCC rules do not currently impose access charges
on most communications carried over this technology.

FRANCHISES AND
LICENSES

Our local exchange business is typically provided
under certificates of public convenience and necessity granted
pursuant to state statutes and public interest findings of the
various public utility commissions of the states in which we do
business. These certificates provide for franchises of
indefinite duration, subject to the maintenance of satisfactory
service at reasonable rates. The Telecommunications Act of 1996
provides that these franchises must be non-exclusive.



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Domestic Wireless

OVERVIEW

Our domestic wireless business consists of our
proportionate share of Cingular Wireless. Cingular is a joint
venture that was formed by the combination of most of the former
domestic wireless operations of BellSouth and SBC
Communications. We have an approximate 40 percent economic
interest in Cingular, and SBC has an approximate 60 percent
economic interest. Cingular is operated independently from both
parents, currently with a four-seat Board of Directors comprised
of two directors from each parent. BellSouth and SBC share
control of Cingular. Cingular is a SEC registrant by virtue of
its publicly traded debt securities. Accordingly, it files
separate reports with the SEC.

Cingular is the second largest provider of
wireless voice and data communications services in the US in
terms of customers. In addition, Cingular is one of the largest
digital wireless network operators in the United States.




| |   |                                                                                                                                                                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Cingular has access to licenses, either through
    owned licenses or licenses owned by joint ventures and
    affiliates, to provide cellular or PCS wireless communications
    services covering an aggregate of 236 million in population
    (POPs), or approximately 81% of the US population,
    including in 45 of the 50 largest US metropolitan areas.
| |  | Cingular provides cellular or PCS services in 43
    of the 50 largest US metropolitan areas.                                                                                                                                                                                                                                                                    
| |  | 100% of Cingulars networks utilize digital
    technology.                                                                                                                                                                                                                                                                                                      
| |  | At December 31, 2003, 95% of Cingulars
    cellular and PCS customers were using digital service, and in
    December 2003, over 99% of Cingulars cellular and PCS
    minutes of use were digital.                                                                                                                                                            

Cingular provides a wide array of wireless
services for individual, business and governmental users.
Cingulars data services are offered over its cellular/PCS
networks and its separate Mobitex network. On a combined basis,
Cingular had approximately 5.5 million active users of its
data services at December 31, 2002 and approximately
6.6 million at December 31, 2003.

In the US wireless telecommunications
industry, there are two principal frequency bands currently
licensed by the FCC for transmitting two-way voice and data
signals. Analog and digital cellular services are provided over
the 850 MHz band and digital PCS services are provided over
the 1900 MHz band. PCS infrastructure is characterized by
shorter transmission distances and closer spacing of cells and
towers than in a cellular network to accommodate the different
characteristics of the PCS radio signals. However, PCS service
does not differ functionally to the end-user from digital
cellular service.


On February 17, 2004, Cingular announced an
agreement to acquire AT&T Wireless Services, Inc. in an
all cash transaction. Under the terms of the agreement, which
were approved by our board of directors and the boards of
directors of SBC and Cingular as well as AT&T Wireless,
shareholders of AT&T Wireless will receive
$15 cash per common share or approximately
$41 billion. The acquisition, which is subject to the
approvals of AT&T Wireless shareholders and federal
regulatory authorities, and to other customary closing
conditions, is expected to be completed in the fourth quarter of
2004. The merger agreement provides that if the conditions to
closing are not satisfied by December 31, 2004 it will be
terminated, subject to extension to June 30, 2005 by either
party if, as of December 22, certain regulatory approvals
have not been obtained (in very limited circumstances it may be
extended another 60 days thereafter). If AT&T Wireless
enters into or consummates certain types of business combination
transactions within fifteen months after certain terminations of
the merger agreement, AT&T Wireless would be obligated to
pay to BellSouth and SBC an aggregate termination fee equal to
$1.4 billion.


The agreement provides that Cingular and AT&T
Wireless are required to use their best efforts to consummate
the merger as promptly as reasonably practicable and BellSouth
and SBC are required to use reasonable best efforts to assist
Cingular in obtaining regulatory approval. However, none of
BellSouth, SBC nor Cingular will be required to take actions
required by regulators as a condition to approval of the merger,
and we will not be required to close the merger if the aggregate
adverse impacts of required sales of subscribers or spectrum or
any conditions imposed on either BellSouth, SBC and/or Cingular
would exceed $8.25 billion. For purposes of calculating the
impacts regarding sales of subscribers or spectrum, the parties
have agreed that the adverse impact of (a) any required
divestitures of a market would be equal to the number of
subscribers in the market required to be divested multiplied by
$825 and (b) any required divestitures of spectrum only
would be equal to the amount of spectrum required to be divested
multiplied by $.50 per MHz POP. Any other adverse impacts on
BellSouth, SBC and/or Cingular would be calculated at the time
the conditions are imposed. Each of SBC and BellSouth has agreed
not to take any action reasonably likely to prevent the closing
of the merger.


BUSINESS STRATEGY

Cingulars business strategy is to:



| |   |                                                                                                                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | expand its customer base profitably by continuing
    to promote the Cingular brand, by expanding and taking advantage
    of its extensive distribution capabilities and by cross-selling
    its products and services through bundling arrangements with its
    parents;
| |  | capture economies through its large scale and
    national scope, allowing it to further realize the significant
    revenue and cost synergies offered by its formation;                                                                                                   
| |  | increase the capacity, speed and functionality of
    its cellular and PCS networks by deploying common voice and
    high-speed data technologies throughout its network;                                                                                                  
| |  | develop and promote advanced wireless data
    applications over multiple communications devices; and                                                                                                                                                                       
| |  | expand its existing footprint and its network
    capacity where economical by obtaining access to additional
    spectrum, primarily through acquisitions, ventures, alliances,
    spectrum exchanges and purchases and possible industry
    consolidation.              



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NETWORK

Licenses

Cingular has licenses to provide cellular and PCS
wireless services on the 850 MHz and 1900 MHz portions
of the radio spectrum. Cingular provides both analog and digital
cellular services on the 850 MHz band and digital services
on the 1900 MHz band. Cingular also has 900 MHz
licenses to provide data services.

Coverage

Cingular has access to wireless licenses to
provide voice and data services over cellular/PCS networks in 45
of the 50 top wireless markets across the country. Cingular has
also signed roaming agreements to ensure its customers can
receive such wireless service in virtually all areas in the
United States where cellular/PCS wireless service is available.
Cingulars cellular/PCS networks are substantially built
out. Cingular also provides wireless data services over its
900 MHz network, covering over 90% of the
US metropolitan POPs, including the 50 largest
US metropolitan areas.

Technology

Cingular uses both Global System for Mobile
Communication (GSM) and Time Division Multiple
Access (TDMA) technology. These are digital
technologies that allow for numerous advantages over analog
service, including extended battery life, improved voice
quality, greater call security and lower per-minute costs.
Digital service also enables enhanced features and services,
such as interactive messaging, facsimile, e-mail and wireless
connections to computer/data networks and the Internet. Further,
GSM offers three to four times the voice capacity of TDMA
digital technology and provides economies of scale due to its
predominant global use.

Cingular is deploying high-speed General Packet
Radio Service (GPRS) throughout its cellular and PCS
networks and, at December 31, 2003, networks covering
approximately 93% of its cellular and PCS wireless POPs were
equipped with this technology. GPRS is an interim step towards
Enhanced Data Rates for GSM Evolution (EDGE),
Cingulars choice of third generation wireless technology.
EDGE was launched in selected markets in 2003, with 20% of
Cingulars operational POPs covered at December 31,
2003, and continued expansion planned for 2004. EDGE will
increase the capacity, speed and functionality of
Cingulars data networks. GPRS utilizes Internet
Protocol-based technology, which allows for high-speed wireless
packet-switched data services. Packet-switched technology allows
for data to be sent and received in bursts, instead of requiring
continuous transmission over the network for the duration of the
communication, thereby providing the user always on,
as opposed to dial-up, connectivity.


For data services, EDGE will offer faster speeds
than TDMA or GSM circuit-switched or GPRS technology and is
expected to provide Cingulars customers with greater
connectivity and communications capabilities, including faster
speeds for accessing the wireless Internet.


COMPETITION

There is substantial and increasing competition
in all aspects of the wireless communications industry. Cingular
competes for customers based principally on its service
offerings, price, call quality, coverage area and customer
service.

Cingulars competitors are principally the
other largest national providers of cellular, PCS and other
wireless communications services  Verizon Wireless,
AT&T Wireless, Sprint PCS, Nextel and T-Mobile, which
together with Cingular, served almost 80% of the
US wireless customers. Verizon Wireless ranks first among
the six national carriers in terms of number of customers served
as of December 31, 2003 and first in 2003 revenues and
profitability. Cingular ranked second among these carriers
according to number of customers served. Although AT&T
Wireless had fewer customers, their 2003 revenues slightly
exceeded Cingulars.


The primary advantages other carriers have over
Cingular are spectrum depth and population coverage. Cingular
addresses this by seeking additional licenses in areas where
Cingular has current or future spectrum needs, via the following
options:




| |   |                                                                                                                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | by participating in FCC auctions, such as the
    auction that ended in January 2001 that resulted in Cingular
    acquiring access, through Salmon PCS LLC, to an additional
    45 licenses;                                                                                                                     
| |  | by acquiring licenses from other carriers, either
    by direct purchases, as in Salt Lake City and the pending
    acquisition of licenses from NextWave, or by swaps for licenses,
    as in the New York metropolitan markets, in exchange for
    licenses for spectrum where Cingular has excess capacity; and
| |  | by joint venturing with other carriers to pool
    spectrum or share network infrastructure, as in Cingulars
    AT&T and T-Mobile ventures.                                                                                                                                                                      

In addition, because Cingular is in the process
of overlaying its TDMA network with GSM/GPRS/EDGE technology and
in the process of transitioning its TDMA customers to that new
technology, Cingular will operate at somewhat of a disadvantage
to other carriers (e.g., Verizon Wireless, Sprint PCS, Nextel
and T-Mobile) that utilize a common technology throughout their
networks. Cingular is meeting these challenges by offering
cellular and PCS phones that will operate on both TDMA and GSM
networks as well as the standard GSM and TDMA only handsets and
negotiating roaming agreements to allow its customers to use
TDMA or GSM networks of other carriers. At the end of 2003,
Cingular had 93% of its operational POPs covered by GSM/GPRS and
20% covered by EDGE.

As a result, Cingular believes it has the ability
to strongly compete in all of its markets. Cingular also
competes with smaller companies, resellers and wireline
telephone service providers. Some of its competitors have
greater financial, technical, marketing, distribution and other
resources than Cingular does. In addition, some of the other
large providers have more extensive coverage areas than Cingular
does. Some of the indirect retailers who sell Cingulars
services also sell its competitors services. Moreover,
Cingular may experience significant competition from companies
that provide similar services using other communications




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##### Table of Contents



technologies and services. Some of these
technologies and services are now operational and others are
being developed or may be developed in the future.


Consolidation, alliances and business ventures
may increase competition. Consolidation and the formation of
alliances and business ventures within the wireless
communications industry have occurred and Cingular expects that
this trend will continue. Cingular has numerous other competing
wireless providers in its markets. Consolidation may create
larger, better-capitalized competitors with substantial
financial, technical, marketing, distribution and other
resources to compete with its product and service offerings.
Competitors with more complete nationwide footprints may be able
to offer nationwide services and plans more economically due to
economies of scale and less dependence on roaming arrangements.
In addition, global combinations of wireless
carriers  such as the alliance between AT&T
Wireless and NTT DoCoMo Inc. of Japan, the joint venture between
Sprint and Virgin Group, Verizon Wireless, which is a joint
venture between Verizon and Vodafone plc, and mergers and
acquisitions, such as the ownership of T-Mobile by Deutsche
Telekom  may give some domestic competitors better
access to international technologies, marketing expertise and
strategies and diversified sources of capital. Other large,
national wireless carriers have affiliations with a number of
smaller, regional wireless carriers that offer wireless services
under the same national brand, thereby expanding the national
carriers perceived national scope. In addition,
infrastructure sharing ventures, while facilitating
Cingulars entry into new markets, also allows its partners
to compete with Cingular in those markets.


Governmental policy at all levels favors robust
competition. For example, under current FCC rules, six or more
PCS licensees, two cellular licensees and one or more enhanced
specialized mobile radio, or ESMR, licensees may
operate in each geographic area. This structure has resulted in
the presence of multiple competitors in Cingulars markets
and makes it challenging for Cingular to attract new customers
and retain existing ones. In addition, specialized mobile radio,
or SMR, dispatch system operators have constructed
two-way ESMR digital mobile communications systems on existing
SMR frequencies in many cities throughout the United States,
including most of the markets in which Cingular operates.


Cingulars ability to compete successfully
will depend, in part, on the quality of its network and
marketing efforts and on its ability to anticipate and respond
to various competitive factors affecting the industry. These
factors include the introduction of new services and
technologies, changes in consumer preferences, demographic
trends, economic conditions, pricing strategies of competitors
and its ability to take advantage of its wireless/wireline
service area overlap with SBC and BellSouth. As a result of
competition, Cingular has in the past and may in the future be
required to:




| |   |                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------
| |  | reduce prices for its services and products;                                                             
| |  | restructure its service packages to provide more
    services without increasing prices;                 
| |  | further upgrade its network infrastructure and
    the handsets Cingular offers;                         
| |  | increase its advertising, promotional spending,
    commissions and other customer acquisition costs; and
| |  | increase its spending to retain customers.                                                               

As previously discussed, on February 17,
2004, Cingular announced an agreement to acquire AT&T
Wireless. We expect that this acquisition will enhance
Cingulars ability to compete by strengthening its network
coverage and quality and improving customer service and
offerings.

On November 24, 2003, the FCCs rules
on wireless local number portability became operative, enabling
wireless customers to keep their wireless number when switching
to another carrier. These rules require wireless carriers to
offer number portability to their customers in the top 100
metropolitan statistical areas (MSAs) now and to all other
customers no later than May 24, 2004. These rules will
likely increase competition, costs and customer churn.


REGULATORY
ENVIRONMENT

The FCC regulates the licensing, construction,
operation, acquisition and transfer of wireless systems in the
United States pursuant to the Communications Act of 1934 and its
associated rules, regulations and policies.

To obtain the authority to have the exclusive use
of radio frequency spectrum in an area within the United States,
wireless communications systems must be licensed by the FCC to
operate the wireless network and mobile devices in assigned
spectrum segments and must comply with the rules and policies
governing the use of the spectrum as adopted by the FCC. These
rules and policies, among other things:




| |   |                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------
| |  | regulate Cingulars ability to acquire and
    hold radio spectrum licenses;                                                                    
| |  | impose technical obligations on the operation of
    Cingulars network;                                                                        
| |  | impose requirements on the ways Cingular provides
    service to and communicates with its customers;                                           
| |  | regulate the interconnection of its network with
    the networks of other carriers;                                                            
| |  | obligate Cingular to serve roaming customers of
    other wireless carriers; and                                                                
| |  | impose a variety of fees and charges on its
    business that are used to finance numerous regulatory programs
    and part of the FCCs budget.

Licenses are issued for only a fixed period of
time, typically 10 years. Consequently, Cingular must
periodically seek renewal of those licenses. The FCC will award
a renewal expectancy to a wireless licensee that has provided
substantial service during its past license term and has
substantially complied with applicable FCC rules and policies
and the Communications Act of 1934. The FCC has routinely
renewed wireless licenses in the past. However, the
Communications Act provides that licenses may be revoked for
cause and license renewal applications denied if the FCC
determines that a renewal would not serve the public interest.
Violations of FCC rules may also result in monetary penalties or
other sanctions. FCC rules provide that competing renewal
applications for licenses will be considered in comparative
hearings, and establish the qualifications for competing
applications and the standards to be applied in hearings.



12 BELLSOUTH
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##### Table of Contents



Wireless systems are subject to Federal Aviation
Administration and FCC regulations governing the location,
lighting and construction of transmitter towers and antennas and
are subject to regulation under federal environmental laws and
the FCCs environmental regulations, including limits on
radio frequency radiation from mobile handsets and towers.
Zoning and land use regulations, including compliance with state
and local historic preservation requirements, also apply to
tower siting and construction activities.


The Communications Act of 1934 and the FCC rules
require the FCCs prior approval of the assignment or
transfer of control of a license for a wireless system. Before
Cingular can complete any such purchase or sale, it must file
appropriate applications with the FCC, and the public is by law
granted a period of time, typically 30 days, to oppose or
comment on such applications. In addition, the FCC has
established transfer disclosure requirements that require
licensees who assign or transfer control of a license acquired
through an auction within the first three years of their license
terms to file associated sale contracts, option agreements,
management agreements or other documents disclosing the total
consideration that the licensee would receive in return for the
transfer or assignment of its license. Non-controlling minority
interests in an entity that holds an FCC license generally may
be bought or sold without FCC approval. However, notification
and expiration or earlier termination of the applicable waiting
period under Section 7A of the Clayton Act by either the
Federal Trade Commission or the Department of Justice may be
required, as well as approval by, or notification of, state or
local regulatory authorities having competent jurisdiction, if
Cingular sells or acquires wireless systems.


Two of the ways by which Cingular can attempt to
meet its needs for additional spectrum are by acquiring spectrum
licenses held by others or by accessing new spectrum being
auctioned and licensed by the FCC. In early 2004, the FCCs
new spectrum leasing rules become effective. These rules permit
license holders to lease the use of their spectrum to others and
provide that such holders can meet their build-out requirements
through the facilities construction and operation activities of
their lessees. The FCC has structured its rules such that it has
minimal involvement in leasing activities. For these reasons,
Cingular views spectrum leasing as an attractive alternative to
license acquisition in areas where Cingular is spectrum
constrained.





Latin America Group

OVERVIEW

Our Latin America Group operations consist
primarily of wireless service providers operating in 10
countries. We own less than 100% of most of these companies;
adjusting customer data to reflect this partial ownership, our
licensed service areas had a population of approximately
144.2 million and provided wireless services to
approximately 8.4 million customers, each as of
November 30, 2003. The operations in Latin America
generated 10% of our total operating revenues in 2003 and 2002
and 12% of our total operating revenues in 2001.

The results of our Latin America subsidiaries
reflect a fiscal year ending November 30 to facilitate
timely reporting of the consolidated results of BellSouth. The
table below sets forth a summary overview of our Latin America
operating companies as of November 30, 2003. The operating
company data is presented on a total basis regardless of our
ownership percentage and does not necessarily represent amounts
attributable to our consolidated financial results.


|                    |  |              |       |               |  |                |        |  |  |  |       | 
|------------------- |  | ------------ | ----- | ------------- |  | -------------- | ------ |  |  |  | ----- | 
|                    |  | BellSouth    |       |               |  |               
|                    |  | Ownership in |       | Total         |  | Total         
|                    |  | Operating    |       | Population    |  | Customers     
|Country             |  | Company      |       | Served        |  | Served        
|                   
|                   
|                   
|                    |  | (Percent)    |       | (In millions) |  | (In thousands)
|                   
|                   
|                   
|Argentina           |  |              | 86.7  |               |  |                | 37.4   |  |  |  | 1,487 | 
|Chile               |  |              | 100.0 |               |  |                | 15.3   |  |  |  | 1,301 | 
|Colombia            |  |              | 66.0  |               |  |                | 40.3   |  |  |  | 1,915 | 
|Ecuador             |  |              | 89.4  |               |  |                | 13.2   |  |  |  | 816   | 
|Guatemala           |  |              | 60.0  |               |  |                | 13.0   |  |  |  | 252   | 
|Nicaragua           |  |              | 89.0  |               |  |                | 2.9    |  |  |  | 229   | 
|Panama              |  |              | 43.7  |               |  |                | 2.8    |  |  |  | 420   | 
|Peru                |  |              | 97.4  |               |  |                | 27.5   |  |  |  | 642   | 
|Uruguay             |  |              | 46.0  |               |  |                | 2.1    |  |  |  | 146   | 
|Venezuela           |  |              | 78.2  |               |  |                | 24.0   |  |  |  | 3,307 | 
|                   
|Total Latin America |  |              | 178.5 |               |  |                | 10,515 | 
|                   

In structuring our investments, we typically
exercise operating influence through board representation, the
right to appoint certain key members of management and consent
rights with respect to significant matters, including amounts of
capital contributions. In addition, we try to assure our ability
to maintain a position of influence in the venture, if not
outright control, by obtaining rights of first refusal on future
sales of our partners interests and on equity issuances by
the venture. From time to time, we may buy out local partners
who wish to sell, increasing our ownership stake and influence
in those companies. The particular governance rights vary from
venture to venture, and often are dependent upon the size of our
investment relative to that of other investors. Under the
governing documents for some of these ventures, certain key
matters such as the approval of business plans and debt
financings and decisions as to the timing and amount of capital
contributions and cash distributions require the consent of our
partners.

In 2002, we sold Listel and OESP, our Brazilian
yellow pages operations. In 2003, we disposed of BCP and BSE,
our Brazilian wireless operations and we increased our interest
in our wireless operation in Argentina from 65.0% to 86.7%
through the purchase of all of Motorolas interest in the
operation for a nominal sum.


BUSINESS STRATEGY

Over the long term, we expect wireless
communications to grow in Latin America. We plan to grow
profitably in this market by pursuing the following strategies:



| |   |                                                                                                                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | grow the core wireless business by offering
    innovative voice and data services like fixed wireless, short
    messaging and mobile Internet applications to our existing
    customer base and by profitably increasing penetration in the
    markets we serve;



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| |   |                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------
| |  | improve profitability through cost and capital
    efficiencies from integration, scale and new technology; and
| |  | increase focus on value generation by building
    our competitive position and reducing debt.                 

During 2002 and much of 2003, Latin America
economies were impacted by negative economic and difficult
political conditions. Much of this is attributed to currency
devaluations and sharp recessions in Argentina, Uruguay and
Venezuela, civil unrest in Venezuela, declines in gross domestic
product within specific countries, as well as economic
conditions within the US market. These deteriorating conditions
made it difficult for us to continue to meet our strategic and
financial goals. Many of these conditions continued to exist at
the end of 2003, particularly in Venezuela. However, economic
conditions began to improve in much of Latin America in 2003. In
particular, Argentinas currency rebounded 16% by the end
of 2003 and several countries in the region are projected to
have had modest GDP growth for 2003. Nonetheless, there are
still significant economic risks in 2004. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations  Operating
Environment  Latin America Economic Trends and
Foreign Risks.

TECHNOLOGY

All of our international wireless markets utilize
digital technology in their wireless service offerings. We
select the type of digital technology for each international
market based on cost, quality and capacity available at the time
in that part of the world. CDMA2000 (Code Division Multiple
Access 2000) has been selected for our Latin America
affiliates migration to third generation cellular
networks. CDMAs spectrum efficiency provides higher
capacity for voice services and provides a wide array of new
services like wireless data and high-speed Internet access. Four
of our Latin America operations (Argentina, Uruguay, Venezuela
and Guatemala) already had CDMA technology in place. CDMA 2000
overlays were completed during 2002 in Ecuador and Panama and
during 2003 in Colombia, Nicaragua, Peru and Chile. In addition,
Venezuela, Argentina and Guatemala were upgraded to CDMA2000 in
2003. As a result of these activities, we have the latest
technology available in nine out of the ten countries we serve.
We plan to upgrade Uruguay to CDMA2000 in the first quarter of
2004.

COMPETITION

Each of our international wireless operations is
subject to competition, generally from at least one other
wireless provider and, increasingly, from new PCS providers and
resellers.

Specifically, BellSouths Latin America
business has three major regional competitors 
America Movil, Telefonica Moviles and Telecom Italia Mobile. It
is likely that these three major players will increase their
share by acquisition and expansion into new markets. We have
four competitors in Argentina. There are three competitors in
Venezuela, Chile, Peru and Guatemala with a fourth competitor
expected to enter in Guatemala. Colombia, Ecuador and Nicaragua
have two competitors. Panama and Uruguay each have one
competitor with a new competitor expected to enter in Uruguay.


In some cases, the government-owned telephone
companies operate incumbent wireline and wireless systems or
have a substantial investment in a competing wireless provider.
The competing wireless providers generally have access to
substantial financial resources. Many governments have
privatized the government-owned telephone companies, and these
privatized companies often become more formidable competitors
due to the availability of additional capital and technical
expertise.


LICENSES AND
REGULATION

Our ability to introduce new products and
services depends to a large extent upon whether the new products
and services are permitted by the local laws and regulatory
authorities. As countries have encouraged foreign investment in
telecommunications and have privatized their government owned
wireless telephone companies, the general trend has been toward
deregulation of telecommunications. In several of our markets,
our operating companies offer or plan to offer international
long distance services either to their wireless subscriber bases
or, in some cases, to the entire population. In addition, we
offer domestic long distance service in certain markets through
our nationwide wireless facilities and backbone networks. We
either offer or plan to offer fixed wireless services and public
telephony in several markets.

Our Latin America businesses operate pursuant to
the terms of licenses granted by the governments of the
countries in which they are located and are regulated by a
telecommunications agency or similar supervisory authority in
such countries. Such agencies typically also promulgate and
enforce regulations regarding, among numerous other items, the
allocation and use of spectrum and radio frequencies, incoming
and/or outgoing rates, quality standards and the construction
and operation of network equipment. Our Latin America operations
also require government permits, including permits from local
building and planning commissions, for the construction and
operation of cell sites. Some of our Latin America operations
have not been able to obtain all required permits. Although we
do not believe such non-compliance will have a material effect
on our business as a whole, we cannot assure that there will not
be claims or regulatory actions relating to noncompliance with
these permitting requirements. Other regulations commonly
encountered in our Latin America markets include legal
restrictions on the percentage ownership of telecommunications
licensees by foreign entities, such as us, and transfer
restrictions or government approval requirements regarding
changes in the ownership of licensees.


The terms of the licenses granted to our
operating companies and conditions of the license renewal vary
from country to country. Although license renewal is not usually
guaranteed, most licenses do address the renewal process and
terms, which we believe we will be able to satisfy. As licenses
approach the end of their terms, it is our intention to pursue
renewal as provided by these license agreements.


As a US company, we are subject to the Foreign
Corrupt Practices Act, which generally prohibits US compa-




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nies from making, directly or indirectly,
improper payments to foreign officials for the purpose of
obtaining or keeping business, and requires US companies and
their subsidiaries to maintain accurate records and adequate
accounting controls. Our policy is to comply fully with the Act,
and we maintain policies, programs and procedures for compliance
with the Act on the part of our employees, agents, partners and
other persons whose actions could expose us to liability under
the Act. Matters relating to the Act may come to the attention
of local authorities, media and others and may result in adverse
local country impacts, including penalties and other serious
injury to our local businesses.


FOREIGN RISKS

Our reporting currency is the US Dollar. However,
most of our Latin America revenues are generated in the
currencies of the countries in which we operate. In addition,
many of our operations and equity investees hold US Dollar
denominated short- and long-term debt. The currencies of many
Latin America countries have recently experienced substantial
volatility and depreciation. Specifically, Venezuela experienced
significant currency devaluation in 2003. The Venezuelan Bolivar
devalued an additional 17% in 2003 after having devalued 44% in
2002. The Argentine Peso, which had devalued in 2002 by 71%,
rebounded in 2003, strengthening 16%. Also in 2002, the
Uruguayan Peso devalued 49% and the Brazilian Real devalued 30%.

Declines in the value of the local currencies in
which we are paid relative to the US Dollar will cause local
currency-denominated revenues and expenses to decrease in US
Dollar terms and dollar-denominated assets and liabilities, as
well as interest expense, to increase in local currency terms.
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, substantial
amounts of our exposures are unhedged.


The impact of a devaluation or a 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 control expenses. In many cases, following a significant
devaluation, inflation causes our local currency-denominated
expenses to increase. Conversely, our ability to raise prices is
limited in many instances by government regulation of tariff
rates and competitive constraints. Where our local operations
have borrowed in US Dollars, a significant devaluation
substantially increases the costs in local currency, in which
our operations generally earn revenues, of servicing and
repaying such loans in dollars. Due to our constantly changing
currency exposure and the potential for substantial volatility
of currency exchange rates, we cannot quantify the anticipated
effect of exchange rate fluctuations on our business.


Economic, social and political conditions in some
Latin American countries are unfavorable and volatile, which
have adversely affected our operations. These conditions make it
difficult for us to continue development of our business,
generate revenues or achieve or sustain profitability in some
countries and could have this effect throughout the region.
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 America business has been materially adversely affected by
recent political and economic crises in Argentina, Brazil and
Venezuela. Other operations in the region could be materially
adversely affected if these crises spread to other Latin America
countries.


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


For a discussion of certain of these factors that
are currently affecting our operations in Latin America, see
Managements Discussion and Analysis of Financial
Condition and Results of Operations  Operating
Environment  Latin America Economic Trends.





Advertising and Publishing
Group

OVERVIEW

We own a group of companies that publish, print,
sell advertising and perform related services concerning
alphabetical and classified telephone directories in both paper
and electronic formats. Advertising and Publishing Group
revenues are derived primarily from sales of directory
advertising, and represented approximately 9% of our total
operating revenues in each of 2003, 2002 and 2001.

We are one of the leading publishers of telephone
directories in the United States. We publish alphabetical white
page directories of business and residential telephone
subscribers in substantially all of our wireline
telecommunications markets and sell advertising in and publish
classified directories under The Real Yellow Pages®
trademark in the same markets.


We also provide telephone directory and
electronic sales and publishing services for nonaffiliated
telephone companies and receive a portion of the advertising
revenue as a commission. During 2003, we contracted with 101
nonaffiliated telephone companies to sell advertising in over
548 classified directories in 42 states. We also act as an agent
for national yellow page ad placements in 50 states on
behalf of over 421 companies.


In addition to publishing directories in
traditional paper form, we publish white and yellow page
directories and other advertising in other media. For example,
we offer white and yellow page directories on CD-ROM for many of
our major markets, publish Internet white and yellow page
directories for the southeastern US and offer additional
Internet advertising services. These services are distributed
across similar on-line directories with information for
businesses nationwide. We sell electronic advertising to local
and national businesses under our RealPages.com trademark.




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##### Table of Contents



We continually seek to expand our advertising and
publishing business by increasing advertising sales in our
traditional directory and electronic products. We also market to
organizations and companies with unique directory and
advertising needs. Examples of such expanded directory services
and products include our Companion directory, a smaller, more
portable version of the traditional print directory, and
electronic Search engine advertising.


We own a printing company that prints
substantially all white page, yellow page, and specialty
directories distributed by BellSouth within our wireline
telecommunications markets. This company also prints other
materials for our affiliates and, to a limited extent, documents
for nonaffiliated companies. In 2003, it printed 60 million
white page, yellow page and specialty directories.


BUSINESS STRATEGY

We are committed to providing a comprehensive
source for linking buyers and sellers in the local marketplace.
To achieve this objective, we intend to:



| |   |                                                                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | maintain product leadership by reinvesting in our
    products and making strategic investments to promote our
    products;                                                                                                                                         
| |  | grow revenues through new products and product
    enhancements, including the development and increased
    distribution of Internet and niche products and by expanding our
    existing markets through new market overlays and traditional
    market re-scoping;
| |  | attract new customers and retain our existing
    customer base by offering competitive pricing and incentive
    programs to encourage new customers and to reward current
    customers for their tenure; and                                                      
| |  | achieve optimal operational efficiency by
    improving sales force effectiveness.                                                                                                                                                                                   

COMPETITION

Competition in the yellow pages industry
continues to intensify. Industry consolidation and market
expansion of other publishers was at an all time high in 2002
and 2003. Major markets are seeing multiple competitors, with
many different media competing for advertising revenue. Within
the print yellow pages, we compete primarily with Yellow Book
USA, White Publishing, and R.H. Donnelly, while new competitors,
such as Verizon, continue to enter our markets. Competition for
directory sales agency contracts for the sale of advertising in
publications of nonaffiliated companies also continues to be
strong. We continue to respond to the increasing competition and
the dynamic media environment with investments in product
enhancements, multiple delivery options, localized pricing
changes and promotions, increased advertising, and sales
enhancements.




Intellectual Property

BellSouths intellectual property portfolio
is a major component of our ability to be a leading and
innovative telecommunications services provider. We diligently
protect and work to build our intellectual property rights
through patent, copyright, trademark and trade secret laws. We
also use various licensed intellectual property to conduct our
business.

In addition to using our intellectual property in
our own operations, BellSouth grants licenses to certain other
companies to use our intellectual property under reasonable
terms and conditions.


From time to time, BellSouth receives notices
from third parties asserting patent and other intellectual
property claims. Regardless of the merit of such claims, they
may require significant resources to investigate and defend and,
if an infringement claim is successful, in the event we are
unable to license the infringed technology or to substitute
acceptable non-infringing technology, our business could be
adversely affected.





Research and Development

Research and development in our industry is
primarily driven by equipment manufacturers. In addition, we
conduct research and development activities internally and
through external vendors, primarily Telcordia Technologies.
Telcordia provides research and development and other services
to us and other telecommunications companies. We have contracted
with Telcordia for ongoing support of engineering and systems.
In addition, we are a member of the National Telecommunications
Alliance, an organization that supports our commitment to
national security and emergency preparedness.




Employees

At December 31, 2003, we employed almost
76,000 individuals. About 60% of BellSouths employees at
December 31, 2003 were represented by the Communications
Workers of America (CWA), which is affiliated with the AFL-CIO.
Collective bargaining agreements with the CWA were last ratified
in September 2001. These three-year contracts cover
approximately 45,000 employees. The contracts included basic
wage increases totaling 13% compounded over a three year term.
In addition, the agreements provided for a standard incentive
award of two percent of base salary and overtime compensation,
which is subject to adjustment based on company performance
measures. Other terms of the agreements included pension band
increases and pension plan cash balance improvements for active
employees.

Our collective bargaining agreements with the CWA
are scheduled to expire on August 7, 2004. Negotiations
with the CWA over the terms of new agreements are expected to
begin in mid-June 2004. The outcome of these negotiations cannot
be determined at this time.





Properties

Our properties do not lend themselves to
description by character or location of principal units. Our
investment in



16 BELLSOUTH
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##### Table of Contents



property, plant and equipment in our consolidated
operations consisted of the following at December 31:


|                              |  |      |      |      |  |  |      |  
|----------------------------- |  | ---- | ---- | ---- |  |  | ---- | -
|                              |  | 2002 |      | 2003
|                             
|                             
|                             
|Outside plant                 |  |      | 40.4 | %    |  |  | 40.5 | %
|Central office equipment      |  |      | 40.1 |      |  |  | 39.7 |  
|Operating and other equipment |  |      | 7.8  |      |  |  | 7.9  |  
|Land and buildings            |  |      | 7.5  |      |  |  | 7.7  |  
|Furniture and fixtures        |  |      | 3.7  |      |  |  | 3.8  |  
|Plant under construction      |  |      | 0.5  |      |  |  | 0.4  |  
|                             
|                              |  |      | 100  | %    |  |  | 100  | %
|                             

These properties are divided among our operating
segments as follows: Communications Group, 93.8%; Latin America
Group, 4.8%; Advertising and Publishing Group, 0.5%; and other,
0.9%.

Outside plant consists of connecting lines
(aerial, underground and buried cable) not on customers
premises, the majority of which is on or under public roads,
highways or streets, while the remainder is on or under private
property. We currently self-insure all of our outside plant
against casualty losses. Central office equipment substantially
consists of digital electronic switching equipment and circuit
equipment. Land and buildings consist principally of central
offices and administrative space. Operating and other equipment
consists of wireless network equipment, embedded intrasystem
wiring (substantially all of which is on the premises of
customers), motor vehicles and other equipment. Central office
equipment, buildings, furniture and fixtures and certain
operating and other equipment are insured under a blanket
property insurance program. This program provides substantial
limits of coverage against all risks of loss
including fire, windstorm, flood, earthquake and other perils
not specifically excluded by the terms of the policies.


Substantially all of the installations of central
office equipment for the wireline communications business are
located in buildings and on land owned by BST. Many garages,
administrative and business offices and telephone service
centers are in leased quarters. Most of the land and buildings
associated with our nonwireline businesses and administrative
functions are leased.





Legal Proceedings

EMPLOYMENT CLAIM

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 USC. Section 1981. Plaintiffs purport to bring the
claims on behalf of two classes: a class of all African-American
hourly workers employed by BellSouth at any time since
April 29, 1998, and a class of all African-American
salaried workers employed by BellSouth 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 time, the
likely outcome of the case cannot be predicted, nor can a
reasonable estimate of the amount of loss, if any, be made.

SECURITIES CLAIMS

From August through October 2002 several
individual shareholders filed substantially identical class
action lawsuits against BellSouth and three of its senior
officers alleging violations of the federal securities laws. The
cases have been consolidated in the United States District Court
for the Northern District of Georgia and are captioned In re
BellSouth Securities Litigation. Pursuant to the provisions of
the Private Securities Litigation Reform Act of 1995, the court
has appointed a Lead Plaintiff. The Lead Plaintiff filed a
Consolidated and Amended Class Action Complaint on or about
July 15, 2003 and named four outside directors as
additional defendants. The Consolidated and Amended
Class Action Complaint alleges that during the period
November 7, 2000 through February 19, 2003, the
Company (1) overstated the unbilled receivables balance of
its advertising and publishing subsidiary; (2) failed to
properly implement SAB 101 with regard to its recognition of
advertising and publishing revenues; (3) improperly billed
competitive local exchange carriers (CLEC) to inflate
revenues; (4) failed to take a reserve for refunds that
ultimately came due following litigation over late payment
charges; and (5) failed to properly write down goodwill of
its Latin American operations. The plaintiffs are seeking an
unspecified amount of damages, as well as attorneys fees
and costs. At this time, the likely outcome of the case cannot
be predicted, nor can a reasonable estimate of loss, if any, be
made.

In February 2003, a similar complaint was filed
in the Superior Court of Fulton County, Georgia on behalf of
participants in BellSouths Direct Investment Plan alleging
violations of Section 11 of the Securities Act. Defendants
removed this action to federal court pursuant to the provisions
of the Securities Litigation Uniform Standards Act of 1998. On
or about July 3, 2003, the federal court issued a ruling
that the case should be remanded to Fulton County Superior
Court. The plaintiffs are seeking an unspecified amount of
damages, as well as attorneys fees and costs. At this
time, the likely outcome of the case cannot be predicted, nor
can a reasonable estimate of loss, if any, be made.


In September and October 2002 three substantially
identical class action lawsuits were filed in the United States
District Court for the Northern District of Georgia against
BellSouth, its directors, three of its senior officers, and
other individuals, alleging violations of the Employee
Retirement Income Security Act (ERISA). The cases
have been consolidated and on April 21, 2003, a
Consolidated Complaint was filed. The plaintiffs, who seek to
represent a putative class of participants and beneficiaries of
BellSouths 401(k) plan (the Plan), allege in
the Consolidated Complaint that the company and the individual
defendants breached their fiduciary duties in violation of
ERISA, by among other things, (1) failing to provide
accurate information to the Plan participants and beneficiaries;
(2) failing to ensure that the Plans assets were
invested properly; (3) failing to monitor the Plans
fiducia-




BELLSOUTH
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##### Table of Contents



ries; (4) failing to disregard Plan
directives that the defendants knew or should have known were
imprudent and (5) failing to avoid conflicts of interest by
hiring independent fiduciaries to make investment decisions. The
plaintiffs are seeking an unspecified amount of damages,
injunctive relief, attorneys fees and costs. Certain
underlying factual allegations regarding BellSouths
advertising and publishing subsidiary and its Latin American
operation are substantially similar to the allegations in the
putative securities class action captioned In re BellSouth
Securities Litigation, which is described above. The
consolidated complaint only pertains to the BellSouth Savings
and Security Plan. In January 2004, BellSouth received a
complaint that is substantially similar to the consolidated
complaint in terms of named defendants and substantive
allegations, but which pertains to the BellSouth Retirement
Savings Plan. At this time, the likely outcome of the cases
cannot be predicted, nor can a reasonable estimate of loss, if
any, be made.


ANTITRUST CLAIMS

In October 2002, a number of antitrust class
action lawsuits were filed against BellSouth in federal district
courts in Atlanta, Georgia and Ft. Lauderdale, Florida. The
plaintiffs purport to represent putative classes consisting of
all BellSouth local telephone service subscribers and/or all
subscribers of competitive local exchange carriers in nine
southeastern states since 1996. The plaintiffs allege that
BellSouth engaged in unlawful anticompetitive conduct in
violation of state and federal antitrust laws by, among other
things, (1) denying competitors access to certain essential
facilities necessary for competitors to provide local telephone
service; (2) using its monopoly power in the wholesale
market for local telephone service as leverage to maintain a
monopoly in the retail market; and (3) failing to provide
the same quality of service, access and billing to competitors
that it provides its own retail customers. The plaintiffs are
seeking an unspecified amount of treble damages, injunctive
relief, as well as attorneys fees and costs. At this time,
the likely outcome of the cases cannot be predicted, nor can a
reasonable estimate of loss, if any, be made.

A consumer class action alleging antitrust
violations of Section 1 of the Sherman Antitrust Act was
recently filed against BellSouth, Verizon, SBC and Qwest in
Federal Court in the Southern District of New York. The
complaint alleged that defendants conspired to restrain
competition by agreeing not to compete with one another
and otherwise allocating customers and markets to one
another. The plaintiffs are seeking an unspecified amount
of treble damages and injunctive relief, as well as
attorneys fees and expenses. In October 2003, the district
court dismissed the complaint for failure to state a claim and
the case is now on appeal.


ENVIRONMENTAL
MATTERS

We are subject to a number of environmental
matters as a result of our operations and the shared liability
provisions related to the breakup of the Bell System. At
December 31, 2003, our recorded liability related to these
matters was approximately $15 million. We continue to
believe that expenditures in connection with additional remedial
actions under the current environmental protection laws or
related matters would not be material to our results of
operations, financial position or cash flows.

OTHER MATTERS

We are also 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 any legal claims, we believe that
any financial impact would not be material to our results of
operations, financial position or cash flows. See Note Q to
our consolidated financial statements.




Submission of Matters to a Vote of
Shareholders

No matter was submitted to a vote of shareholders
in the fourth quarter of the fiscal year ended December 31,
2003.




Additional Information 
Description of BellSouth Stock

GENERAL

Our Articles of Incorporation authorize the
issuance of 8,650,000,000 shares of common stock, par value $1
per share, and 100,000,000 shares of cumulative, first preferred
stock, par value $1 per share. Our Board of Directors is
authorized to create from the unissued common stock one or more
series, and, prior to the issuance of any shares in any
particular series, to fix the voting powers, preferences,
designations, rights, qualifications, limitations or
restrictions of such series. The Board has not created any
series of common stock. The Board is also authorized to provide
for the issuance, from time to time, of the first preferred
stock in series and, as to each series, to fix the number of
shares in such series and the voting, dividend, redemption,
liquidation, retirement and conversion provisions applicable to
the shares of such series. No shares of first preferred stock
are outstanding. The Board has created Series B First
Preferred Stock consisting of 30 million shares, the
Series B Preferred Stock, for possible issuance under the
BellSouth Shareholder Rights Plan. The Series A First
Preferred Stock was created for a previous shareholder rights
plan, which has expired. See Preferred Stock
Purchase Rights and Market for Registrants
Common Equity, Related Shareholder Matters and Issuer Purchases
of Equity Securities.

DIVIDEND RIGHTS

The holders of common stock are entitled to
receive, from funds legally available for the payment thereof,
dividends



18 BELLSOUTH
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##### Table of Contents



when and as declared by resolution of the Board.
While any series of preferred stock is outstanding, no
dividends, other than dividends payable solely in common stock,
may be declared or paid on common stock, and no common stock may
be purchased, redeemed or otherwise acquired for value, unless
(a) dividends on all outstanding shares of preferred stock
for the current and all past dividend periods have been paid or
declared and provision made for payment thereof and (b) all
requirements with respect to any purchase, retirement or sinking
fund or funds applicable to all outstanding series of preferred
stock have been satisfied.


VOTING RIGHTS

Except in connection with the business
combinations and fair price provisions
discussed below, holders of shares of common stock are entitled
to one vote, in person or by proxy, for each share held on the
applicable record date with respect to each matter submitted to
a vote at a meeting of shareholders, but such holders do not
have cumulative voting rights. The holders of any series of
preferred stock, when issued, may receive the right to vote as a
class on certain amendments to the Articles of Incorporation and
on certain other matters, including the election of directors in
the event of certain defaults, which may include nonpayment of
preferred stock dividends.

LIQUIDATION RIGHTS

In the event of voluntary or involuntary
liquidation of BellSouth, holders of the common stock will be
entitled to receive, after creditors have been paid and the
holders of the preferred stock, if any, have received their
liquidation preferences and accumulated and unpaid dividends,
all the remaining assets of BellSouth.

PRE-EMPTIVE RIGHTS; CONVERSION
RIGHTS; REDEMPTION

No shareholders of any class shall be entitled to
any preemptive rights to subscribe for or purchase any shares or
other securities issued by BellSouth. The common stock has no
conversion rights and is not subject to redemption.

PREFERRED STOCK PURCHASE
RIGHTS

Each share of common stock outstanding includes
one preferred stock purchase right (Right). Under certain
circumstances, each Right will entitle the holder to purchase
one one-thousandth of a share of Series B Preferred Stock,
$1 par value (Common Equivalent Preferred Stock), which unit is
substantially equivalent in voting and dividend rights to one
whole share of the common stock, at a price of $200 per unit
(the Purchase Price). The Rights are not presently exercisable
and may be exercised only if a person or group (Acquiring
Person) acquires 10% of the outstanding voting stock of
BellSouth without the prior approval of the Board or announces a
tender or exchange offer that would result in ownership of 10%
or more of the common stock.

If an Acquiring Person becomes such without prior
Board approval, the Rights are adjusted, and each holder, other
than the Acquiring Person, then has the right to receive, on
payment of the Purchase Price, the number of shares of common
stock, units of the Common Equivalent Preferred Stock or other
assets having a market value equal to twice the Purchase Price.


The Rights currently trade with the common stock
and expire in December 2009.


BUSINESS
COMBINATIONS

The Georgia legislature has enacted legislation
which generally prohibits a corporation which has adopted a
By-law electing to be covered thereby, which BellSouth has done,
from engaging in any business combination, that is a
merger, consolidation or other specified corporate transaction,
with an interested shareholder, a 10% shareholder or
an affiliate of the corporation which was a 10% shareholder at
any time within the preceding two years, for a period of five
years from the date such person becomes an interested
shareholder, unless the interested shareholder (a) prior to
becoming an interested shareholder, obtained the approval of the
Board of Directors for either the business combination or the
transaction which resulted in the shareholder becoming an
interested shareholder, (b) becomes the owner of at least
90% of the outstanding voting stock of the corporation in the
same transaction in which the interested shareholder became an
interested shareholder, excluding for purposes of determining
the number of shares outstanding those shares owned by officers,
directors, subsidiaries and certain employee stock plans of the
corporation or (c) subsequent to the acquisition of 10% or
more of the outstanding voting stock of the corporation,
acquires additional shares resulting in ownership of at least
90% of the outstanding voting stock of the corporation and
obtains approval of the business combination by the holders of a
majority of the shares of voting stock of the corporation, other
than those shares held by an interested shareholder, officers,
directors, subsidiaries and certain employee stock plans of the
corporation. BellSouths business combinations
By-law may be repealed only by an affirmative vote of two-thirds
of the continuing directors and a majority of the votes entitled
to be cast by the shareholders, other than interested
shareholders, and shall not be effective until 18 months
after such shareholder vote. The Georgia statute provides that a
domestic corporation which has thus repealed such a By-law may
not thereafter readopt the By-law as provided therein.

FAIR PRICE
PROVISIONS

Fair price provisions contained in
the Articles of Incorporation require, generally, in connection
with a merger or similar transaction between BellSouth and an
interested shareholder, the unanimous approval of
BellSouths directors not affiliated with the interested
shareholder or the affirmative vote of two-thirds of such
directors and a majority of the outstanding shares held by
disinterested shareholders, unless (a) within the past
three years the shareholder has been an interested shareholder
and has not increased its shareholdings by more than one percent
in any 12-month period or (b) all shareholders receive at
least the same consideration for their shares as the



BELLSOUTH
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interested shareholder previously paid.
Additionally, these provisions may be revised or rescinded only
upon the affirmative vote of at least two-thirds of the
directors not affiliated with an interested shareholder and a
majority of the outstanding shares held by disinterested
shareholders.


BOARD CLASSIFICATION; REMOVAL
OF DIRECTORS

Board classification provisions adopted by the
shareholders and contained in the By-laws prescribe a
shareholder vote for approximately one-third of the directors,
instead of all directors, at each annual meeting of shareholders
for a three-year term. The proxy statement dated March 10,
2004 includes a management proposal that asks the shareholders
to amend the By-laws to eliminate the classified board
structure. The By-laws also provide that shareholders may remove
directors from office only for cause, and can amend the By-laws
with respect to the number of directors or amend the board
classification provisions only by the affirmative vote of the
holders of at least 75% of the outstanding shares entitled to
vote for the election of directors.

LIMITATION ON
SHAREHOLDERS PROCEEDINGS

Our By-laws require that notice of shareholder
nominations for directors and of other matters to be brought
before annual shareholders meetings must be provided in
writing to the Corporate Secretary of BellSouth not later than
the 75th day nor earlier than the 120th day prior to the date
which is the anniversary of the annual meeting of shareholders
held in the prior year. Such By-laws also provide that a special
shareholders meeting may be called by shareholders only
upon written request signed by the holders of at least
three-quarters of the outstanding shares entitled to vote at the
meeting.

The provisions discussed under the five preceding
sub-headings and the ability to issue first preferred stock,
such as the Series B Preferred Stock described above, with
characteristics established by the Board and without the consent
of the holders of common stock and the ability to issue
additional shares of common stock may have the effect of
discouraging takeover attempts and may also have the effect of
maintaining the position of incumbent management. In addition,
these provisions may have a significant effect on the ability of
our shareholders to benefit from certain kinds of transactions
that may be opposed by the incumbent Board.





Executive Officers

The executive officers of BellSouth Corporation
are listed below:

|                       |  |     |    |        |  |                                                                  |  |        |      |  |  |  |      |  |  | 
|---------------------- |  | --- | -- | ------ |  | ---------------------------------------------------------------- |  | ------ | ---- |  |  |  | ---- |  |  | 
|                       |  |     |    |        |  |                                                                  |  | This   |      | 
|                       |  |     |    |        |  | Officer                                                          |  | Office |      | 
|Name                   |  | Age |    | Office |  | Since                                                            |  | Since  |      | 
|                      
|                      
|                      
|F. Duane Ackerman      |  |     | 61 |        |  | Chairman of the Board, President and
    Chief Executive Officer |  |        | 1983 |  |  |  | 1997 |  |  | 
|Richard A. Anderson    |  |     | 45 |        |  | President  Customer Markets                                     |  |        | 1993 |  |  |  | 2000 |  |  | 
|Francis A. Dramis, Jr. |  |     | 55 |        |  | Chief Information, E-Commerce and Security Officer               |  |        | 1998 |  |  |  | 2000 |  |  | 
|Ronald M. Dykes        |  |     | 57 |        |  | Chief Financial Officer                                          |  |        | 1988 |  |  |  | 1995 |  |  | 
|Mark L. Feidler        |  |     | 47 |        |  | Chief Staff Officer                                              |  |        | 2004 |  |  |  | 2004 |  |  | 
|Isaiah Harris, Jr.     |  |     | 51 |        |  | President  BellSouth Enterprises                                |  |        | 1997 |  |  |  | 2004 |  |  | 
|Charles R. Morgan      |  |     | 57 |        |  | General Counsel                                                  |  |        | 1998 |  |  |  | 1998 |  |  | 
|W. Patrick Shannon     |  |     | 41 |        |  | Vice President  Finance                                         |  |        | 1997 |  |  |  | 2000 |  |  | 
|                      

All of the executive officers of BellSouth, other
than Mr. Feidler, have for at least the past five years
held high level management or executive positions with BellSouth
or its subsidiaries. Prior to joining BellSouth in January 2004,
Mr. Feidler had been Chief Operating Officer of Cingular
since October 2000. Prior to that, he held various senior
positions with BellSouths domestic wireless operations.

All officers serve until their successors have
been elected and qualified.





Website Access

Our website address is www.bellsouth.com.
You may obtain free electronic copies of our annual reports on
Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and all amendments to those reports at
our investor relations website,
www.bellsouth.com/investor/, under the heading SEC
Filings. These reports are available on our investor
relations website as soon as reasonably practicable after we
electronically file them with the SEC.

We have adopted a written code of ethics that
applies to all directors, officers and employees of BellSouth,
including our principal executive officer and senior financial
officers, in accordance with Section 406 of the
Sarbanes-Oxley Act of 2002 and the rules of the Securities and
Exchange Commission promulgated thereunder. The code of ethics,
which we call Our Personal Responsibility, is
available on our corporate governance website,
www.bellsouth.com/corporate governance/. In the
event that we make changes in, or provide waivers from, the
provisions of this code of ethics that the SEC requires us to
disclose, we intend to disclose these events on our corporate
governance website.




20 BELLSOUTH
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##### Table of Contents



We have adopted corporate governance guidelines.
The corporate guidelines, which we call governance
principles, and the charters of our board committees, are
available on our corporate governance website. Copies of the
code of ethics, corporate governance guidelines and board
committee charters are also available in print upon written
request to the Corporate Secretary, BellSouth Corporation,
Suite 2001, 1155 Peachtree Street, N.E., Atlanta,
Georgia 30309-3610.







PART II







Market for Registrants Common
Equity, Related Shareholder Matters and Issuer Purchases of
Equity Securities


The principal market for trading in BellSouth
common stock is the New York Stock Exchange, Inc. (NYSE).
BellSouth common stock is also listed on the London, Frankfurt,
Amsterdam and Swiss exchanges. The ticker symbol for BellSouth
common stock is BLS. At January 31, 2004, there were
730,185 holders of record of BellSouth common stock. Market
price data was obtained from the NYSE Composite Tape, which
encompasses trading on the principal United States stock
exchanges as well as off-board trading. High and low prices
represent the highest and lowest sales prices for the periods
indicated.

|               |  |               |       |           |  |          |       |  |  |   |     | 
|-------------- |  | ------------- | ----- | --------- |  | -------- | ----- |  |  | - | --- | 
|               |  |               |       | Per Share
|               |  | Market Prices |       | Dividends
|               |  | High          |       | Low       |  | Declared
|               |  |              
|               |  |              
|               |  |              
|2002           |  |               |       |           |  |          |       |  |  |   |     | 
|First Quarter  |  | $             | 40.90 |           |  | $        | 36.81 |  |  | $ | .19 | 
|Second Quarter |  |               | 37.00 |           |  |          | 28.00 |  |  |   | .20 | 
|Third Quarter  |  |               | 32.65 |           |  |          | 18.32 |  |  |   | .20 | 
|Fourth Quarter |  |               | 28.90 |           |  |          | 18.37 |  |  |   | .20 | 
|              
|2003           |  |               |       |           |  |          |       |  |  |   |     | 
|First Quarter  |  | $             | 30.00 |           |  | $        | 19.79 |  |  | $ | .21 | 
|Second Quarter |  |               | 27.98 |           |  |          | 21.00 |  |  |   | .23 | 
|Third Quarter  |  |               | 27.92 |           |  |          | 23.15 |  |  |   | .23 | 
|Fourth Quarter |  |               | 28.37 |           |  |          | 22.19 |  |  |   | .25 | 

The following table contains information about
our purchases of equity securities during the fourth quarter of
2003.

Issuer Purchases of Equity
Securities

|                    |  |                     |            |                |  |                         |       |                          |  |  |            |  |  |   |               | 
|------------------- |  | ------------------- | ---------- | -------------- |  | ----------------------- | ----- | ------------------------ |  |  | ---------- |  |  | - | ------------- | 
|                    |  |                     |            |                |  | Total Number of Shares  |       | Approximate Dollar      
|                    |  | Total Number of     |            | Average Price  |  | Purchased as Part of a  |       | Value that May Yet Be   
|Period              |  | Shares Purchased(1) |            | Paid per Share |  | Publicly Announced Plan |       | Purchased Under the Plan
|                   
|                   
|                   
|October 1-31, 2003  |  |                     |           |                |  |                         |      |                          |  |  |           |  |  | $ | 1,322,083,000 | 
|November 1-30, 2003 |  |                     | 9,419,000  |                |  | $                       | 25.72 |                          |  |  | 9,419,000  |  |  |   | 1,079,843,000 | 
|December 1-31, 2003 |  |                     | 10,826,200 |                |  |                         | 27.19 |                          |  |  | 10,826,200 |  |  |   | 785,532,000   | 
|                   
|Total               |  |                     | 20,245,200 |                |  |                         |       |                          |  |  | 20,245,200 |  |  |   |               | 
|                   

(1) All shares were purchased through our
publicly announced stock repurchase program.


In July 2002, we announced our intention to
purchase up to $2 billion of our outstanding common stock
through December 31, 2003. Since the announcement, we have
purchased 49.8 million shares for an aggregate of
$1,214 million and an average price per share of $24.39. We
will not purchase any additional shares under that repurchase
program.

Stock Transfer Agent and
Registrar

Mellon Investor Services, LLC is our stock
transfer agent and registrar.



BELLSOUTH
2003      21




---



##### Table of Contents






Selected Financial and Operating
Data



(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

The comparability of the following Selected
Financial and Operating Data is significantly impacted by
various changes in accounting principle and merger, acquisition
and disposition activity. The more significant items include the
formation of Cingular in October 2000, which resulted in a
reduction in revenues and expenses caused by the contribution of
our wireless operations to Cingular; the adoption of Statement
of Financial Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangible Assets, effective
January 1, 2002, which resulted in the cessation of
amortization of goodwill; and the adoption of SFAS No. 143,
Accounting for Asset Retirement Obligations,
effective January 1, 2003, which resulted in a reduction in
depreciation expense.

|                                                                               |                                                                        |      |        |      |  |      |        |      |  |      |        |      |  |   |        |      |  |   |        |      |  |  | 
|------------------------------------------------------------------------------ | ---------------------------------------------------------------------- | ---- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ | ---- |  | - | ------ | ---- |  | - | ------ | ---- |  |  | 
|At December 31 or for the year ended                                           |                                                                        | 1999 |        | 2000 |  | 2001 |        | 2002 |  | 2003 |        |     
|                                                                              
|                                                                              
|                                                                              
|Income Statement
    Data:                                                     |                                                                        |      |        |      |  |      |        |      |  |      |        |      |  |   |        |      |  |   |        |      |  | 
|Operating revenues                                                             |                                                                        | $    | 25,224 |      |  | $    | 26,151 |      |  | $    | 24,130 |      |  | $ | 22,440 |      |  | $ | 22,635 |      |  | 
|                                                                              
|Operating expenses                                                             |                                                                        |      | 18,902 |      |  |      | 19,434 |      |  |      | 17,992 |      |  |   | 17,694 |      |  |   | 16,729 |      |  | 
|                                                                              
|Operating income                                                               |                                                                        |      | 6,322  |      |  |      | 6,717  |      |  |      | 6,138  |      |  |   | 4,746  |      |  |   | 5,906  |      |  | 
|                                                                              
|Income before cumulative effect of changes in
    accounting principle         |                                                                        |      | 3,379  |      |  |      | 4,118  |      |  |      | 2,447  |      |  |   | 2,608  |      |  |   | 3,589  |      |  | 
|                                                                              
|Cumulative effect of changes in accounting
    principle, net of tax           |                                                                        |      |       |      |  |      |       |      |  |      |       |      |  |   | (1,285 | )    |  |   | 315    |      |  | 
|                                                                              
|Net income                                                                     |                                                                        |      | 3,379  |      |  |      | 4,118  |      |  |      | 2,447  |      |  |   | 1,323  |      |  |   | 3,904  |      |  | 
|                                                                              
|Operating income margin                                                        |                                                                        |      | 25.1%  |      |  |      | 25.7%  |      |  |      | 25.4%  |      |  |   | 21.1%  |      |  |   | 26.1%  |      |  | 
|                                                                              
|Diluted earnings per share of common stock:                                    |                                                                        |      |        |      |  |      |        |      |  |      |        |      |  |   |        |      |  |   |        |      |  | 
|                                                                              
|                                                                               | Income before cumulative effect of changes in
    accounting principle |      | $      | 1.76 |  |      | $      | 2.18 |  |      | $      | 1.30 |  |   | $      | 1.39 |  |   | $      | 1.94 |  |  | 
|                                                                              
|                                                                               | Net income                                                             |      | $      | 1.76 |  |      | $      | 2.18 |  |      | $      | 1.30 |  |   | $      | 0.71 |  |   | $      | 2.11 |  |  | 
|                                                                              
|Diluted weighted-average shares of common
    stock
    outstanding (millions) |                                                                        |      | 1,916  |      |  |      | 1,893  |      |  |      | 1,888  |      |  |   | 1,876  |      |  |   | 1,852  |      |  | 
|                                                                              
|Dividends declared per share of common stock                                   |                                                                        | $    | .76    |      |  | $    | .76    |      |  | $    | .76    |      |  | $ | .79    |      |  | $ | .92    |      |  | 
|                                                                              
|                                                                              
|Balance Sheet Data:                                                            |                                                                        |      |        |      |  |      |        |      |  |      |        |      |  |   |        |      |  |   |        |      |  | 
|Total assets                                                                   |                                                                        |      | 43,453 |      |  |      | 50,925 |      |  |      | 52,046 |      |  |   | 49,479 |      |  |   | 49,702 |      |  | 
|                                                                              
|Long-term debt                                                                 |                                                                        |      | 9,113  |      |  |      | 12,463 |      |  |      | 15,014 |      |  |   | 12,283 |      |  |   | 11,489 |      |  | 
|                                                                              
|Shareholders equity                                                           |                                                                        |      | 14,831 |      |  |      | 16,993 |      |  |      | 18,758 |      |  |   | 17,906 |      |  |   | 19,712 |      |  | 
|                                                                              
|                                                                              
|Other:                                                                         |                                                                        |      |        |      |  |      |        |      |  |      |        |      |  |   |        |      |  |   |        |      |  | 
|Operating cash flow                                                            |                                                                        |      | 8,199  |      |  |      | 8,590  |      |  |      | 7,998  |      |  |   | 8,246  |      |  |   | 8,529  |      |  | 
|Investing cash flow                                                            |                                                                        |      | (9,888 | )    |  |      | (9,303 | )    |  |      | (7,039 | )    |  |   | (1,707 | )    |  |   | (1,698 | )    |  | 
|Financing cash flow                                                            |                                                                        |      | (167   | )    |  |      | 487    |      |  |      | (1,428 | )    |  |   | (4,649 | )    |  |   | (4,757 | )    |  | 
|                                                                              

See Managements Discussion and
Analysis of Financial Condition and Results of
Operations  Consolidated Results of Operations
for a discussion of unusual items affecting the results for
2001, 2002 and 2003.



22 BELLSOUTH
2003




---



##### Table of Contents






MANAGEMENTS DISCUSSION
AND ANALYSIS OF 
 FINANCIAL CONDITION AND RESULTS OF OPERATIONS


BELLSOUTH CORPORATION

THROUGHOUT THIS SECTION, DOLLARS ARE IN MILLIONS,
EXCEPT PER SHARE AMOUNTS AND AS OTHERWISE INDICATED.

Overview

We are a Fortune 100 company with annual revenues
of nearly $23 billion. Our core business is wireline
communications and our largest customer segment is the retail
consumer. We have significant interests in wireless
communications through our ownership of approximately
40 percent of Cingular Wireless (Cingular), the
nations second largest wireless company, and wireless
operations in 10 countries in Latin America. We also operate one
of the largest directory advertising businesses in the United
States. The great majority of our revenues are generated based
on monthly recurring services.

We operate much of our business in one of the
countrys strongest regional economies, where the
population is increasing, real income growth is outpacing the
national average and a diverse mix of businesses require
advanced information and communication technology solutions. In
the Southeast, we expect the growth in our markets to outpace
the national average. The Southeast is a net migration region,
with net migration averaging almost 500 thousand annually. The
regions real income is expected to grow 10 to 15 percent
higher than the national average in the next five years.


INDUSTRY
DYNAMICS

The telecommunications industry has experienced a
very difficult period of contraction brought on by
over-investment in the late 1990s that created significant
excess capacity and too many companies competing for the same
business. Demand in the traditional voice business has been
negatively impacted by the proliferation of wireless services
led by one-rate pricing plans that include a large bucket of
minutes and free roaming and long-distance, the popularity of
e-mail and instant messaging, technological advances such as
cable and DSL that obviate the need for additional telephone
lines and stagnant job growth. After a period of significant
growth in the 1990s, access lines, a key driver of our business,
have declined steadily since 2001.

Based on comparisons to penetration rates in
other parts of the world, there is still significant growth
potential in the wireless market in the United States. There are
currently six national wireless companies engaging in aggressive
competition in a growing market. The intense competition has
driven down pricing, increased costs due to customer churn and
increased wireless usage as companies attempt to differentiate
their service plans. Meanwhile, significant capital is being
invested in networks to meet increasing demand and to upgrade
capabilities in anticipation of the development of new data
applications.


REGULATION AND
COMPETITION

The wireline communications business is heavily
influenced by government regulation. Historically, we operated
as a monopoly in our geographic area with rates determined by
state service commissions based on cost plus a rate of return.
Although we now operate under price regulation in all of our
markets, where prices for regulated products are monitored by
the service commissions, historical prices and policies still
influence todays business. For example, we continue to
operate as a provider of last resort, which carries with it
requirements for a minimum level of capital spend and network
maintenance support.

With the arrival of the Telecommunications Act of
1996, our markets were opened to competitors. The 1996 Telecom
Act required local telephone companies to open their existing
facilities to use by competitors on
non-discriminatory terms and prices under what is
referred to as an unbundled network element platform, or UNE-P.
This has created an illusionary competitive marketplace where
competitors are allowed to rent access lines at deeply
discounted rates that are generally below our historical cost.
Utilizing UNE-P, competitors are able to market telephone
service and generate reasonable margins with little to no
capital investment at risk.


There are a number of regulatory proceedings in
progress that could bring about reform. We are appealing the
results of last years FCC Triennial Review Order because
the FCC has not yet produced a set of rules on unbundling that
comply with the 1996 Telecom Act. We also have a pending
reconsideration request on the architectural requirements
related to fiber deployment for broadband before the FCC. We
hope the FCC will rule rapidly on our reconsideration request.
In addition, the FCC is reviewing UNE pricing rules, including
an evaluation of the TELRIC methodology, access charge reform
and potential regulation of voice over Internet protocol (VoIP).
Progress on any of these issues would be positive to our
business.


HIGHLIGHTS AND
OUTLOOK

Consolidated revenues for 2003 were essentially
flat compared to 2002 reflecting top line pressures caused by
the loss of 1.5 million retail access lines to UNE-P
competitors and technology substitution. Revenue contraction due
to line loss and pricing pressures to remain competitive were
offset by solid revenue growth in long distance and DSL, which
together generated nearly $800 in new revenue in 2003. Beyond
our traditional wireline business, wireless operations at
Cingular and in Latin America both experienced accelerating
growth in 2003 and have potential for future growth with
upgrades to their networks in process. We remain cautious
regarding the political situation in Venezuela, where we have
our largest operation in Latin America, and its effect on the
value of the local currency and our ability to repatriate
capital.

We expect competition to be intense throughout
2004 as competitors, including long distance and competitive
local exchange carriers, increasingly seek innovative ways




BELLSOUTH
2003      23




---



##### Table of Contents



MANAGEMENTS DISCUSSION
AND ANALYSIS OF 
 FINANCIAL CONDITION AND RESULTS OF
OPERATIONS CONTINUED


BELLSOUTH CORPORATION

to offer telephone service bundled with other
services. We also expect increased competitive pressures as
cable providers begin expected launches of voice over Internet
protocol (VoIP) telephony to complement their video and data
bundle. We will respond by continuing to offer a portfolio of
services enhanced by bundling strategies enabling us to retain,
acquire and reacquire customers. This ability will be further
strengthened in 2004 as we add a video component to our product
portfolio by offering satellite television.

We will also drive penetration of long distance
service in the mass market and expand our complex long distance
offerings to continue the growth of this revenue stream. Our
deployment of DSL covers over 70% of the households in our
franchises and 85% of our most valuable customers, providing us
a significant opportunity for further penetration of our retail
customer base.


Our cost structure is heavily weighted towards
labor and depreciation. Our margins were stable in 2003 as we
continued to focus on reducing operating costs across the
company and we executed on a targeted capital expenditure
program. In the Communications Group, we must adjust our
workforce as market share of access lines shifts. Since the
beginning of 2001, we reduced our workforce in this group by
almost 13,000 employees or 18%. In the fourth quarter of 2003,
we announced that the needs of the business would require
additional force reductions of over 1,000 employees. Maintaining
operating margins going forward will be challenging as
competition intensifies and lower margin products, such as long
distance and DSL, generate a larger percentage of our overall
revenue. We will continue to manage our cost structure and
capital spending. Capital expenditures in 2004 are expected to
be comparable to 2003 at approximately 13 to 15 percent of
revenue.


Despite the lack of growth in the traditional
business, cash flows were strong in 2003 as we delivered
$5.3 billion in operating free cash flow (cash flow from
operating activities less capital expenditures). We reduced our
total debt to $15 billion by the end of 2003 and had
$4.5 billion in cash. Over the past two years, strong cash
flow has allowed us to increase the quarterly dividend by
31.6 percent from 19 cents per common share to 25 cents per
common share. Dividend increases remain a priority for us as we
move to keep our dividend competitive. In the last 18 months, we
have repurchased almost 50 million shares worth over
$1.2 billion, and we will continue to consider the
repurchase of shares of stock.





Consolidated Results of
Operations

Key selected financial and operating data for the
three years ended December 31, 2001, 2002 and 2003 are as
follows. All references to earnings per share are on a diluted
basis. The following consolidated Managements Discussion
and Analysis of Financial Condition and Results of Operations
should be read in conjunction with results by segment.

|                                                                     |                                                                                              |      |        |        |  |      |        |                |  |          |        |        |  |  |       |       |   |  |        |       |  
|-------------------------------------------------------------------- | -------------------------------------------------------------------------------------------- | ---- | ------ | ------ |  | ---- | ------ | -------------- |  | -------- | ------ | ------ |  |  | ----- | ----- | - |  | ------ | ----- | -
|                                                                     |                                                                                              |      |        |        |  |      |        |               
|                                                                     |                                                                                              |      |        |        |  |      |        | Percent Change
|                                                                     |                                                                                              |      |        |        |  |      |        |               
|                                                                     |                                                                                              |      |        |        |  |      |        |               
|                                                                     |                                                                                              |      |        |        |  |      |        | 2002 vs.       |  | 2003 vs.
|                                                                     |                                                                                              | 2001 |        | 2002   |  | 2003 |        | 2001           |  | 2002    
|                                                                    
|                                                                    
|                                                                    
|Results of operations:                                              
|                                                                    
|                                                                    
|                                                                    
|Total operating revenues                                             |                                                                                              | $    | 24,130 |        |  | $    | 22,440 |                |  | $        | 22,635 |        |  |  | (7.0  | )     |   |  | 0.9    |      
|Cost of services and products                                        |                                                                                              |      | 8,049  |        |  |      | 7,512  |                |  |          | 7,988  |        |  |  | (6.7  | )     |   |  | 6.3    |      
|Selling, general, and administrative expenses                        |                                                                                              |      | 4,803  |        |  |      | 4,542  |                |  |          | 4,353  |        |  |  | (5.4  | )     |   |  | (4.2   | )    
|Depreciation and amortization                                        |                                                                                              |      | 4,782  |        |  |      | 4,643  |                |  |          | 4,179  |        |  |  | (2.9  | )     |   |  | (10.0  | )    
|Provision for restructuring and asset impairments                    |                                                                                              |      | 358    |        |  |      | 997    |                |  |          | 209    |        |  |  | 178.5 |       |   |  | (79.0  | )    
|                                                                     | Total operating expenses                                                                     |      |        | 17,992 |  |      |        | 17,694         |  |          |        | 16,729 |  |  |       | (1.7  | ) |  |        | (5.5  | )
|                                                                     | Operating income                                                                             |      |        | 6,138  |  |      |        | 4,746          |  |          |        | 5,906  |  |  |       | (22.7 | ) |  |        | 24.4  |  
|Interest expense                                                     |                                                                                              |      | 1,315  |        |  |      | 1,188  |                |  |          | 1,048  |        |  |  | (9.7  | )     |   |  | (11.8  | )    
|Net (losses) earnings of equity affiliates                           |                                                                                              |      | 465    |        |  |      | 80     |                |  |          | 465    |        |  |  | (82.8 | )     |   |  | *      |      
|Gain (loss) on sale of operations                                    |                                                                                              |      | 38     |        |  |      | 1,261  |                |  |          | (229   | )      |  |  | *     |       |   |  | (118.2 | )    
|Foreign currency transaction gains (losses)                          |                                                                                              |      | (81    | )      |  |      | (679   | )              |  |          | 159    |        |  |  | *     |       |   |  | 123.4  |      
|Other income (expense), net                                          |                                                                                              |      | (1,431 | )      |  |      | 196    |                |  |          | 347    |        |  |  | 113.7 |       |   |  | 77.0   |      
|                                                                     | Income before taxes and cumulative effect of
    changes in accounting principle, net of tax |      |        | 3,814  |  |      |        | 4,416          |  |          |        | 5,600  |  |  |       | 15.8  |   |  |        | 26.8  |  
|Provision for income taxes                                           |                                                                                              |      | 1,367  |        |  |      | 1,808  |                |  |          | 2,011  |        |  |  | 32.3  |       |   |  | 11.2   |      
|                                                                     | Income before cumulative effect of changes in
    accounting principle                       |      |        | 2,447  |  |      |        | 2,608          |  |          |        | 3,589  |  |  |       | 6.6   |   |  |        | 37.6  |  
|Cumulative effect of changes in accounting
    principle, net of tax |                                                                                              |      |       |        |  |      | (1,285 | )              |  |          | 315    |        |  |  | *     |       |   |  | 124.5  |      
|                                                                     | Net income                                                                                   |      | $      | 2,447  |  |      | $      | 1,323          |  |          | $      | 3,904  |  |  |       | (45.9 | ) |  |        | 195.1 |  



|  |  |               
|- |  | --------------
|* |  | Not meaningful



24 BELLSOUTH
2003




---



##### Table of Contents







2003 COMPARED TO
2002

Operating revenues

The increase in total operating revenues is
attributable to revenue growth in long distance and DSL, which
together generated nearly $800 in new revenue in 2003. Growth
from these new products was substantially offset by lower voice
revenues caused by the loss of 1.5 million retail access
lines to UNE-P competitors and technology substitution. Voice
revenues were also impacted by pricing strategies in our effort
to remain competitive. Revenues from the sale of wholesale data
transport services declined 7.8% in 2003 primarily due to
reductions in leased circuits by large inter-exchange carriers
as they rationalized their capacity needs in relation to current
demand. The exit from our payphone business and the elimination
of certain products within the wholesale long distance portfolio
also negatively impacted year-over-year comparisons.

Beyond our traditional wireline business,
wireless operations in Latin America showed nearly 3% growth in
revenue over the prior year driven by the addition of over
1.5 million net customers and steady average revenue per
customer, partially offset by the negative impacts of currency
devaluation in Venezuela, our largest operation in the region.
Although Advertising and Publishing Group revenues were up
nearly 6%, the year-over-year comparison was significantly
impacted by a one-time reduction of $163 in 2002 for the
correction of an error.


Operating expenses

Operating expenses declined by nearly
$1 billion in 2003 driven by:



| |   |                                                                                                                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | $788 in lower charges related to restructuring
    and asset impairments as we rationalized our business in 2002;                                                                                                                                                                                                                      
| |  | $492 of lower depreciation expense associated
    with the declines in capital expenditures and a change in
    accounting for plant retirements;                                                                                                                                                                                      
| |  | $287 of improvements in uncollectibles expense
    due to a steadily improving economy, lower bankruptcy rates and
    operational improvements;                                                                                                                                                                                       
| |  | $86 of lower cost of goods related to equipment
    sales in the Communications Group due to a change in the
    presentation for drop shipments from gross to net, which had no
    impact on operating margin, and $53 of lower cost of goods
    related to the de-emphasis of paging equipment and wholesale
    long distance; and
| |  | $121 in lower labor related costs in the
    Communications Group due to a nearly 12% reduction in our
    workforce since the beginning of 2002 driven by weak demand and
    increased productivity.                                                                                                                                 

These decreases were partially offset by:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | $373 of incremental expense associated with
    pension and postretirement benefits plans (pension and retiree
    medical costs) driven by rising health care costs, unfavorable
    returns on pension assets due to weak capital markets over the
    past few years, changes to plan assumptions regarding expected
    asset returns, and a lower discount rate used to calculate
    service and interest cost;
| |  | $350 of customer acquisition costs related to
    competitive response in the Communications Group;                                                                                                                                                                                                                                                                                                                  
| |  | $155 of volume-related increases in the Latin
    America Group associated with customer growth partially offset
    by the currency devaluation in Venezuela; and                                                                                                                                                                                                                                                   
| |  | $108 of variable cost of goods for the provision
    of long distance service in the Communications Group.                                                                                                                                                                                                                                                                                                           

We have made adjustments to our business model to
address changes in our economic, regulatory, and competitive
environment, and as a result we have incurred charges in each of
the years presented. The provision for restructuring and asset
impairments of $209 in 2003 includes $157 of charges associated
with workforce reductions (including $47 of pension settlement
losses) and a $52 charge for an abandoned software project. The
provision of $997 in 2002 includes $654 of charges associated
with workforce reductions (including $167 of pension settlement
losses) and a $221 charge for the impairment of MMDS spectrum
license and charges of $134 associated with the elimination of
certain services including wholesale long distance and
e-business services. The provision of $358 in 2001 includes $255
of charges associated with workforce reductions and a $103
charge for the impairment of an abandoned software project.


Interest expense

Interest expense declined $140 in comparison to
the prior year, reflecting reductions in average debt of
approximately $2.6 billion, as rates were relatively stable.

Gain (loss) on sale of
operations

Gain (loss) on sale of operations in 2003
relates to losses incurred from the sale of our interests in two
Brazilian wireless companies. The gain in 2002 includes $1,335
related to the exit from E-Plus partially offset by a loss of
$74 associated with the disposal of Listel, our Brazilian
advertising and publishing company.

Net earnings (losses) of
equity affiliates

|                              |  |                    |      |      |  |        |     |  |  |   |     |   |  | 
|----------------------------- |  | ------------------ | ---- | ---- |  | ------ | --- |  |  | - | --- | - |  | 
|                              |  |                    |      |     
|                              |  | For the Year Ended |      |     
|                              |  | December 31,       |      |     
|                             
|                             
|                             
|Equity in Earnings            |  | 2002               |      | 2003 |  | Change |     | 
|                             
|                             
|                             
|Cingular                      |  | $                  | 497  |      |  | $      | 408 |  |  |   | (89 | ) |  | 
|Brazilian wireless affiliates |  |                    | (402 | )    |  |        |    |  |  |   | 402 |   |  | 
|Other equity investees        |  |                    | (15  | )    |  |        | 57  |  |  |   | 72  |   |  | 
|                             
|Total                         |  | $                  | 80   |      |  | $      | 465 |  |  | $ | 385 |   |  | 
|                             

Earnings from Cingular in 2003 were down compared
to 2002 primarily due to significant growth in customers and



BELLSOUTH
2003      25




---



##### Table of Contents



MANAGEMENTS DISCUSSION
AND ANALYSIS OF 
 FINANCIAL CONDITION AND RESULTS OF
OPERATIONS CONTINUED


BELLSOUTH CORPORATION

the costs related to that growth and due to
slightly lower average revenue per customer (see Results
by Segment  Domestic Wireless for further
discussion of Cingular results). Losses from our Brazilian
wireless affiliates in 2002 include recognition of
other-than-temporary impairments of $383. Earnings from other
equity investees increased $72 in 2003 as compared to 2002. The
increase is the result of an other-than-temporary impairment
during 2002 of $62 related to our investment in a Guatemalan
wireless partnership.

Other income (expense),
net

|                                                                 |          |                    |      |      |   |        |     |    |  |   |      |     |  |  | 
|---------------------------------------------------------------- | -------- | ------------------ | ---- | ---- | - | ------ | --- | -- |  | - | ---- | --- |  |  | 
|                                                                 |          |                    |      |     
|                                                                 |          | For the Year Ended |      |     
|                                                                 |          | December 31,       |      |     
|                                                                
|                                                                
|                                                                
|Gain (loss) on sales and impairments of cost method investments: |          | 2002               |      | 2003 |   | Change |     |   
|                                                                
|                                                                
|                                                                
|Qwest                                                            |          | $                  | (336 | )    |   | $      |    |    |  | $ | 336  |     |  | 
|TCO                                                              |          |                    | 22   |      |   |        | 50  |    |  |   | 28   |     |  | 
|Other                                                            |          |                    |     |      |   |        | (9  | )  |  |   | (9   | )   |  | 
|                                                                
|                                                                 | Subtotal |                    |      | (314 | ) |        |     | 41 |  |   |      | 355 |  |  | 
|                                                                
|Interest Income                                                  |          |                    | 496  |      |   |        | 364 |    |  |   | (132 | )   |  | 
|Minority Interest, income (loss)                                 |          |                    | 74   |      |   |        | (47 | )  |  |   | (121 | )   |  | 
|Loss on early extinguishment of debt                             |          |                    | (40  | )    |   |        | (18 | )  |  |   | 22   |     |  | 
|Other                                                            |          |                    | (20  | )    |   |        | 7   |    |  |   | 27   |     |  | 
|                                                                
|Total Other Income (Expense), net                                |          | $                  | 196  |      |   | $      | 347 |    |  | $ | 151  |     |  | 
|                                                                

During 2002 we recorded other than temporary
impairments to reduce the carrying value of our Qwest investment
driven by continued weak market conditions, particularly in
technology and communications stocks. We also incurred losses on
sales of our Qwest investment and gains on sales of Telecentro
Oeste Celular Participacoes SA (TCO) shares. See Note D to
our consolidated financial statements for additional details on
these investments. As of December 31, 2003, we no longer
hold any interest in Qwest or TCO.

Interest income declined as compared to 2002 due
to lower rates on our advance to Cingular and the loss of income
on an advance to Dutch telecommunications provider Royal KPN
N.V. (KPN) due to early repayment.


Minority interest in 2002 was income reflecting
an allocation of losses to our partner driven by foreign
currency transaction losses in Argentina. During 2003, the
Argentine peso recovered creating minority interest expense
reflecting an allocation of foreign currency gains to our
partner. Adjusted for currency gains and losses, minority
interest is comparable in 2003 in relation to 2002.


Foreign currency transaction
gains and losses

Foreign currency transaction activity of
consolidated subsidiaries, which relate primarily to US
dollar-denominated debt in Latin America, improved $838 in 2003.
Gains in 2003 were primarily driven by improvement in the
Argentine Peso and the Chilean Peso. The majority of the losses
in 2002 were driven by the devaluation of the Argentine Peso.

Provision for income
taxes

The effective tax rate decreased to 35.9% in 2003
from 40.9% in 2002. The recording of a foreign tax valuation
allowance, deferring recognition of the tax benefits generated
by losses at our operations in Argentina, substantially
increased the rate in 2002. In 2003, partial reversal of this
valuation allowance decreased the effective rate as foreign
currency gains were realized in Argentina. The 2003 rate was
further decreased by reversal of valuation allowances on net
operating losses in Ecuador and by income tax benefits relating
to inflation adjustments deductible for Venezuelan tax purposes.
The decreases were partially offset by additional book losses on
the sale of our Brazilian investments for which no tax benefit
was recognized.

A reconciliation of the statutory federal income
tax rate to the effective income tax rate for each period is
included in Note I to our consolidated financial statements.


Cumulative effect of changes
in accounting principle

Asset retirement
obligations

Effective January 1, 2003, we adopted SFAS
No. 143, Accounting for Asset Retirement
Obligations (SFAS No. 143). In connection with the
adoption of this standard, we recorded the cumulative effect of
accounting change that increased 2003 net income by $816. See
Note C to our consolidated financial statements for further
discussion of this change.

Revenue recognition for
publishing revenues

Effective January 1, 2003, we changed our
method for recognizing revenues and expenses related to our
directory publishing business from the publication and delivery
method to the deferral method. The cumulative effect of the
change in accounting method is reflected in the income statement
as a decrease to 2003 net income of $501. See Note C to our
consolidated financial statements for further discussion of this
change.

2002 COMPARED TO
2001

Operating revenues

The decrease in total operating revenues in 2002
is attributable to lower voice revenues caused by the loss of
1.5 million retail access lines to UNE-P competitors and
technology substitution. Voice revenues were also impacted by
pricing strategies in our effort to remain competitive. These
decreases were slightly offset by revenue



26 BELLSOUTH
2003




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##### Table of Contents







growth in DSL which generated nearly $250 in
incremental revenue in 2002.

Beyond our traditional wireline business,
revenues of our wireless operations in Latin America decreased
23% compared to the prior year driven by the declining value of
most Latin American currencies against the US dollar and
economic and political instability in Argentina and Venezuela.
Revenue growth was also negatively impacted by a one-time
reduction to directory revenues of $163 in 2002 for the
correction of an error and by the loss of revenues associated
with insurance fees on wireless handsets as a result of Cingular
creating its own insurance program in 2002.


Operating expenses

Operating expenses declined by nearly $300 in
2002 driven by:



| |   |                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a decline in total operating expenses of $708 in
    the Latin America Group almost entirely attributable to local
    currency devaluation;                                                      
| |  | $185 decrease in labor related costs at the
    Communications Group due to a reduction in our workforce since
    the beginning of 2002 driven by weak demand and increased
    productivity; and
| |  | $215 in one-time charges in 2001 related to an
    accrual for reciprocal compensations and curtailment related to
    the transfer of employees to Cingular.                                     

These decreases were partially offset by:



| |   |                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------
| |  | $639 of higher charges related to restructuring
    and asset impairments as we rationalized our business in 2002;
    and         
| |  | $263 of higher uncollectibles expense due to
    customer bankruptcies and non-paying customers associated with a
    weak economy.

Interest expense

Interest expense decreased $127 in 2002. The
decrease in 2002 was the result of both lower short-term
interest rates and lower average principal amounts outstanding
on short-term and long-term borrowings.

Gain (loss) on sale of
operations

The gain in 2002 includes $1,335 related to the
exit from E-Plus partially offset by a loss of $74 associated
with the disposal of Listel, our Brazilian advertising and
publishing company. In 2001, we recognized a gain of $24 from
the sale of a 24.5% ownership interest in Skycell, an Indian
wireless venture, and $14 from the sale of BellSouth
International Wireless Services, an international wireless
roaming clearinghouse.

Net earnings (losses) of
equity affiliates

|                              |       |                    |      |      |  |        |      |    |  |   |      |      |   |  | 
|----------------------------- | ----- | ------------------ | ---- | ---- |  | ------ | ---- | -- |  | - | ---- | ---- | - |  | 
|                              |       |                    |      |     
|                              |       | For the Year Ended |      |     
|                              |       | December 31,       |      |     
|                             
|                             
|                             
|Equity in Earnings            |       | 2001               |      | 2002 |  | Change |      |   
|                             
|                             
|                             
|Cingular                      |       | $                  | 673  |      |  | $      | 497  |    |  | $ | (176 | )    |   | 
|Brazilian wireless affiliates |       |                    | (231 | )    |  |        | (402 | )  |  |   | (171 | )    |   | 
|Other equity investees        |       |                    | 23   |      |  |        | (15  | )  |  |   | (38  | )    |   | 
|                             
|                              | Total |                    | $    | 465  |  |        | $    | 80 |  |   | $    | (385 | ) |  | 
|                             

Cingular

Earnings from Cingular in 2002 were down compared
to 2001 due to higher total operating expenses impacted by
higher network usage and high uncollectible expense. (See
Results by Segment  Domestic Wireless for
further discussion of Cingular results.)

Brazilian wireless
affiliates

Losses from our Brazilian wireless affiliates in
2002 include a pre-tax loss of $383 related to the recognition
of other-than-temporary impairments. Earnings excluding the
impairments were $(19) which represents an improvement of $212
compared to 2001, primarily resulting from cessation of losses
subsequent to the impairment.

Other equity
investees

Earnings from other equity investees declined $38
in 2002 as compared to 2001. The decline is the result of an
other-than-temporary impairment of $62 related to our investment
in a Guatemalan wireless partnership partially offset by the
cessation of losses related to E-Plus that resulted in
year-over-year improvement of $39.



BELLSOUTH
2003      27




---



##### Table of Contents



MANAGEMENTS DISCUSSION
AND ANALYSIS OF 
 FINANCIAL CONDITION AND RESULTS OF
OPERATIONS CONTINUED


BELLSOUTH CORPORATION

Other income (expense),
net

|                                                                 |          |                    |        |        |   |        |      |      |   |   |       |       |  |  | 
|---------------------------------------------------------------- | -------- | ------------------ | ------ | ------ | - | ------ | ---- | ---- | - | - | ----- | ----- |  |  | 
|                                                                 |          |                    |        |       
|                                                                 |          | For the Year Ended |        |       
|                                                                 |          | December 31,       |        |       
|                                                                
|                                                                
|                                                                
|Gain (loss) on sales and impairments of cost method investments: |          | 2001               |        | 2002   |   | Change |      |     
|                                                                
|                                                                
|                                                                
|Qwest                                                            |          | $                  | (1,648 | )      |   | $      | (336 | )    |   | $ | 1,312 |       |  | 
|TCO                                                              |          |                    | (138   | )      |   |        | 22   |      |   |   | 160   |       |  | 
|Crown Castle                                                     |          |                    | (86    | )      |   |        |     |      |   |   | 86    |       |  | 
|Other                                                            |          |                    | (76    | )      |   |        |     |      |   |   | 76    |       |  | 
|                                                                
|                                                                 | Subtotal |                    | $      | (1,948 | ) |        | $    | (314 | ) |   | $     | 1,634 |  |  | 
|                                                                
|Interest Income                                                  |          | $                  | 462    |        |   | $      | 496  |      |   | $ | 34    |       |  | 
|Minority Interest                                                |          |                    | (25    | )      |   |        | 74   |      |   |   | 99    |       |  | 
|Loss on early extinguishment of debt                             |          |                    |       |        |   |        | (40  | )    |   |   | (40   | )     |  | 
|Other                                                            |          |                    | 80     |        |   |        | (20  | )    |   |   | (100  | )     |  | 
|                                                                
|Total Other Income (Expense), net                                |          | $                  | (1,431 | )      |   | $      | 196  |      |   | $ | 1,627 |       |  | 
|                                                                

During 2001 we recorded other-than-temporary
impairments to reduce the carrying value of our cost investments
driven by continued weak market conditions, particularly in
technology and communications stocks. This trend continued
during 2002, as we recorded both impairments and losses on sales
of our Qwest investment.

Minority interest expense was impacted by the
2002 devaluation of the Argentine Peso, which generated foreign
currency transaction losses creating minority interest income in
2002.


Foreign currency transaction
gains and losses

Foreign currency transaction losses of
consolidated subsidiaries, which relate primarily to US
dollar-denominated debt in Latin America, increased $598 in
2002. The majority of the losses in 2002 were driven by the
devaluation of the Argentine peso.

Provision for income
taxes

The provision for income taxes increased $441
during 2002. Our effective tax rate was 40.9% in 2002 and 35.8%
in 2001.

The increase in the 2002 effective tax rate
compared to 2001 was driven by the recording of a foreign tax
valuation allowance, deferring recognition of the tax benefits
generated by losses at our operations in Argentina. The
valuation allowance is necessary due to a limited tax
carry-forward period. Partially offsetting this was an income
tax benefit of $33 related to the recognition of a deferred tax
asset for the excess of our tax basis over book basis in Listel,
one of our Brazilian Yellow Page operations, which reversed when
we sold the property. In addition, the effective rate was
reduced for income tax benefits of $32 related to inflation
adjustments deductible for Venezuelan tax purposes.


A reconciliation of the statutory federal income
tax rate to the effective income tax rate for each period is
included in Note I to our consolidated financial statements.


Cumulative effect of change in
accounting principle

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).

In connection with 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. During 2002, we completed the transitional
impairment test required under SFAS No. 142. Goodwill was
tested for impairment by comparing the fair value of our
reporting units to their carrying values. The test indicated an
impairment that lead to recognition of a loss of $1,277, with no
income tax benefit. Additionally, Cingular completed its
transitional impairment test in 2002 resulting in an additional
loss to BellSouth of $8 after taxes.




28 BELLSOUTH
2003




---



##### Table of Contents












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 Group; and         
| |  | Advertising and Publishing Group.

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 adjust historical operating information to reflect the
current business structure. See Note N to our 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.




BELLSOUTH
2003      29




---



##### Table of Contents



MANAGEMENTS DISCUSSION
AND ANALYSIS OF 
 FINANCIAL CONDITION AND RESULTS OF
OPERATIONS CONTINUED


BELLSOUTH CORPORATION






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.

During 2003, the Communications Group emphasized
interLATA long distance and FastAccess® DSL,
encouraging customers to purchase packages containing multiple
telecommunications services. We continue to experience retail
access line market share loss due to competition and technology
substitution, and we expect these trends to continue into 2004.

|                                                |                                               |                                  |                           |                          |        |        |        |                |        |          |        |        |        |        |        |      |       |      |       |       |       |      |      |   |  | 
|----------------------------------------------- | --------------------------------------------- | -------------------------------- | ------------------------- | ------------------------ | ------ | ------ | ------ | -------------- | ------ | -------- | ------ | ------ | ------ | ------ | ------ | ---- | ----- | ---- | ----- | ----- | ----- | ---- | ---- | - |  | 
|                                                |                                               |                                  |                           |                          |        |        |        |                |        |         
|                                                |                                               |                                  |                           |                          |        |        |        | Percent Change |        |         
|                                                |                                               |                                  |                           |                          |        |        |        |               
|                                                |                                               |                                  |                           |                          |        |        |        |               
|                                                |                                               |                                  |                           |                          |        |        |        |               
|                                                |                                               |                                  |                           |                          |        |        |        | 2002 vs.       |        | 2003 vs. |        |       
|                                                |                                               | 2001                             |                           | 2002                     |        | 2003   |        | 2001           |        | 2002     |        |       
|                                               
|                                               
|                                               
|Segment operating revenues:                     |                                               |                                  |                           |                          |        |        |        |                |        |          |        |        |        |        |        |      |       |      |       |       |       |     
|                                                | Voice                                         |                                  | $                         | 13,138                   |        |        | $      | 12,498         |        |          | $      | 12,622 |        |        |        | (4.9 | )     |      |       | 1.0   |       |      |     
|                                                | Data                                          |                                  |                           | 4,124                    |        |        |        | 4,276          |        |          |        | 4,371  |        |        |        | 3.7  |       |      |       | 2.2   |       |      |     
|                                                | Other                                         |                                  |                           | 1,809                    |        |        |        | 1,715          |        |          |        | 1,455  |        |        |        | (5.2 | )     |      |       | (15.2 | )     |      |     
|                                                |                                               | Total segment operating revenues |                           |                          | 19,071 |        |        |                | 18,489 |          |        |        | 18,448 |        |        |      | (3.1  | )    |       |       | (0.2  | )    |      |  
|Segment operating expenses:                     |                                               |                                  |                           |                          |        |        |        |                |        |          |        |        |        |        |        |      |       |      |       |       |       |     
|                                                | Cost of services and products                 |                                  |                           | 6,520                    |        |        |        | 6,464          |        |          |        | 6,755  |        |        |        | (0.9 | )     |      |       | 4.5   |       |      |     
|                                                | Selling, general, and administrative expenses |                                  |                           | 2,826                    |        |        |        | 2,948          |        |          |        | 3,079  |        |        |        | 4.3  |       |      |       | 4.4   |       |      |     
|                                                | Depreciation and amortization                 |                                  |                           | 4,114                    |        |        |        | 4,161          |        |          |        | 3,771  |        |        |        | 1.1  |       |      |       | (9.4  | )     |      |     
|                                                |                                               | Total segment operating expenses |                           |                          | 13,460 |        |        |                | 13,573 |          |        |        | 13,605 |        |        |      | 0.8   |      |       |       | 0.2   |      |      |  
|Segment operating income                        |                                               |                                  | 5,611                     |                          |        |        | 4,916  |                |        |          | 4,843  |        |        |        | (12.4  | )    |       |      | (1.5  | )     |       |     
|                                               
|Segment net income                              |                                               | $                                | 3,208                     |                          |        | $      | 2,751  |                |        | $        | 2,829  |        |        |        | (14.2  | )    |       |      | 2.8   |       |       |     
|                                               
|Segment net income including unusual items      |                                               | $                                | 3,006                     |                          |        | $      | 2,237  |                |        | $        | 3,505  |        |        |        | (25.6  | )    |       |      | 56.7  |       |       |     
|                                               
|                                               
|Key
    Indicators:(000s except where noted)    |                                               |                                  |                           |                          |        |        |        |                |        |          |        |        |        |        |        |      |       |      |       |       |       |     
|                                               
|Access lines:(1)                                |                                               |                                  |                           |                          |        |        |        |                |        |          |        |        |        |        |        |      |       |      |       |       |       |     
|                                                | Residence retail:                             |                                  |                           |                          |        |        |        |                |        |          |        |        |        |        |        |      |       |      |       |       |       |      |     
|                                                |                                               | Primary                          |                           |                          | 13,974 |        |        |                | 13,260 |          |        |        | 12,479 |        |        |      | (5.1  | )    |       |       | (5.9  | )    |      |  
|                                                |                                               | Additional                       |                           |                          | 2,256  |        |        |                | 1,926  |          |        |        | 1,601  |        |        |      | (14.6 | )    |       |       | (16.9 | )    |      |  
|                                               
|                                                |                                               |                                  | Total Retail Residence    |                          |        | 16,230 |        |                |        | 15,186   |        |        |        | 14,080 |        |      |       | (6.4 | )     |       |       | (7.3 | )    |   | 
|                                               
|                                                | Residential wholesale:                        |                                  |                           |                          |        |        |        |                |        |          |        |        |        |        |        |      |       |      |       |       |       |      |     
|                                                |                                               | Resale                           |                           |                          | 542    |        |        |                | 342    |          |        |        | 177    |        |        |      | (36.9 | )    |       |       | (48.2 | )    |      |  
|                                                |                                               | UNE-P                            |                           |                          | 185    |        |        |                | 934    |          |        |        | 1,696  |        |        |      | 404.9 |      |       |       | 81.6  |      |      |  
|                                               
|                                                |                                               |                                  | Total Wholesale Residence |                          |        | 727    |        |                |        | 1,276    |        |        |        | 1,873  |        |      |       | 75.5 |       |       |       | 46.8 |      |   | 
|                                               
|Total residence                                 |                                               |                                  | 16,957                    |                          |        |        | 16,462 |                |        |          | 15,953 |        |        |        | (2.9   | )    |       |      | (3.1  | )     |       |     
|                                               
|                                                | Business retail                               |                                  |                           | 7,653                    |        |        |        | 7,254          |        |          |        | 6,857  |        |        |        | (5.2 | )     |      |       | (5.5  | )     |      |     
|                                               
|                                                | Business wholesale:                           |                                  |                           |                          |        |        |        |                |        |          |        |        |        |        |        |      |       |      |       |       |       |      |     
|                                                |                                               | Resale                           |                           |                          | 186    |        |        |                | 94     |          |        |        | 79     |        |        |      | (49.5 | )    |       |       | (16.0 | )    |      |  
|                                                |                                               | UNE-P                            |                           |                          | 417    |        |        |                | 611    |          |        |        | 693    |        |        |      | 46.5  |      |       |       | 13.4  |      |      |  
|                                               
|                                                |                                               |                                  |                           | Total Wholesale Business |        |        | 603    |                |        |          | 705    |        |        |        | 772    |      |       |      | 16.9  |       |       |      | 9.5  |   |  | 
|                                               
|Total business                                  |                                               |                                  | 8,256                     |                          |        |        | 7,959  |                |        |          | 7,629  |        |        |        | (3.6   | )    |       |      | (4.1  | )     |       |     
|                                               
|Other Retail/Wholesale Lines (primarily public) |                                               |                                  | 209                       |                          |        |        | 182    |                |        |          | 147    |        |        |        | (12.9  | )    |       |      | (19.2 | )     |       |     
|                                               
|                                                |                                               |                                  |                           | Total access lines       |        |        | 25,422 |                |        |          | 24,603 |        |        |        | 23,729 |      |       |      | (3.2  | )     |       |      | (3.6 | ) |  | 
|DSL customers                                   |                                               |                                  | 621                       |                          |        |        | 1,021  |                |        |          | 1,462  |        |        |        | 64.4   |      |       |      | 43.2  |       |       |     
|Long distance customers                         |                                               |                                  |                          |                          |        |        | 1,002  |                |        |          | 3,960  |        |        |        | *      |      |       |      | 295.2 |       |       |     
|Access minutes of use (millions)                |                                               |                                  | 110,106                   |                          |        |        | 98,571 |                |        |          | 92,141 |        |        |        | (10.5  | )    |       |      | (6.5  | )     |       |     
|                                               
|Capital expenditures                            |                                               | $                                | 5,125                     |                          |        | $      | 3,337  |                |        | $        | 2,824  |        |        |        | (34.9  | )    |       |      | (15.4 | )     |       |     
|                                               



|    |  |                                                                                                                    
|--- |  | -------------------------------------------------------------------------------------------------------------------
|*   |  | Not meaningful                                                                                                     
|(1) |  | Access lines include an adjustment to convert
    ISDN lines to a switched access line basis for
    comparability.



30 BELLSOUTH
2003




---



##### Table of Contents







2003 COMPARED TO
2002

Segment operating
revenues

Voice

Voice revenues increased $124 driven by
significant growth in interLATA long distance substantially
offset by continued access line share loss and conversion to
wholesale lines. Total switched access lines declined 3.6% with
retail line losses being partially offset by increases in
wholesale lines. The access line decline was the result of share
loss, technology substitution and a continued weak economy.

Wholesale lines consist primarily of unbundled
network element  platform (UNE-P) lines. The UNE-P
lines totaled approximately 2.4 million, up
867,000 lines from the prior year. The vast majority of the
UNE-P additions were residential. Business UNE-P line adds of
82,000 fell slightly from the prior year while other wholesale
UNE-P lines, primarily payphone, increased by 23,000 in 2003.
When lines over which we provide retail services are converted
to UNE-P, we lose revenue and margin. The revenue from our
provision of UNE-P does not permit us to recover the fully
allocated costs we incur to provide it. To mitigate this loss,
we are actively seeking reform of the pricing rules that
regulators use to set UNE-P prices.


In efforts to combat share loss, we continue to
grow our package services. BellSouth AnswersSM is our
signature residential package that combines wireline, wireless
and Internet services. The package combines the Complete Choice
calling plan of local service and multiple convenience calling
features with BellSouth Long Distance,


FastAccess® DSL or dial-up Internet,
and Cingular Wireless services. As of the end of 2003, we had
more than 3 million residential packages designated as
Answers customers, which represents a 24.1% penetration of our
retail primary line residence base. Over 75% of Answers
customers have long distance in their package and over 40% have
either DSL or dial-up Internet.


InterLATA revenues increased $573 compared to
2002. Substantial interLATA growth reflects our receipt of
regulatory relief to provide interLATA services in the nine
southeastern states we serve. At December 31, 2003, we had
nearly 4 million long distance customers, a penetration
rate of 28% of primary residential access lines and 39% of
mass-market small business accounts. Earlier this year, we began
offering unlimited long distance to reduce competitive churn and
increase retention and reacquisition of residential customers.
Since its April 2003 launch, over one-third of our long distance
gross additions have chosen the Unlimited plan. We have also
made progress in the complex business market, signing over 7,300
contracts through the end of 2003 with a total contract value of
$690. Revenue from wholesale long-distance services provided to
Cingular increased $47 in 2003. This increase was caused by
higher volumes associated with the proliferation of wireless
long distance plans.


Switched access revenues were down in 2003 due to
volume and rate decreases. Switched access rates were lower due
to effects of the CALLs program, an FCC access charge reform
initiative. The decline in rates, however, is substantially
offset by higher subscriber line charges. Switched access
minutes of use (MOU) declined 6.5% in 2003. The decline is
the result of access line losses and alternative communications
services, primarily wireless and e-mail. The decrease in
switched access MOUs was partially offset by growth of unlimited
long distance plans.


Data

Data revenues increased $95 in 2003. The overall
growth was driven by revenues from the sale of
FastAccess® DSL service. Combined wholesale and
retail DSL revenues were up $248 in 2003 due to a larger
customer base. As of December 31, 2003, we had over
1.46 million DSL customers, an increase of 441,000
customers.

Retail data services, which represent roughly
half of data revenues, grew 14.1% in 2003 driven primarily by
growth from the sale of FastAccess® DSL service.
Early in the third quarter 2003, we introduced
FastAccess® DSL Lite, creating a tiered approach to
broadband that allows customers to choose the connection speed
and price best suited to their Internet use. Other retail data
products, primarily DS1 lines (dedicated high capacity lines)
were lower driven by decreases in demand and special access rate
reductions effective July 2002.


Revenues from the sale of wholesale data
transport services to other communications providers, including
long distance companies and Competitive Local Exchange Carriers,
declined 7.8% in 2003 primarily due to reductions in leased
circuits by large inter-exchange carriers as they rationalized
their capacity needs in relation to current demand. The decline
was also attributable to the lingering impacts of a soft economy
and the renegotiation of an access contract with a bankrupt
wholesale customer.


Other

Other communications revenue decreased $260
primarily due to a decline of $123 in sales to second and third
tier long distance carriers due to our decision to eliminate
certain products within the wholesale long distance portfolio
and due to the continuing phase-out of our payphone business
which created a decline of $59. We completed our exit of the
payphone business as of December 31, 2003. Other revenues
decreased $86 due to a change in the presentation for drop
shipments of equipment from gross to net, which lowered both
revenues and expenses.

Segment operating
expenses

Cost of services and
products

Cost of services and products increased $291
compared to the same periods in 2002. The increase reflects
higher pension and retiree medical costs of $315. Costs of
service associated with providing retail interLATA long distance
increased $183 driven by higher volumes related to more



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MANAGEMENTS DISCUSSION
AND ANALYSIS OF 
 FINANCIAL CONDITION AND RESULTS OF
OPERATIONS CONTINUED


BELLSOUTH CORPORATION

customers while costs associated with the
provision of long distance services to Cingular increased $34
driven by higher volumes. In addition, installation and
activation expense increased $239 as compared to the prior
period reflecting lower expense deferrals related to lower
installation and activation service revenue.

These cost increases were partially offset by
work force reductions, primarily as a result of reduced business
volumes, that resulted in decreased salary and wage related
expenses of $116. Wholesale long distance cost of services
decreased $100 reflecting a de-emphasis in these services. Costs
of goods related to equipment sales decreased $86 due to a
change in the presentation for drop shipments from gross to net,
which had no impact on operating margin. In addition, page and
equipment costs decreased $53 driven by lower volumes.
Information technology infrastructure costs decreased $60,
reflecting cost containment efforts.


Selling, general, and
administrative expenses

Selling, general, and administrative expenses
increased $131 in 2003 compared to 2002. The periods presented
were impacted by increases in advertising of
$111 associated with higher spending related to a more
competitive environment and increases in outside sales
commissions of $55 primarily related to the long distance
launch. The periods presented were also impacted by increased
pension and retiree medical costs of $33.

These increases were partially offset by
decreases in uncollectible expenses of $116. Prior year periods
included the impact of higher bankruptcies and non-pay accounts
driving the decrease in the current year.


Depreciation and
amortization

Depreciation and amortization expense decreased
$390. The primary driver of the year-over-year decline in
depreciation expense relates to lower depreciation rates under
the group life method of depreciation. The lower rates were
caused primarily by the significant reductions in capital
expenditures over the past several years. In addition,
depreciation expense was lower due to the adoption of SFAS
No. 143. In connection with the adoption of this standard,
we no longer accrue for net cost of removal in our depreciation
rates causing lower depreciation expense. Amortization expense
increased slightly due to higher levels of capitalized software.

2002 COMPARED TO
2001

Segment operating
revenues

Voice

Voice revenues decreased $640 driven primarily by
continued access line share loss. Total switched access lines
declined 3.2% with retail line losses being partially offset by
increases in wholesale lines. The access line decline was the
result of share loss and, to a lesser extent, technology
substitution and a weak economy.

Wholesale lines consist primarily of unbundled
network element  platform (UNE-P) lines. The UNE-P lines
totaled approximately 1.6 million, up 952,000 lines from
the prior year. The vast majority of the UNE-P additions were
residential. Business UNE-P line adds of 194,000 fell from the
prior year while other wholesale UNE-P lines, primarily
payphone, added 9,000 in 2002. When lines over which we provide
retail services are converted to UNE-P, we lose revenue and
margin. On average, the revenue from our provision of UNE-P does
not permit us to recover the fully allocated costs we incur to
provide the service. To mitigate this loss, we are actively
seeking reform of the pricing rules that regulators use to set
UNE-P prices.


In efforts to combat share loss, we continued to
grow our package services in 2002. BellSouth
AnswersSM, introduced in 2002, is our signature
residential package that combines wireline, wireless and
Internet services. The package combines the Complete Choice
calling plan of local service and multiple convenience calling
features with BellSouth Long Distance, FastAccess®
DSL or dial-up Internet, and Cingular Wireless services. We
added approximately 1.2 million Answers customers during
2002.


InterLATA revenues were $49 in 2002 compared to
zero in 2001 as we obtained regulatory approval throughout 2002
to provide interLATA services in the nine southeastern states we
serve. Service was actually launched in seven of the nine states
in 2002. At December 31, 2002, we had over one million long
distance customers.


Wireless interconnection revenues increased $110
due to growth in customers and higher volumes to Cingular driven
by proliferation or wireless long distance plans.


Switched access revenues were down in 2002 due to
volume and rate decreases. Switched access rates were lower due
to effects of the CALLs program, an FCC access charge reform
initiative. The decline in rates, however, is substantially
offset by higher subscriber line charges. Switched access
minutes of use (MOU) declined 10.5% in 2002. The decline is
the result of access line loss, the continuing shift of
wholesale lines from resale to UNE-P, and alternative
communications services, primarily wireless and e-mail.


Data

Data revenues increased $152 in 2002. The overall
growth was driven by strong retail growth, primarily revenues
from the sale of FastAccess® DSL service. Combined
wholesale and retail DSL revenues were up $243 in 2002 due to a
larger customer base. As of December 31, 2002, we had over
one million customers, an increase of over 400,000 customers.

Retail data services, which represent roughly
half of data revenues, grew 10.5% in 2002 driven primarily by
growth from the sale of FastAccess® DSL service.
Other retail data products, primarily DS1 lines (dedicated high




32 BELLSOUTH
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##### Table of Contents







capacity lines) were lower, driven by special
access rate reductions effective July 2002.

Revenues from the sale of wholesale data
transport services to other communications providers, including
long distance companies and competitive local exchange carriers,
declined 1.4% in 2002 primarily due to weak sales of wholesale
data transport services to other communications providers, the
lingering impacts of a soft economy, network consolidation by
large inter-exchange carriers and the renegotiation of an access
contract with a bankrupt wholesale customer.


Other

Other communications revenue decreased $94
primarily due to the continuing phase-out of our payphone
business which created a decline of $71. Collocation revenues
decreased $73 from 2001, driven by lower volumes. Billing and
collection revenues continued to decrease resulting in a
year-over-year decline of $20 reflecting additional carriers
utilizing their own billing systems and the loss of carrier
billing revenues as retail customers change from other carriers
to our long distance services. Wholesale long distance revenues
increased $50 driven by increased sales to second and third tier
long distance carriers and UNE.

Segment operating
expenses

Cost of services and
products

Cost of services and products decreased $56
compared to 2001. The decrease reflects work force reductions,
primarily as a result of reduced business volumes and increased
productivity that resulted in decreased labor-related expenses
of $153. Materials expense decreased $91 driven by lower volumes
reflecting lower demand and increased competitive impacts. Also,
gross receipts tax decreased $64 primarily impacted by
regulatory billing changes in North Carolina.

These decreases were somewhat offset by increases
in pension and retiree medical costs of $89 compared to 2001.
Other increases include higher retail interLATA long distance
costs, which increased $72 due to our growth in retail interLATA
long distance, and $65 of increased service installation expense
reflecting decreased deferrals as compared to 2001.


Selling, general, and
administrative expenses

Selling, general, and administrative expenses
increased $122 compared to 2001. Uncollectible expense increased
$111 due to bankruptcies of telecom sector wholesale customers
and weak economic conditions. Advertising expense increased $45
associated with higher spending related to a more competitive
environment and our long distance launch.

These increases were partially offset by
decreases in labor related expenses of $32 and in contract
services of $34, reflecting workforce related reduction efforts
and cost reduction initiatives implemented in 2002.


Depreciation and
amortization

Depreciation and amortization expense increased
$47. The increases are primarily attributable to increased
amortization expense associated with higher levels of
capitalized software partially offset by lower depreciation
expense. The primary driver of the depreciation expense decline
relates to lower depreciation rates under the group life method
of depreciation. The lower rates were caused by the significant
reductions in capital expenditures.

Unusual items excluded from
segment net income

Unusual items which were excluded from this
segments results consisted of the following: in 2003, $676
for the cumulative effect of a change in accounting principle
related to the adoption of FAS 143 offset by restructuring
charges, costs associated with the early extinguishment of debt,
and an asset impairment; in 2002, $(514) related to
restructuring costs, including pension settlements, costs
associated with the early extinguishment of debt, costs
associated with service curtailments and asset impairments and
refund of customer late fees in Florida; in 2001, $(202) related
to reciprocal compensation and restructuring costs were excluded
from results.




Domestic Wireless

We own an approximate 40% economic interest in
Cingular, a joint venture with SBC Communications. Because we
exercise influence over the financial and operating policies of
Cingular, we use the equity method of accounting for this
investment. Under the equity method of accounting, we record our
proportionate share of Cingulars earnings in our
consolidated statements of income. These earnings are included
in the caption Net earnings (losses) of equity
affiliates. 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 financial and non-financial
results.

During 2003, Cingular had the highest number of
annual net additions since the company began operations. Prior
to the commencement of wireless local number portability on
November 24, 2003, Cingular offered incentives that
encouraged customers to purchase upgraded handsets and sign new
service contracts. Cingular incurred significant expense,
consisting primarily of handset subsidies and selling costs, in
the latter part of the year related to those efforts. Thus far,
number porting volumes at Cingular have been less than
predicted. Data revenue played an increasingly




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2003      33




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##### Table of Contents



MANAGEMENTS DISCUSSION
AND ANALYSIS OF 
 FINANCIAL CONDITION AND RESULTS OF
OPERATIONS CONTINUED


BELLSOUTH CORPORATION

important role in revenue composition in 2003,
and those impacts are expected to increase in 2004. Further,
competition continues to be intense, with up to six competitors
in most of the significant markets.

To be consistent with emerging industry
practices, the income statement for all periods presented has
been changed to reflect billings to Cingulars customers
for the Universal Service Fund (USF) and other regulatory
fees as Service revenues and the related payments
into the associated regulatory funds as Cost of
services expenses. Operating income and net income for all
prior periods have been unaffected.


|                                                                                        |                                               |                                  |       |       |       |      |       |                |       |          |       |       |       |  |       |      |     |  |       |      |     |  |  | 
|--------------------------------------------------------------------------------------- | --------------------------------------------- | -------------------------------- | ----- | ----- | ----- | ---- | ----- | -------------- | ----- | -------- | ----- | ----- | ----- |  | ----- | ---- | --- |  | ----- | ---- | --- |  |  | 
|                                                                                        |                                               |                                  |       |       |       |      |       |                |       |         
|                                                                                        |                                               |                                  |       |       |       |      |       | Percent Change |       |         
|                                                                                        |                                               |                                  |       |       |       |      |       |               
|                                                                                        |                                               |                                  |       |       |       |      |       |               
|                                                                                        |                                               |                                  |       |       |       |      |       | 2002 vs.       |       | 2003 vs. |       |      
|                                                                                        |                                               | 2001                             |       | 2002  |       | 2003 |       | 2001           |       | 2002     |       |      
|                                                                                       
|                                                                                       
|                                                                                       
|Segment operating revenues:                                                             |                                               |                                  |       |       |       |      |       |                |       |          |       |       |       |  |       |      |     |  |       |      |     | 
|                                                                                        | Service revenues                              |                                  | $     | 5,291 |       |      | $     | 5,569          |       |          | $     | 5,689 |       |  |       | 5.3  |     |  |       | 2.2  |     |  | 
|                                                                                        | Equipment revenues                            |                                  |       | 416   |       |      |       | 392            |       |          |       | 504   |       |  |       | (5.8 | )   |  |       | 28.6 |     |  | 
|                                                                                        |                                               | Total segment operating revenues |       |       | 5,707 |      |       |                | 5,961 |          |       |       | 6,193 |  |       |      | 4.5 |  |       |      | 3.9 |  |  | 
|Segment operating expenses:                                                             |                                               |                                  |       |       |       |      |       |                |       |          |       |       |       |  |       |      |     |  |       |      |     | 
|                                                                                        | Cost of services and products                 |                                  |       | 1,826 |       |      |       | 1,965          |       |          |       | 2,273 |       |  |       | 7.6  |     |  |       | 15.7 |     |  | 
|                                                                                        | Selling, general, and administrative expenses |                                  |       | 2,094 |       |      |       | 2,170          |       |          |       | 2,170 |       |  |       | 3.6  |     |  |       | 0.0  |     |  | 
|                                                                                        | Depreciation and amortization                 |                                  |       | 767   |       |      |       | 740            |       |          |       | 835   |       |  |       | (3.5 | )   |  |       | 12.8 |     |  | 
|                                                                                        |                                               | Total segment operating expenses |       |       | 4,687 |      |       |                | 4,875 |          |       |       | 5,278 |  |       |      | 4.0 |  |       |      | 8.3 |  |  | 
|Segment operating income                                                                |                                               |                                  | 1,020 |       |       |      | 1,086 |                |       |          | 915   |       |       |  | 6.5   |      |     |  | (15.7 | )    |     | 
|                                                                                       
|Segment net income                                                                      |                                               | $                                | 425   |       |       | $    | 357   |                |       | $        | 261   |       |       |  | (16.0 | )    |     |  | (26.9 | )    |     | 
|                                                                                       
|Segment net income including unusual items                                              |                                               | $                                | 378   |       |       | $    | 301   |                |       | $        | 261   |       |       |  | (20.4 | )    |     |  | (13.3 | )    |     | 
|                                                                                       
|                                                                                       
|Key Indicators:                                                                         |                                               |                                  |       |       |       |      |       |                |       |          |       |       |       |  |       |      |     |  |       |      |     | 
|                                                                                       
|Cellular/PCS Customers (000s)                                                           |                                               |                                  | 8,638 |       |       |      | 8,770 |                |       |          | 9,611 |       |       |  | 1.5   |      |     |  | 9.6   |      |     | 
|Wireless average monthly revenue per
    customer 
    Cellular/PCS (whole dollars)(a) |                                               | $                                | 53    |       |       | $    | 52    |                |       | $        | 51    |       |       |  | (1.9  | )    |     |  | (1.9  | )    |     | 
|Capital Expenditures                                                                    |                                               | $                                | 1,262 |       |       | $    | 1,234 |                |       | $        | 1,094 |       |       |  | (2.2  | )    |     |  | (11.3 | )    |     | 
|                                                                                       



|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | Management uses average revenue per user
    (ARPU) as an indicator of operating performance of the business.
    Wireless ARPU  Cellular/PCS is defined as Cellular/PCS
    service revenues during the period divided by average
    Cellular/PCS subscribers during the period. This metric is used
    to compare the recurring revenue amounts being generated on
    Cingulars network to prior periods and internal targets.
    We believe that this metric provides useful information
    concerning the performance of Cingulars initiatives to
    attract and retain high value customers and the use of its
    network.

2003 COMPARED TO
2002

Segment operating
revenues

Cellular/PCS customers increased 9.6% during
2003. Net cellular/PCS additions in 2003 increased 702,000
compared to 2002. Improvement in customer additions is
attributable to several business initiatives Cingular
implemented earlier in 2003: (1) reorganization of
Cingulars marketing, sales and operations activities from
a national to a regional basis to more effectively address local
market needs; (2) introduction of a more meaningful brand
message; (3) increased emphasis on Cingulars
affiliation with its parents and co-branding and more
effectively utilizing the parents sales channels in those
areas where Cingulars wireless markets overlap with the
parents wireline markets; and (4) more effective
marketing execution such as the Family Talk rate
plan offer introduced in the third quarter of 2003. Prepaid
subscriber growth was impacted positively in 2003 by the KIC
(Keep in Contact) prepaid plan launched in the fourth quarter of
2002. The reseller subscriber base is higher due to aggressive
growth by Cingulars primary reseller during 2003 and to a
loss of 148,000 WorldCom (currently known as MCI) reseller
customers in 2002, principally when WorldCom made the decision
to exit the wireless reseller business in the second half of
2002. The cellular/PCS churn rate was 2.7% in 2003 compared with
a 2.8% churn rate in 2002.

Total segment operating revenues increased $232
during 2003. The growth in total operating revenues was a result
of improved service revenues driven by a larger average
cellular/PCS customer base, robust growth in data revenues and
increased regulatory fee revenues. Strong customer growth and a
significant increase in handset upgrade activity in 2003 also
contributed to increased equipment revenues.


Service revenues increased $120 in 2003, driven
by the 3.6% increase in the average subscriber base, a 14.4%
increase in local minutes of use, and a $64 increase over prior
year of revenues related to billings to Cingulars
customers for the USF and other regulatory fees. Other increases
were a result of an increase in data revenues from 2002,
reflective of higher penetration and usage of SMS short
messaging data services with cellular/PCS customers as well as
increased revenue per customer related to the Mobitex data
business. Partially offsetting these increases were a decrease
in wireless average revenue per user (ARPU), declines in roaming
and long distance revenues reflecting the migration of customers
to regional and national rate plans and a reduction in roaming
rates




34 BELLSOUTH
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##### Table of Contents







with major roaming partners to support
all-inclusive rate plans. Additionally, the increase was offset
partially by the effects of Emerging Issues Task Force Issue
No. 00-21 (EITF 00-21), Revenue Arrangements with
Multiple Deliverables, adopted July 1, 2003. Implementation
of EITF 00-21 resulted in a reclassification of certain direct
channel activation revenues from service revenues to equipment
revenues on a prospective basis only. As a result, service
revenue growth was reduced by approximately $14 for the year.

ARPU for cellular/PCS customers declined 1.6% or
$0.82 to $51.32 in 2003 from $52.14 in 2002. Increased sales of
lower ARPU Family Talk plans in the second half of
the year, in combination with a higher percentage of lower ARPU
reseller and prepaid customers in Cingulars 2003 customer
base, negatively impacted its overall ARPU when compared with
the prior year. Additionally, the impact of increased revenue
deferrals associated with its rollover rate plans,
which allow customers to carry over any unused
anytime minutes from month to month for up to one
year, plus the revenue reclassification as a result of the
adoption of EITF 00-21 also had a negative impact on ARPU. Other
unfavorable impacts include on-going competitive pricing
pressures and the reductions in roaming and long distance
revenues.


Equipment revenues increased $112 in 2003
compared to 2002. An increase in handset revenues was primarily
driven by higher unit sales reflecting the nearly 14% increase
in cellular/PCS postpaid and prepaid gross customer additions
and a significant increase in the sale of upgrade
handsets compared with the prior year. The increased unit sales,
particularly for upgrades, was a function of both
Cingulars GSM conversions and focused efforts to increase
the number of customers under contract in anticipation of
wireless local number portability. These increases also included
the impact of the implementation of EITF 00-21, which increased
equipment revenues by approximately $14.


Segment operating
expenses

Cost of services and
products

Cost of services primarily includes expenses to
monitor, maintain and service Cingulars network, landline
facilities expense, incollect roaming charges from other
carriers, cost of equipment sales, and long distance expense.
Cost of services and products increased $308 during 2003. The
primary driver of the increase of cost of services was the
increase in the cost of equipment sales of $198. This increase
was driven primarily by higher unit sales associated with the
large increase in gross customer additions and upgrade unit
sales. Overall, the increased cost of equipment sales was also
impacted by higher per unit handset costs for upgrade units
driven by a shift to more advanced handsets, such as the dual
mode TDMA/GSM handsets in use during Cingulars GSM system
conversion and newly introduced feature-rich GSM-only handsets.
Other increases in cost of services include increases in local
system costs of $164, partially offset by decreases in third
party system costs. Local systems costs continue to be driven by
growth in system minutes of use, system expansion and the
increased costs of redundant TDMA and GSM networks required
during the current GSM system overlay. System minutes of use
increased 19.1% in 2003. The increase in local system costs
includes a $64 increase in costs related to payments into the
USF and other regulatory funds. The primary contributor to lower
third party system costs was a decrease in incollect roaming
costs, which decreased $53 in 2003. These reductions were a
result of lower negotiated roaming rates and cost reductions
associated with the Mobile Telecommunications Sourcing Act.

Selling, general, and
administrative expenses

Selling, general, and administrative expenses
remained flat in 2003. Increases in Cingulars selling
expenses were offset by decreases in costs related to
maintaining and supporting its customer base and other
administrative costs. Higher commissions and advertising
expenses were partially offset by reduced employee-related costs
as a result of the sales operation reorganization in 2002.

Costs for maintaining and supporting the customer
base decreased $27 during 2003. Reduced costs included lower bad
debt expenses and billing expenses, partially offset by
increased residuals and upgrade commissions expenses related to
the existing customer base. The lower billing expenses reflect
cost reductions as a result of system conversions and related
consolidations in 2002.


Depreciation and
amortization

Depreciation and amortization increased $95 in
2003. The increase in depreciation expense of $106 was
attributable to higher levels of gross property, plant and
equipment plus accelerated depreciation on TDMA assets that
began in 2003. Amortization expense declined $11 due to certain
finite-lived intangibles becoming fully amortized during 2002.

2002 COMPARED TO
2001

Segment operating
revenues

Segment operating revenues grew $254, or 4.5%,
during 2002 while cellular/PCS customers increased 1.5%. Net
cellular/PCS customer additions in 2002 were down 81.3% from net
customer additions in 2001. The decrease in net customer
additions was primarily a function of a 12.3% reduction in gross
customer additions in 2002. The decreases in 2002 were a result
of intense industry competition, impacts of the economic
slowdown, lower than expected sales performance and the
continued decline in our prepaid and reseller customer bases,
which was exacerbated by the bankruptcy of WorldCom (currently
known as MCI), a major reseller of Cingulars wireless
services.

Revenue growth in 2002 consists of an increase of
$278 in service revenues and a decrease in equipment revenues




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MANAGEMENTS DISCUSSION
AND ANALYSIS OF 
 FINANCIAL CONDITION AND RESULTS OF
OPERATIONS CONTINUED


BELLSOUTH CORPORATION

of $24. Although service revenues increased in
2002 compared to 2001, the rate of increase declined during
2002, reflecting slower customer growth and lower prices for
Cingulars services driven by increasing competition.
Service revenue increases were primarily the result of higher
local service revenues associated with growth in the customer
base and the attraction of all-inclusive rate plans that offer
larger numbers of included minutes and bundling of roaming and
long distance offerings. Also included in the 2002 service
revenues growth were revenues derived from the first quarter
2002 addition of a wireless handset captive insurance
subsidiary. These insurance fees contributed $62 to the increase
for 2002. The September 2001 consolidation of Puerto Rico
wireless properties also contributed to the 2002 increase. These
increases were partially offset by a decline in roaming and long
distance revenues reflecting the migration of customers to
regional and national rate plans and a reduction in roaming
rates with major roaming partners to support all-inclusive rate
plans and the formation of a venture to share infrastructure
with T-Mobile USA, Inc., which reduced roaming charges to both
carriers customers.

ARPU for cellular/PCS customers declined 1.5% or
$0.77 to $52.14 in 2002 from $52.91 in 2001. Cingulars
strategy of targeting, acquiring and retaining non-reseller
postpaid customers resulted in an increase in customer revenues.
This increase, however, was offset by reductions in revenues
from bundled services and outcollect and other revenues, thereby
reducing overall ARPU. The consolidation of Puerto Rico
operating results in Cingulars financial statements,
beginning September 2001, also adversely affected ARPU as a
result of the heavy concentration of prepaid customers in Puerto
Rico. Of the $0.77 decline in ARPU, $0.18 of the decline can be
attributed to the dilutive ARPU impact of the Puerto Rico
consolidation.


Segment operating
expenses

Cost of services and
products

Cost of services and products increased $139, or
7.6%, during 2002. Cingulars expense growth was driven by
increased service costs of $263 in 2002 resulting from a rise in
minutes of use, higher roaming and long distance costs driven by
customer movement toward all-inclusive rate plans which include
more minutes, free long distance calling, and free roaming.
Minutes of use on the network were up 36% in 2002. Slightly
offsetting these increases were lower equipment costs due to
slower customer growth and efficiencies attributable to greater
digital usage.

Selling, general, and
administrative expenses

Selling, general, and administrative expenses
increased $76, or 3.6%, during 2002. The increase was impacted
by an increase in uncollectible expense related to a WorldCom
write-off. Further impacting 2002 expense growth were higher
costs attributable to higher residual and upgrade commissions,
costs associated with the launch of service in New York City,
customer retention costs and restructuring-related severance
costs. Slightly offsetting these increases were declines in
branding expenses associated with the introduction of the
Cingular brand name in 2001.

Depreciation and
amortization

Depreciation and amortization of $740 decreased
$27, or 3.5%, in 2002. Depreciation expense increased $60 and
was comprised primarily of increased depreciation associated
with new capital assets partially offset by a reduction in
depreciation as a result of the transfer of assets to
Cingulars network infrastructure venture with T-Mobile.
Amortization expense decreased by $87 compared with the prior
year. This was primarily attributable to the January 1,
2002 adoption of SFAS No. 142 and the resultant cessation
of the amortization of goodwill and of most wireless licenses.

Unusual items excluded from
segment net income

Unusual items which were excluded from this
segments results consisted of the following: in 2003, no
unusual items were excluded; in 2002, $(56) related to
impairment losses; in 2001, $(47) related to pension and
postretirement losses.




Latin America Group

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

The Latin America Group experienced a modest
recovery in much of the region and showed strong organic
customer growth in 2003 as customer additions improved
dramatically. While currency devaluation and economic pressures
continued to adversely affect the Venezuela market,
Argentinas currency and overall economic environment
rebounded from 2002 levels. As a result of modest revenue growth
as well as operating expense and capital expenditure control,
the Latin America Group generated positive operating free cash
flow in 2003. We expect significant economic and currency-




36 BELLSOUTH
2003




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##### Table of Contents







related risks to continue in 2004, particularly
in Venezuela. See Operating Environment  Latin
America Economic Trends and  Foreign
Risks.

During 2003 we purchased an incremental 21.7%
ownership share in our Argentine operating company from one
partner for a nominal amount, and we now own 86.7% of the
company. Also during 2003, we disposed of our remaining interest
in BCP and BSE, our Brazilian wireless operations. During 2002,
we exited our remaining advertising and publishing operations in
Latin America.


|                                                            |                                               |                                  |        |       |       |      |        |                |       |          |        |       |       |  |       |       |       |   |       |        |     | 
|----------------------------------------------------------- | --------------------------------------------- | -------------------------------- | ------ | ----- | ----- | ---- | ------ | -------------- | ----- | -------- | ------ | ----- | ----- |  | ----- | ----- | ----- | - | ----- | ------ | --- | 
|                                                            |                                               |                                  |        |       |       |      |        |               
|                                                            |                                               |                                  |        |       |       |      |        | Percent Change
|                                                            |                                               |                                  |        |       |       |      |        |               
|                                                            |                                               |                                  |        |       |       |      |        |               
|                                                            |                                               |                                  |        |       |       |      |        | 2002 vs.       |       | 2003 vs.
|                                                            |                                               | 2001                             |        | 2002  |       | 2003 |        | 2001           |       | 2002    
|                                                           
|                                                           
|                                                           
|Segment operating revenues:                                 |                                               |                                  |        |       |       |      |        |                |       |          |        |       |       |  |       |       |       |   |       |       
|                                                            | Service revenues                              |                                  | $      | 2,439 |       |      | $      | 1,878          |       |          | $      | 1,928 |       |  |       | (23.0 | )     |   |       | 2.7    |    
|                                                            | Equipment revenues                            |                                  |        | 187   |       |      |        | 140            |       |          |        | 171   |       |  |       | (25.1 | )     |   |       | 22.1   |    
|                                                            | Other revenues                                |                                  |        | 223   |       |      |        | 180            |       |          |        | 199   |       |  |       | (19.3 | )     |   |       | 10.6   |    
|                                                            | Advertising and publishing revenues           |                                  |        | 86    |       |      |        | 40             |       |          |        | 0     |       |  |       | (53.5 | )     |   |       | (100.0 | )  
|                                                            |                                               | Total segment operating revenues |        |       | 2,935 |      |        |                | 2,238 |          |        |       | 2,298 |  |       |       | (23.7 | ) |       |        | 2.7 | 
|Segment operating expenses:                                 |                                               |                                  |        |       |       |      |        |                |       |          |        |       |       |  |       |       |       |   |       |       
|                                                            | Cost of services and products                 |                                  |        | 1,061 |       |      |        | 841            |       |          |        | 996   |       |  |       | (20.7 | )     |   |       | 18.4   |    
|                                                            | Selling, general, and administrative expenses |                                  |        | 1,001 |       |      |        | 678            |       |          |        | 606   |       |  |       | (32.3 | )     |   |       | (10.6  | )  
|                                                            | Depreciation and amortization                 |                                  |        | 605   |       |      |        | 440            |       |          |        | 367   |       |  |       | (27.3 | )     |   |       | (16.6  | )  
|                                                            |                                               | Total segment operating expenses |        |       | 2,667 |      |        |                | 1,959 |          |        |       | 1,969 |  |       |       | (26.5 | ) |       |        | 0.5 | 
|Segment operating income                                    |                                               |                                  | 268    |       |       |      | 279    |                |       |          | 329    |       |       |  | 4.1   |       |       |   | 17.9  |       
|Net earnings (losses) of equity affiliates                  |                                               |                                  | (36    | )     |       |      | (10    | )              |       |          | 18     |       |       |  | 72.2  |       |       |   | 280.0 |       
|                                                           
|Segment net income (loss)                                   |                                               | $                                | (46    | )     |       | $    | 108    |                |       | $        | 161    |       |       |  | *     |       |       |   | 49.1  |       
|                                                           
|Segment net income (loss) including unusual
    items       |                                               | $                                | (392   | )     |       | $    | (2,090 | )              |       | $        | 41     |       |       |  | *     |       |       |   | 102.0 |       
|                                                           
|                                                           
|Key Indicators:                                             |                                               |                                  |        |       |       |      |        |                |       |          |        |       |       |  |       |       |       |   |       |       
|                                                           
|Customers(a)(000s)                                          |                                               |                                  | 7,585  |       |       |      | 8,172  |                |       |          | 9,696  |       |       |  | 7.7   |       |       |   | 18.6  |       
|Average monthly revenue per customer (whole
    dollars)(b) |                                               | $                                | 25     |       |       | $    | 19     |                |       | $        | 18     |       |       |  | (24.0 | )     |       |   | (5.3  | )     
|Total Billed MOUs (millions)                                |                                               |                                  | 12,072 |       |       |      | 13,538 |                |       |          | 17,111 |       |       |  | 12.1  |       |       |   | 26.4  |       
|                                                           
|Capital Expenditures                                        |                                               | $                                | 500    |       |       | $    | 247    |                |       | $        | 268    |       |       |  | (50.6 | )     |       |   | 8.5   |       
|                                                           

|    |  |                                                                                                                                  
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------
|*   |  | Not meaningful                                                                                                                   
|(a) |  | The amounts shown are for our consolidated
    properties and do not include customer data for our
    unconsolidated properties.
|(b) |  | Average monthly revenue per customer is
    calculated by dividing average monthly service revenue by
    average customers.     

2003 COMPARED TO
2002

Segment operating
revenues

Service revenues in the Latin America Group
increased $50 in 2003. The increase in service revenue was
primarily driven by an increase in Ecuador of $80, reflecting a
29% increase in its customer base as well as a $26 increase
associated with a settlement reached with another wireless
carrier over disputed interconnect fees. An increase of $39 was
generated in Colombia primarily due to a 42% increase in its
customer base substantially offset by an overall decrease in
rates and the impact of an average currency devaluation of 15%.
The increases were offset by service revenue declines in
Venezuela of $96, driven by the 30% average devaluation of the
Venezuelan Bolivar.

Equipment and other revenues increased $50 in
2003 primarily due to the 28.6% increase in gross customer
additions over last year, partially offset by the previously
discussed currency devaluations.


Segment operating
expenses

Cost of services and
products

Cost of services and products increased $155 in
2003. The increase was primarily caused by cost of equipment
increases from higher gross additions and upgraded handsets.
Increases in cost of services also reflect higher interconnect
costs driven by $39 of additional expense recorded in Ecuador
associated with an interconnect settlement previously described,
as well as growth in minutes of use, partially offset by
devaluation in Venezuela.

Costs also increased due to a $40 contingency
accrual recorded in 2003. Changes in administrative regulations
in one of the countries in which we operate, regarding the
inclusion of interconnection income in the taxable revenue base,
contradicted the method of calculation used by our subsidiary in
computing and paying its liability for taxes on
telecommunications services. We believe we have a valid argument
under existing law for our method of calculating the tax.
However, because of uncertainty in the outcome of this issue,
our subsidiary has recorded a contingency accrual for prior
unpaid taxes based on the new regulations and it intends to
calculate taxes in future periods in conformity with these
regulations until the legal issues are




BELLSOUTH
2003      37




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##### Table of Contents



MANAGEMENTS DISCUSSION
AND ANALYSIS OF 
 FINANCIAL CONDITION AND RESULTS OF
OPERATIONS CONTINUED


BELLSOUTH CORPORATION

resolved. We plan to defend our position, in the
courts if necessary. We cannot predict how long it will take to
resolve this issue, however we do not expect the impact, if any,
to be material to our results of operations, financial position
or cash flows.

The cost of services change also was impacted by
a $24 decrease in 2003 due to the exit from the advertising and
publishing business in 2002.


Selling, general, and
administrative expenses

Selling, general, and administrative expenses
decreased $72 in 2003. The decrease in US Dollar terms was
caused primarily by the currency devaluation in Venezuela, which
recorded a decline of $31, and by a decrease of $33 related to
the exit from the advertising and publishing business in 2002.

In local currency terms, selling, general, and
administrative expenses increased modestly due to strong
customer growth, as well as inflationary pressures, partially
offset by cost containment efforts and operational efficiencies.
Customer gross adds increased 28.6%, and the customer base
increased by 18.6% as compared to the prior year. The variance
in 2003 also reflects a benefit in Ecuador associated with
cumulative future deductions to be used to calculate employee
profit-sharing expense.


Depreciation and
amortization

Depreciation and amortization expense decreased
$73 in 2003, reflecting the impact of currency devaluations on
the amortizable basis of tangible and intangible assets and the
impact of certain customer intangibles becoming fully amortized.

Net earnings (losses) of
equity affiliates

Net earnings from our Latin America Group equity
affiliates improved from a loss of ($10) in 2002 to income of
$18 in 2003, primarily as a result of the cessation of recording
losses from our equity investments in Brazil during the second
quarter of 2002.

2002 COMPARED TO
2001

Segment operating
revenues

Segment operating revenues decreased $697, or
23.7%, in 2002. The decrease was almost entirely attributable to
the continued weakening of our Latin America operations
local currencies against the US Dollar. Significant
economic challenges continued in Argentina and Venezuela, two of
BellSouths largest Latin America markets. The currency
devaluations that began during the first quarter continued to
worsen throughout the year. As of November 30, 2002, the
Argentine Peso had devalued approximately 71% relative to the US
Dollar and the Venezuelan Bolivar had depreciated approximately
44% since the beginning of 2002. The decreases in Argentina and
Venezuela were partially offset by increases in service revenues
totaling $118 at our operations in Colombia and Ecuador,
attributable to growth in the customer bases of those operations.

Other revenues relate primarily to wholesale long
distance voice, data access and transport and Internet access.
The decrease in 2002 related primarily to currency fluctuations.
Advertising and publishing revenues decreased in 2002 due to
devaluation, competitive pressures and our exit of the business
in 2002. Revenue per customer decreased in 2002 primarily due to
the effect of foreign currency translation.


Segment operating
expenses

Cost of services and
products

Cost of services and products decreased $220, or
20.7%, in 2002. The 2002 decrease was almost entirely
attributable to the declining value of most Latin American
currencies against the US Dollar. Reductions in expenses
are also being driven by lower customer acquisition costs.

Selling, general, and
administrative expenses

Selling, general, and administrative expenses
decreased $323, or 32.3%, in 2002. The 2002 decrease was almost
entirely attributable to the declining value of most Latin
American currencies against the US Dollar. Reductions in
expenses are also being driven by targeted reductions in
administrative costs through headcount reductions.

Depreciation and
amortization

Depreciation expense decreased $86 in 2002 as a
result of currency devaluations and true-ups of depreciation on
network assets in Chile and Colombia. Amortization expense
decreased $79 during 2002 primarily as a result of the cessation
of amortization of goodwill due to the adoption of SFAS
No. 142, and to a lesser extent, to the effect of foreign
currency translation.

Net earnings (losses) of
equity affiliates

Net losses from our Latin America Group equity
affiliates improved $26 to $(10) in 2002. The 2002 improvement
was primarily due to the cessation of recording losses in our
Brazil investments during the second quarter of 2002.

Unusual items excluded from
segment net income

Unusual items which were excluded from this
segments results consisted of the following: in 2003,
$(120) related to loss on disposal of our wireless property in
Brazil-Sao Paulo, bond impairment, loan write-off and severance
costs, partially offset by foreign currency transaction gains,
gain on sale of stock and gain on sale of our wireless property
in Brazil NE; in 2002, $(2,198) related to impairment losses
under SFAS No. 142, foreign currency transaction losses,
Brazil loan impairment, losses on the sale of Brazilian yellow



38 BELLSOUTH
2003




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##### Table of Contents







pages operation, asset impairments and severance
costs, partially offset by gain on sale of stock; in 2001,
$(346) related to foreign currency transaction losses, asset
impairments and restructuring costs, partially offset by a gain
from the sale of our investment in BellSouth International
Wireless Services.




Advertising and Publishing
Group

Our Advertising and Publishing Group is comprised
of companies in the US that publish, print, sell advertising in
and perform related services concerning alphabetical and
classified telephone directories and electronic product
offerings.

As discussed more fully in Note C to our
consolidated financial statements, effective January 1,
2003, we changed our method for recognizing revenues and
expenses related to our directory publishing business from the
publication and delivery method (issue-basis) to the deferral
method (deferral basis). For BellSouths consolidated
results, this change was treated as a prospective change and
prior year consolidated results were not restated. However, to
align internal reporting, the 2002 and 2001 segment results for
the Advertising and Publishing Group were recast to reflect the
change.


Under the issue basis, we recognized 100% of
revenues and direct expenses at the time the directories were
published and delivered. Under the deferral basis, we amortize,
or recognize ratably, revenues and direct expenses over the life
of the related directory, generally 12 months. When
compared to the issue-basis method, the deferral method causes
trends in current-period operating results to be recognized in
the income statement over a longer period of time and to cross
fiscal years.


In 2003, our Advertising and Publishing Group was
negatively affected by weak economic conditions and competition.
Although an improving economy should result in higher
advertising spending, we expect continued competitive pressure
to impact volumes and pricing.


|                                           |                                               |      |     |       |  |      |     |                |  |          |     |       |  |  |       |       |   |  |       |       |  
|------------------------------------------ | --------------------------------------------- | ---- | --- | ----- |  | ---- | --- | -------------- |  | -------- | --- | ----- |  |  | ----- | ----- | - |  | ----- | ----- | -
|                                           |                                               |      |     |       |  |      |     |               
|                                           |                                               |      |     |       |  |      |     | Percent Change
|                                           |                                               |      |     |       |  |      |     |               
|                                           |                                               |      |     |       |  |      |     |               
|                                           |                                               |      |     |       |  |      |     | 2002 vs.       |  | 2003 vs.
|                                           |                                               | 2001 |     | 2002  |  | 2003 |     | 2001           |  | 2002    
|                                          
|                                          
|                                          
|Segment operating revenues                 |                                               |      |     |       |  |      |     |                |  |          |     |       |  |  |       |       |   |  |       |      
|                                           | Advertising and publishing revenues           |      | $   | 1,966 |  |      | $   | 2,010          |  |          | $   | 1,906 |  |  |       | 2.2   |   |  |       | (5.2  | )
|                                           | Commission revenues                           |      |     | 124   |  |      |     | 147            |  |          |     | 144   |  |  |       | 18.5  |   |  |       | (2.0  | )
|                                           | Total segment operating revenues              |      |     | 2,090 |  |      |     | 2,157          |  |          |     | 2,050 |  |  |       | 3.2   |   |  |       | (5.0  | )
|Segment operating expenses:                |                                               |      |     |       |  |      |     |                |  |          |     |       |  |  |       |       |   |  |       |      
|                                           | Cost of services and products                 |      |     | 390   |  |      |     | 351            |  |          |     | 345   |  |  |       | (10.0 | ) |  |       | (1.7  | )
|                                           | Selling, general, and administrative expenses |      |     | 689   |  |      |     | 879            |  |          |     | 706   |  |  |       | 27.6  |   |  |       | (19.7 | )
|                                           | Depreciation and amortization                 |      |     | 29    |  |      |     | 29             |  |          |     | 26    |  |  |       | 0.0   |   |  |       | (10.3 | )
|                                           | Total segment operating expenses              |      |     | 1,108 |  |      |     | 1,259          |  |          |     | 1,077 |  |  |       | 13.6  |   |  |       | (14.5 | )
|Segment operating income                   |                                               |      | 982 |       |  |      | 898 |                |  |          | 973 |       |  |  | (8.6  | )     |   |  | 8.4   |      
|                                          
|Segment net income                         |                                               | $    | 596 |       |  | $    | 545 |                |  | $        | 600 |       |  |  | (8.6  | )     |   |  | 10.1  |      
|                                          
|Segment net income including unusual items |                                               | $    | 593 |       |  | $    | 428 |                |  | $        | 96  |       |  |  | (27.8 | )     |   |  | (77.6 | )    
|                                          
|Capital Expenditures                       |                                               | $    | 63  |       |  | $    | 29  |                |  | $        | 28  |       |  |  | (54.0 | )     |   |  | (3.4  | )    
|                                          

2003 COMPARED TO
2002

Segment operating
revenues

The overall industry environment continues to
reflect weak economic conditions and increasing competitive
activity. Segment operating revenues decreased $107 from 2002 to
2003. The decrease includes a reduction in print revenues due to
lower overall spending by our advertisers. The decline in print
revenue was partially offset by an increase in revenues from
electronic media offerings, resulting from increased penetration
of the print customer base. Sales agency commission revenues
decreased slightly as the result of a discontinued line of
business.

Because of the accounting convention used for
publishing revenue, the revenue decline during 2003 was
primarily driven by the amortization of revenues from
directories issued in 2002, and to a lesser extent from those
issued in 2003. Revenues from directories issued in 2003 also
declined when compared to their 2002 issues attributable to the
factors discussed previously. Approximately 50% of the decline
was recognized in the segments 2003 income statement, with
the remainder to be recognized in 2004.


Segment operating
expenses

Cost of services and products decreased $6 in
2003, primarily reflecting the impact of manufacturing cost
reduction efforts. Selling, general, and administrative expenses
decreased $173 in 2003. Uncollectible expense was the primary
driver of the reductions, decreasing $141. The decrease reflects
the impact of improved collection performance in 2003. In
addition, variable costs associated with selling decreased as
the result of the reduction in revenues. Depreciation and
amortization expenses were relatively flat in 2003.



BELLSOUTH
2003      39




---



##### Table of Contents



MANAGEMENTS DISCUSSION
AND ANALYSIS OF 
 FINANCIAL CONDITION AND RESULTS OF
OPERATIONS CONTINUED


BELLSOUTH CORPORATION

2002 COMPARED TO
2001

Segment operating
revenues

Segment operating revenues increased $67 during
2002. The improvement was attributable to several factors,
including improvements in print customer adjustment activity and
an increase in revenues from electronic media offerings
resulting from further penetration of the print customer base.
Print revenues were relatively flat, reflecting the impact on
the overall industry of weak economic conditions and increased
competitive activity. Sales agency commission revenues increased
as the result of new agency agreements generated outside of the
Southeastern US.

Segment operating
expenses

Cost of services and products decreased $39 in
2002. The decrease primarily reflects the impact of cost
reduction efforts in manufacturing and distribution expenses.
Selling, general, and administrative expenses increased $190 in
2002. This increase is primarily due to a higher provision for
uncollectible receivables expense that increased $181 for 2002.
The higher provision was primarily due to weak economic
conditions and increased bankruptcies of our advertisers.
Depreciation and amortization remained flat in 2002.

Unusual items excluded from
segment net income

Unusual items which were excluded from this
segments results consisted of the following: in 2003,
$(504) included the cumulative effect of a change in accounting
principle and severance and pension costs; in 2002, $(117)
related to an unbilled receivable adjustment, severance costs
and employee benefits related to workforce reduction; in 2001,
$(3) related to restructuring costs.



40 BELLSOUTH
2003




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##### Table of Contents












Liquidity and Financial
Condition

DESCRIPTION OF CASH
FLOWS

Net cash provided by (used
for):

|                     |  |      |        |      |  |      |        |                |  |          |        |   |  |  |        |   |  |  |      |  
|-------------------- |  | ---- | ------ | ---- |  | ---- | ------ | -------------- |  | -------- | ------ | - |  |  | ------ | - |  |  | ---- | -
|                     |  |      |        |      |  |      |        |               
|                     |  |      |        |      |  |      |        | Percent Change
|                     |  |      |        |      |  |      |        |               
|                     |  |      |        |      |  |      |        |               
|                     |  |      |        |      |  |      |        |               
|                     |  |      |        |      |  |      |        | 2002 vs.       |  | 2003 vs.
|                     |  | 2001 |        | 2002 |  | 2003 |        | 2001           |  | 2002    
|                    
|                    
|                    
|Operating activities |  | $    | 7,998  |      |  | $    | 8,246  |                |  | $        | 8,529  |   |  |  | 3.1    |   |  |  | 3.4  |  
|Investing activities |  |      | (7,039 | )    |  |      | (1,707 | )              |  |          | (1,698 | ) |  |  | 75.7   |   |  |  | 0.5  |  
|Financing activities |  |      | (1,428 | )    |  |      | (4,649 | )              |  |          | (4,757 | ) |  |  | (225.6 | ) |  |  | (2.3 | )
|                    

Net cash provided by operating
activities

Cash generated by operations increased $283
during 2003 compared to the prior year. The increase was driven
primarily by lower severance payments and better receivables
collections. Severance payments of $125 in 2003 declined $369 as
compared to $494 of payments in 2002. We have enhanced our
processes with respect to receivable collection management
resulting in improved collections as net accounts receivable
decreased $356 (excluding the accounts receivable decrease
impacted by the advertising and publishing accounting change).
Decreases in interest income, due to lower rates on our advance
to Cingular and the loss of income on an advance to KPN were
substantially offset by lower interest expense due to lower
borrowings. Operating cash flows for the next few years will be
negatively impacted by higher federal income tax payments as the
timing of accelerated tax deprecation in 2002 and 2003 begins to
reverse.

Cash generated by operations increased $248
during 2002 compared to 2001, favorably impacted by lower income
tax payments of $431 and a $200 payment made in 2001 to a
supplier settling a lawsuit. The reduction of income tax
payments in 2002 from 2001 is primarily due to additional
accelerated depreciation and severance deductions in 2002. These
cash increases were somewhat offset by lower operating cash
flows in the Communications Group impacted by a decline in
revenue.


Net cash used for investing
activities

Capital expenditures

Capital expenditures consist primarily of
(a) gross additions to property, plant and equipment having
an estimated service life of one year or more, plus the
incidental costs of preparing the asset for its intended use,
and (b) gross additions to capitalized software.

Total investment in property, plant and equipment
has increased from $58 billion at January 1, 1999 to
$66 billion at December 31, 2003, not including
deductions for accumulated depreciation. Between 1999 and 2001,
significant additions to property, plant and equipment were
required to meet the growing demand for telecommunications
services and to continually modernize and improve such services
to meet competitive demands. However, during late 2001 through
2003 demand decreased significantly. Although current demand is
down, we project continued population and economic expansion in
certain growth centers within our nine-state area during the
next five to ten years. In addition, our Latin America Group
will continue to make investments to transition technology for
its wireless networks and to support customer growth.


Our capital expenditures for 1999 through 2003
were as follows:


|     |  |          |       |              |  |  |      |  |  | 
|---- |  | -------- | ----- | ------------ |  |  | ---- |  |  | 
|     |  | Millions |       | % of Revenue |  | 
|    
|    
|    
|1999 |  | $        | 6,200 |              |  |  | 24.6 |  |  | 
|2000 |  | $        | 6,995 |              |  |  | 26.7 |  |  | 
|2001 |  | $        | 5,997 |              |  |  | 24.9 |  |  | 
|2002 |  | $        | 3,785 |              |  |  | 16.9 |  |  | 
|2003 |  | $        | 3,200 |              |  |  | 14.1 |  |  | 
|    

Decreases in capital spending levels in 2002 and
2003 reflect continued decreases in demand and targeted capital
deployment. We project 2004 capital expenditures to be between
13 and 15 percent of revenue. A majority of the
expenditures will be to expand, enhance and modernize current
wireline operating systems.

We expect expenditures for 2004 to be financed
substantially through internal sources and, to the extent
necessary, from external financing sources.


Other investing
activities

Other 2003 investing activities include net
proceeds of $1,458 resulting from an early repayment by KPN of
the entire outstanding balance of the loan we had extended to
them and the settlement of related currency swaps. In addition,
we received proceeds of $35 from the exercise of a loan put
agreement with our Colombian partner, proceeds of $70 related to
the sale of two equity investments in Brazil, and proceeds of
$105 related to the sale of equity securities. In June 2003, we
sold our entire interest in two real estate partnerships for net
proceeds of $26. In conjunction with the sale, we received
proceeds of $97 for the repayment of loans we had extended to
the partnerships. During 2003, we purchased $261 in debt and
equity securities.



BELLSOUTH
2003      41




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##### Table of Contents



MANAGEMENTS DISCUSSION
AND ANALYSIS OF 
 FINANCIAL CONDITION AND RESULTS OF
OPERATIONS CONTINUED


BELLSOUTH CORPORATION

Other 2002 investing activities include receipt
of $2,358 in proceeds from the sale of shares in Qwest, KPN and
portions of our investment in TCO as well as proceeds from a
principal payment related to a loan to KPN. In addition, we
contributed a total of $309 to equity affiliates, including $200
to Cingular and $94 to Brazil. The $200 contribution related to
income tax benefits realized by BellSouth associated with our
investment in Cingular.

During 2001, we advanced $1,850 to E-Plus via
demand notes that replaced previously guaranteed debt, invested
$279 in loan participation agreements related to our Colombian
operations and invested approximately $105 in our Brazilian
wireless affiliates. We also generated approximately $1,100 from
the sale of a portion of our investment in Qwest common stock.


In February 2004, we closed on the sale of our
interest in Sonofon. We received approximately $600 in proceeds.


Net cash used for financing
activities

Cash used for financing activities increased $108
during 2003 compared to 2002 due primarily to an increase in
dividends paid of $148 and an increase in purchases of treasury
shares of $267, partially offset by a reduction in debt pay
downs of $256. During 2003, we paid dividends of $.87 per share
totaling $1,608 and purchased 35.0 million shares of our
common stock for $858. During 2002, we paid dividends of $.78
per share totaling $1,460 and purchased 22.3 million shares
of our common stock for $591. Dividends paid in 2001 were $.76
per share totaling $1,424.

We utilized cash in 2003 to pay down short-term
borrowings by $427 and long-term notes by $1,932. Our debt to
total capitalization ratio of 43.1% at December 31, 2003
decreased from 49.2% at December 31, 2002, reflecting both
the $2.4 billion debt pay down for both short-term and
long-term notes as well as an increase in equity due to earnings
partially offset by dividends declared.


The increase in cash used for financing
activities during 2002 compared to 2001 reflects substantial
debt pay downs during 2002. We utilized cash from operations to
reduce our short-term borrowings by $1,408 and long-term notes
by $1,223. This includes early extinguishment of $1,120 in
long-term debt, which resulted in a loss on extinguishment of
$40.


Our debt to total capitalization ratio of 49.2%
at December 31, 2002 decreased from 51.7% at
December 31, 2001 reflecting the $2.6 billion debt pay
down for both short-term and long-term notes described above.


Anticipated sources and uses
of funds

Cash flows from operations are our primary source
of cash for funding existing operations, capital expenditures,
interest and principal payments on debt, and dividend payments
to shareholders. Should the need arise, however, we believe we
are well positioned to raise capital in the public debt markets.
As of December 31, 2003 our consolidated cash balance was
$4,556.

The Communications Group and Advertising and
Publishing Group generate substantially all of our consolidated
cash provided by operating activities. These segments generate
sufficient cash flow to fund operating, investing and financing
needs and dividend excess cash to BellSouth for corporate uses.
The Domestic Wireless segment, which consists entirely of our
equity investment in Cingular, typically does not rely on
BellSouth for funding; Cingular generates sufficient cash flow
to meet its operating, investing and financing needs through its
own operations or through its own financing activities.


Although the Latin America Group currently holds
approximately $1,000 in cash, it has not historically remitted
dividends to BellSouth. The local currency equivalent of
US $346 was held in local accounts in Venezuela at
November 30, 2003. Due to government restrictions, we have
not been able to freely convert this local currency to
US Dollars at the official rate. We have converted some,
and we are seeking to convert more, of this local currency to
US Dollars in the parallel market. As discussed below, some
of the operations within this segment may experience financing
needs for the purchase of additional ownership interests or to
meet debt payments that could require funding from other
financing sources. We are restricting new investment in Latin
America and expect that the group will fund its financial needs
from current cash and the groups future cash flow from
operations. We do not expect to enter into additional, or
increase existing, debt guarantees.


In addition, cash includes $144 held in grantor
trusts that is not readily available for general corporate
purposes.


At December 31, 2003, our long-term debt
rating was A1 from Moodys Investor Service and A+ from
Standard and Poors. Our short-term credit rating at
December 31, 2003 was P-1 from Moodys and A-1 from
Standard and Poors. Moodys and Standard &
Poors have placed us on negative credit watch due to the
Cingular announcement as described below. Our authorized
commercial paper program as of December 31, 2003 is
$8.0 billion, with $1.5 billion outstanding. We
believe we have ready access to the commercial paper market in
the event funding in excess of our operating cash flows is
needed. We also have a registration statement on file with the
SEC under which $2.3 billion of long-term debt securities
could be issued. We believe that these sources of funds will be
sufficient to meet the operating needs of our business for at
least the next twelve months.


On February 17, 2004, Cingular announced an
agreement to acquire AT&T Wireless Services, Inc. in an
all cash transaction. Under the terms of the agreement, which
were approved by our board of directors and the boards of
directors of SBC and Cingular as well as AT&T Wireless,
shareholders of AT&T Wireless will receive
$15 cash per common share or approximately
$41 billion. The acquisition, which is subject to the
approvals of AT&T Wireless shareholders and federal
regulatory authorities, and to other customary closing
conditions, is expected to be completed in the fourth quarter of
2004.




42 BELLSOUTH
2003




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##### Table of Contents







We have committed to funding our proportionate
share of the all cash transaction. We expect our funding
requirement will be approximately $16 billion. Funding will
be achieved through a combination of existing cash on hand, cash
generated from our operations prior to closing and potential
asset sales. We plan to access the public debt markets for the
remainder. At the time of closing, we currently anticipate our
likely external funding needs to be in the $9.5 to
$10.5 billion range.

Cingular expects to achieve significant operating
and capital synergies through this acquisition by consolidating
networks, distribution, billing, procurement, marketing,
advertising and other functions. Due to the impacts of purchase
accounting at Cingular, integration costs and additional
financing costs of indebtedness we expect to incur to satisfy
our funding commitment to the transaction, we expect some
dilution to GAAP earnings per share in the first few years
subsequent to the closing of the transaction.


SBCs and BellSouths proportionate
equity stake in Cingular will remain unchanged following the
transaction, with SBC holding 60 percent and BellSouth
40 percent. SBC and BellSouth will continue to have equal
management control.


CASH
MANAGEMENT

BellSouths primary source of cash flow is
dividends from its subsidiaries. Generally, we do not permit our
subsidiaries to accumulate cash, requiring them to pay out
either net income or cash flow available in the form of
dividends. BellSouth Telecommunications pays dividends in the
amount of net income. For all other wholly owned domestic
subsidiaries, companies must pay out cash flow available (less
interest expense) if it exceeds net income. Any funding
requirements for wholly owned domestic subsidiaries are filled
by BellSouth Corporation. Cingular pays dividends to BellSouth
in an amount equal to cash taxes paid by BellSouth on behalf of
Cingular. Latin American subsidiaries dividend policies
vary by company and are dependent upon financing needs and
ownership structure. All Latin America Group dividends are
invested in the region and funds may be loaned from one
subsidiary to another to facilitate funding needs.

DEBT
INSTRUMENTS

Publicly held
indebtedness

BellSouth and BellSouth Telecommunications
currently have debt outstanding under various indentures that we
have entered into over the past eleven years. None of these
indentures contain any financial covenants. They do contain
limitations that restrict the companys (or the affiliate
of the company that is a party to the indenture) ability to
create liens on their properties or assets (but not the
properties or assets of their subsidiaries) except in specified
circumstances. None of these indentures contains any provisions
that are tied to the ratings assigned to the company or its
affiliates by an external debt rating agency. Further, none of
these indentures contains cross-default provisions.

International
operations

Our Latin American operations generally have
local credit facilities denominated in local currency and other
facilities denominated in US dollars. We are seeking, where
feasible, to replace our dollar denominated debt with local
currency facilities to reduce the impact of currency
fluctuations on our operations. Except as noted below, these
facilities are generally non-recourse to BellSouth. The
facilities have customary terms and financial covenants for
non-recourse obligations of this type.

BellSouth Enterprises, a subsidiary of BellSouth,
has guaranteed our Chilean operations $180 syndicated loan
facility, our Peruvian operations $200 credit facility and
approximately $30 of the long-term debt of our Guatemalan
operation. The credit facilities of our Latin American
operations in many cases may become due and payable upon a
change of control or the sale of the operation to a third party.


Our operation in Colombia, of which BellSouth
owns 66%, has outstanding $346 of indebtedness pursuant to its
senior credit facilities. The debt is non-recourse to BellSouth.
In 2003, the Colombian operations commenced negotiations with
the lenders of these facilities to extend the facilities
amortization schedule. To facilitate the negotiations, the
lenders have agreed to waive certain financial covenants until
February 27, 2004. If the refinancing is not completed
prior to the expiration of the waiver, the Colombian operations
may be in default of debt service coverage ratio and minimum
EBITDA covenants. In this event, after the expiration of
applicable cure periods, the lenders could declare the
facilities to be immediately due and payable. Although the
Colombian operations currently expect to seek an additional
waiver for a limited time to permit completion of the
negotiations, if necessary, there can be no assurance that the
negotiations will be concluded successfully.


Our operation in Argentina, of which BellSouth
owns 86.7%, is in default on $490 of its US Dollar-denominated
debt as a result of the cumulative devaluation of the Argentina
Peso. The debt is non-recourse to BellSouth. The Argentine
operations are currently working with lenders to resolve this
matter. However, there can be no assurance that this debt can be
successfully refinanced.


Line of credit

We have a syndicated line of credit in the amount
of $1,500 that we would use in the event we are unable to access
the commercial paper market. We do not have any balances
outstanding under the line of credit. Except as described in
this paragraph, the line of credit contains no financial
covenants or requirements for compensating balances. The line of
credit does not contain any provisions that are tied to the
ratings assigned to us or our affiliates



BELLSOUTH
2003      43




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##### Table of Contents



MANAGEMENTS DISCUSSION
AND ANALYSIS OF 
 FINANCIAL CONDITION AND RESULTS OF
OPERATIONS CONTINUED


BELLSOUTH CORPORATION

by an external debt rating agency. At our
election, any outstanding borrowings may be converted to a
one-year term, in which case the debt of the company and its
consolidated subsidiaries are not permitted to exceed 300% of
consolidated earnings before interest, taxes, depreciation and
amortization on a rolling four-quarter basis. In addition, the
line of credit prohibits the company and its significant
subsidiaries from permitting liens to be placed on their
properties or assets except in specified circumstances. If
BellSouth or any of our subsidiaries, except for our Latin
American entities, defaults on any outstanding debt in excess of
$200, this will cause an event of default to occur under the
line of credit. If we draw on this line of credit, a similar
event of default clause will be brought into certain of our
Latin American credit facilities. If the line of credit is not
drawn and the term conversion is not exercised, the line of
credit will expire on April 30, 2004. We expect to enter
into a new line of credit on substantially similar terms.




Off-Balance Sheet Arrangements and
Aggregate Contractual Obligations

OFF-BALANCE SHEET
ARRANGEMENTS

We have guaranteed approximately $30 of the
long-term debt of our Guatemalan entity. We own 60% of that
company and we account for it using the equity method.

In most of our sale and divestiture transactions
we indemnify the purchaser for various items including labor and
general litigation as well as certain tax matters. Generally,
the terms last one to five years for general and specific
indemnities and for the statutory review periods for tax
matters. The events or circumstances that would require us to
perform under the indemnity are transaction and circumstance
specific. We regularly evaluate the probability of having to
incur costs associated with these indemnifications and have
accrued for expected losses that are probable. In addition, in
the normal course of business, we indemnify counter parties in
certain agreements. The nature and terms of these indemnities
vary by transaction. Historically, we have not incurred
significant costs related to performance under these types of
indemnities.

We do not have transactions, arrangements or
relationships with special purpose entities, and we
do not have any off-balance sheet debt.

CONTRACTUAL
OBLIGATIONS

The following table discloses aggregate
information about our contractual obligations and the periods in
which payments are due:

|                                      |                                    |           |        |                        |  |           |        |           |        |            |        |        |        |  | 
|------------------------------------- | ---------------------------------- | --------- | ------ | ---------------------- |  | --------- | ------ | --------- | ------ | ---------- | ------ | ------ | ------ |  | 
|                                      |                                    |           |        |                        |  |          
|                                      |                                    |           |        | Payments Due by Period |  |          
|                                     
|                                     
|                                     
|                                      |                                    | Less than |        |                       
|                                      |                                    | Total     |        | 1 year                 |  | 2005-2007 |        | 2008-2010 |        | After 2010 |        |       
|                                     
|                                     
|                                     
|Debt maturing within 1 year           |                                    | $         | 1,637  |                        |  | $1,637    |        | $        |        | $         |        | $     |        | 
|Long-term debt(1)                     |                                    |           | 13,742 |                        |  | 1,897     |        | 3,314     |        | 1,990      |        | 6,541  |        | 
|Operating leases                      |                                    |           | 988    |                        |  | 160       |        | 363       |        | 210        |        | 255    |        | 
|Unconditional purchase obligations(2) |                                    |           | 3,563  |                        |  | 807       |        | 2,156     |        | 600        |        |       |        | 
|Interest rate swaps(3)                |                                    |           | 77     |                        |  | 38        |        | 31        |        | 8          |        |       |        | 
|                                     
|                                      | Total contractual cash obligations |           | $      | 20,007                 |  |           | $4,539 |           | $5,864 |            | $2,808 |        | $6,796 |  | 
|                                     



|    |  |                                                                                                                                                                                                                                                                                                                                                                         
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) |  | The long-term debt amount above excludes
    $(116) of unamortized discounts and premiums included in
    long-term debt on the balance sheet as of December 31,
    2003. Payments after the year 2010 include the final principal
    amount of $500 for the Zero-to-Full Debentures due in 2095,
    which have a carrying value of $217 as of December 31,
    2003.
|(2) |  | The total unconditional purchase obligation
    includes $323 related to agreements with Qwest and Accenture
    that do not stipulate annual minimum purchases. The agreement
    with Qwest expires in 2006 and the Accenture agreement expires
    in 2007. These amounts are included in the 2005 - 2007
    column.                                                
|(3) |  | The amounts due for the interest rate swaps
    and forward contracts are based on market valuations at
    December 31, 2003. Actual payments, if any, may differ at
    settlement date.                                                                                                                                                                              

Pensions and other retiree
benefits

As of December 31, 2003, our defined benefit
pension plans were fully funded. Therefore, we do not currently
anticipate any cash funding needs to meet minimum required
funding thresholds. Other retiree benefits, primarily health and
life benefits, are generally funded to cover current year
claims. Over the past three years, funding for other retiree
benefits was $425 in 2001, $493 in 2002, and $563 in 2003. We
anticipate funding in 2004 to be in the range of $475 to $525.



44 BELLSOUTH
2003




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##### Table of Contents







OTHER POTENTIAL
OBLIGATIONS

Debt put options

Several issues of long-term debt included in the
table above contain embedded options which may require us to
repurchase the debt or which alter the interest rate associated
with that debt. Please refer to Note H to our consolidated
financial statements for further information on these
instruments. Those issues, their amounts and the date of the
related options, are as follows:

|                     |            |        |     |                    |           |  | 
|-------------------- | ---------- | ------ | --- | ------------------ | --------- |  | 
|Issue                |            | Amount |     | Date of Put Option |           | 
|                    
|                    
|                    
|20-put-1 Securities  |            | $1,000 |     | Annually in April  |           | 
|Extendible Liquidity |            |        |     |                    |           | 
|                     | Securities |        | 745 |                    | Quarterly |  | 
|Putable debentures   |            | 281    |     | November 2006      |           | 

Venezuelan put-call
provision

We own a 78.2% interest in Telcel, our Venezuelan
operation. Telcels other major shareholder holds an
indirect 21% interest in Telcel. Under a Stock Purchase
Agreement, that shareholder has the right to initiate a process
that could require us to purchase (the puts), and we have the
right to initiate a process that could require that shareholder
to sell (the calls) to us, the shareholders interest in
Telcel. Notice of the initiation of the process with respect to
approximately half of that shareholders interest was to be
given in 2000 and notice with respect to the remaining balance
was to be given in 2002. If we exercise our call right, we would
purchase that shareholders interest at between 100% and
120% of its appraised fair value. If we are required to purchase
the interest, we would do so at between 80% and 100% of its
appraised fair value.

In 2000, the shareholder initiated a process for
appraising the value of approximately half of its interest in
Telcel, but the process was not completed. The shareholder also
has sent a letter purporting to exercise the balance of the puts
under the Stock Purchase Agreement. We are currently in
arbitration with the shareholder over alleged breaches by
BellSouth and the shareholder of the Stock Purchase Agreement,
including the timing of the valuation and whether the process
was properly initiated in 2000. The arbitration does not
directly involve the valuation of the balance of the puts. The
shareholder is seeking damages and specific performance, and
BellSouth is seeking, among other things, unspecified damages
and a ruling that it has not breached the Stock Purchase
Agreement in any respect. The arbitration also related to an
alleged oral agreement to buy out the shareholders entire
interest in Telcel, which we argue does not exist. The first
stage of the hearing on these matters occurred in early 2004,
with additional hearings scheduled for the second quarter of
2004. If the arbitration panel rules against BellSouth, it is
possible that the appraised fair value of the shareholders
interest in Telcel could be substantially in excess of current
value. At this time, the likely outcome of this arbitration
cannot be predicted, nor can a reasonable estimate of the amount
of loss, if any, be made.


Colombian put-call
provision

We own approximately 66% of BellSouth Colombia.
Our principal partner holds approximately 34%. We have agreed
with our partner to a series of related put and call agreements
where by we can acquire, or could be compelled by our partner to
acquire, additional shares of the Colombian operation currently
held by our partner for a price equal to the appraised fair
value. During the first put/call period, we have the right, but
not the obligation, to call and our partner has the right, but
not the obligation, to put to us approximately one-third of our
partners holding in the Colombian operation. In February
2004, we exercised our call right with respect to the first
put/call provision. As a result, we agreed to purchase 11.6% of
the Colombian operation from our partner. The purchase price for
the additional interest is $32 and will be funded from cash on
hand. Under a second put/call option, the remaining balances of
our partners shares (100% of the partners shares if
the first put/call expires unexercised) can be called by us or
put to us beginning in 2006 until 2009. We cannot predict if
either party will exercise its rights under the second put/call
option provision.

RELATED PARTY
TRANSACTIONS

We own an approximate 40% interest in Cingular.
We generated revenues of approximately $426 in 2003, $386 in
2002, and $304 in 2001 from the provision of local interconnect,
long distance and complex business services to Cingular and
agent commissions for selling wireless services for Cingular. We
also earned $256 in 2003, $284 in 2002, and $287 in 2001 from
interest income on advances to Cingular.

In addition, we have receivables and payables
incurred in the ordinary course of business recorded in our
balance sheets as follows:


|                         |  |      |     |      |  |  |     | 
|------------------------ |  | ---- | --- | ---- |  |  | --- | 
|                        
|As of December 31,       | 
|                        
|                        
|                        
|                         |  | 2002 |     | 2003
|                        
|                        
|                        
|Receivable from Cingular |  |      | $49 |      |  |  | $57 | 
|Payable to Cingular      |  |      | $23 |      |  |  | $33 | 
|                        




Quantitative and Qualitative Disclosure
About Market Risk

DESCRIPTION OF
RISK

We are exposed to various types of market risk in
the normal course of business, including the impact of interest
rate changes, changes in equity investment prices and foreign
currency exchange rate fluctuations. To manage this exposure, we
employ risk management strategies including the use of
derivatives such as interest rate swap agreements, foreign
currency forwards and currency swap



BELLSOUTH
2003      45




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##### Table of Contents



MANAGEMENTS DISCUSSION
AND ANALYSIS OF 
 FINANCIAL CONDITION AND RESULTS OF
OPERATIONS CONTINUED


BELLSOUTH CORPORATION

agreements. We do not hold derivatives for
trading purposes.

Interest rate risk

Our objective in managing interest rate risk is
to maintain a balance of fixed and variable rate debt that will
lower our overall borrowing costs within reasonable risk
parameters. Interest rate swaps are used to convert a portion of
our debt portfolio from a variable rate to a fixed rate or from
a fixed rate to a variable rate.

Foreign currency
translation

The functional currency for most of our foreign
operations is the local currency. The translation of income
statement and balance sheet amounts of these entities into US
Dollars gives rise to cumulative translation adjustments, which
are included in accumulated other comprehensive income
(loss) in our consolidated statements of shareholders
equity and comprehensive income. We have not hedged our
accounting translation exposure to foreign currency fluctuations
relative to these investments.

Foreign exchange
risk

Our objective in managing foreign exchange risk
is to protect against cash flow and earnings volatility
resulting from changes in foreign exchange rates. Short-term
foreign currency transactions and commitments expose us to
changes in foreign exchange rates. We occasionally enter into
forward contracts and similar instruments to mitigate the
potential impacts of such risks. The success of these
strategies, however, depends on many factors and, as a result,
such hedging may be ineffective.

Several of our foreign operations hold
US Dollar denominated debt and recognize foreign
currency gains or losses based on movements in the exchange rate
between the US Dollar and local currencies. The amount of US
Dollardenominated debt for consolidated entities at
November 30, 2003, is $1,489. See Operating
Environment  Foreign Risks.


There are currently currency restrictions in
place in Venezuela that limit our ability to physically convert
local currency to US Dollars. In preparing our consolidated
financial statements, we used the exchange rate established by
the Venezuelan government of 1,600 Bolivars to the US Dollar to
translate the local currency financial statements into our
reporting currency, the US Dollar. During February 2004, the
official exchange rate was adjusted by the government to
1,920 Bolivars to the US Dollar, but the currency exchange
restrictions were not lifted. This devaluation will result in a
reduction to revenues and net income of our Venezuelan operation
beginning in the first quarter of 2004.


In the event the currency restrictions are deemed
other-than-temporary, we would be required under generally
accepted accounting principles to cease consolidation of this
operation and would reflect the investment using the cost method
of accounting. Under the cost method, the financial results of
this operation would not be included in our income statement.
See Note P to our consolidated financial statements.


Risk sensitivity

Our use of derivative financial instruments is
designed to mitigate foreign currency and interest rate risks,
although to some extent they expose us to credit risks. The
credit risks associated with these instruments are controlled
through the evaluation and continual monitoring of the
creditworthiness of the counter parties. In the event that a
counter party fails to meet the terms of a contract or
agreement, our exposure is limited to the current value at that
time of the currency rate or interest rate differential and not
the full notional or contract amount. Such contracts and
agreements have been executed with credit worthy financial
institutions, and as such, we consider the risk of
nonperformance to be remote.

The following table provides information, by
maturity date, about our interest rate sensitive financial
instruments, which consist of fixed and variable rate debt
obligations and, other than indicated below, includes the debt
of our consolidated Latin America operations. Fair values for
the majority of our long-term debt obligations are based on
quotes from dealers.

|               |                    |                       |   |            |      |            |  |      |      |      |  |            |      |       |  |      |      |            |  |       |      |   |  |       |      |   |   |        |      |   |   |        |  |  |  |    |   |  |   |        |  | 
|-------------- | ------------------ | --------------------- | - | ---------- | ---- | ---------- |  | ---- | ---- | ---- |  | ---------- | ---- | ----- |  | ---- | ---- | ---------- |  | ----- | ---- | - |  | ----- | ---- | - | - | ------ | ---- | - | - | ------ |  |  |  | -- | - |  | - | ------ |  | 
|               |                    |                      
|Maturity Dates |                    | Fair Value           
|               |                    |                      
|               |                    | Total Book            |   | Underlying |      | Associated |  |     
|               |                    | 2004                  |   | 2005       |      | 2006       |  | 2007 |      | 2008 |  | Thereafter |      | Value |  | Debt |      | Derivative |  | Total
|               |                    |                      
|               |                    |                      
|               |                    |                      
|Debt:(1)       |                    |                       |   |            |      |            |  |      |      |      |  |            |      |       |  |      |      |            |  |       |      |   |  |       |      |   |   |        |      |   |   |        |  |  |  |    |   |  |   |       
|               | Fixed rate debt    |                       | $ | 1,261      |      |            |  | 501  |      |      |  | 1,310      |      |       |  | 25   |      |            |  | 629   |      |   |  | 7,549 |      |   | $ | 11,275 |      |   | $ | 12,189 |  |  |  | (5 | ) |  | $ | 12,184 | 
|               |                    | Average interest rate |   |            | 4.55 | %          |  |      | 6.65 | %    |  |            | 5.25 | %     |  |      | 6.33 | %          |  |       | 5.78 | % |  |       | 6.92 | % |   |        | 6.39 | % |   |        |  |  |  |    |   |  |   |        |  | 
|               | Variable rate debt |                       | $ | 1,785      |      |            |  | 440  |      |      |  | 1,035      |      |       |  |     |      |            |  |      |      |   |  |      |      |   | $ | 3,260  |      |   | $ | 3,673  |  |  |  | 80 |   |  | $ | 3,753  | 
|               |                    | Average interest rate |   |            | 1.52 | %          |  |      | 4.49 | %    |  |            | 2.64 | %     |  |      |     |            |  |       |     |   |  |       |     |   |   |        | 2.28 | % |   |        |  |  |  |    |   |  |   |        |  | 
|              

|    |  |                                                                                                                                                       
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) |  | CRM, our subsidiary in Argentina, is in
    default on $490 of its US Dollar-denominated debt;
    therefore we have excluded the debt from the table.

PROPORTIONAL
DEBT

Our consolidated debt at December 31, 2003
was $14,980, which represented the debt of all consolidated
subsidiaries. We have minority partners in various consolidated
wireless properties as well as significant investments in other
wireless properties that are not consolidated for accounting pur-



46 BELLSOUTH
2003




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##### Table of Contents







poses due to the fact that we do not exercise
control over those operations. The following table presents our
proportionate share of total debt for all of our
investments  adjusting our share of debt in each of
our consolidated subsidiaries or equity method investments based
on ownership percentages.

|                                                                                        |  |   |        |   |  | 
|--------------------------------------------------------------------------------------- |  | - | ------ | - |  | 
|                                                                                       
|Consolidated debt                                                                       |  | $ | 14,980 |   |  | 
|Less: debt attributable to minority partners                                            |  |   | (129   | ) |  | 
|Plus: debt associated with unconsolidated
    investments (excluding shareholder loans) |  |   | 1,682  |   |  | 
|Proportional debt                                                                       |  | $ | 16,533 |   |  | 
|                                                                                       

Debt attributable to minority partners represents
our minority partners share of external debt included in
our consolidated balance sheet at December 31, 2003. Debt
associated with unconsolidated investments relates primarily to
our interest in Cingular. This is non-recourse debt.




Operating Environment

DOMESTIC ECONOMIC
TRENDS

On average, the economy of the nine-state region
tends to closely track the US economy. Real gross domestic
product (GDP) grew at an average annual rate of
2 percent in the first quarter of 2003, 3.1 percent in
the second quarter, and 8.2 percent in the third quarter.
The improvement in the economy was widespread, with business
fixed investment spending, government purchases, personal
consumption, and exports all registering strong gains.
Nonagricultural employment increased in the second half of 2003,
but at a very slow pace, and the unemployment rate was at a
relatively high 5.7 percent at the end of the year. The
economys momentum is expected to carry over into 2004 with
GDP growth near 4.5 percent. Employment gains are expected
to reduce the unemployment rate to near 5.2 percent by the
end of 2004.

We believe real personal income in the nine-state
region grew near 2.5 percent in 2003. Growth is expected to
accelerate to 4.5 percent in 2004. Employment in the
region, which has been closely correlated with various measures
of BellSouths business performance in the past, increased
0.4 percent in 2003. A gain of 1.7 percent is
anticipated for 2004. With housing starts exceeding 500,000,
residential construction activity was strong in the region and
in the nation in 2003. A strong pace is projected for 2004 as
well.


Historically, our business has generally followed
the timing of the cycle in the overall economy. However, given
the issues impacting our industry, expected improvements to the
economy during 2004 may not have as pronounced an impact on our
business.


REGULATORY
DEVELOPMENTS

The FCC regulates rates and other aspects of
carriers provision of interstate (across states)
telecommunications services while state regulatory commissions
have jurisdiction over carriers provision of intrastate
(within states) telecommunications services. Our future
operations and financial results will be substantially
influenced by developments in a number of federal and state
regulatory proceedings. Adverse results in these proceedings
could materially affect our revenues, expenses and ability to
compete effectively against other telecommunications carriers.

Price regulation

The FCC regulates interstate prices using a price
regulation plan, which limits aggregate price changes to the
rate of inflation, minus a productivity offset, plus or minus
other cost changes recognized by the FCC. The productivity
factor can vary among services. Interstate prices have been
decreasing over the last few years as a result of low inflation
in the US economy.

Our intrastate prices are regulated under price
regulation plans provided by statute or approved by state public
service commissions. Under these plans, the state regulatory
commissions or state legislatures have established maximum
prices that can be charged for certain telecommunication
services. While such plans limit the amount of increases in
prices for specified services, they enhance our ability to
adjust prices and service options to respond more effectively to
changing market conditions and competition. Price regulation
also provides an opportunity to benefit more fully from
productivity enhancements. The majority of these plans have
limitations on raising prices for basic local exchange services
during the early years with provisions for inflation-based price
increases in later years.


While some plans are not subject to either review
or renewal, other plans contain specified termination dates
and/or review periods. Upon review or renewal, a regulatory
commission could attempt to require substantial modifications to
prices and other terms of these plans. During 2003, our plan in
Louisiana was renewed. A review of our Kentucky plan is pending.
We also expect reviews of our plans in Alabama, Mississippi and
North Carolina during 2004.


Beginning in 1996, we operated under a price
regulation plan approved by the South Carolina Public Service
Commission (PSC) 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 state statute, adopted subsequent to the PSC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 PSC. The election became
effective during August 1999. The South Carolina Consumer
Advocate petitioned the PSC seeking review of the level of our
earnings during the 1996-1998 period when we operated under the
subsequently invalidated price regulation plan. The PSC
dismissed 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 PSCs dismissal of the
petition. In January 2004, the court hearing the appeal




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MANAGEMENTS DISCUSSION
AND ANALYSIS OF 
 FINANCIAL CONDITION AND RESULTS OF
OPERATIONS CONTINUED


BELLSOUTH CORPORATION

affirmed the PSCs decision. An appeal of
this decision to the South Carolina Supreme Court is probable.
If the Consumer Advocate eventually prevails, the case could be
remanded to the PSC, which could, after considering evidence,
order refunds to customers in South Carolina, which in the
aggregate may be material to the company. At this time, we are
unable to predict the outcome of this possible appeal and,
therefore, cannot determine the impact, if any, this matter may
have on future earnings.

Access charge reform

The FCC has favored access reform, through which
the historical subsidy for residential local service contained
in network access charges paid by long distance carriers is
funded instead by the end-user, by universal service funds, or
both. As a result of a May 2000, FCC order implementing access
reform, we have reduced the interstate network access charges
paid by long distance carriers and increased interstate
subscriber line charges paid by end-users. These rate changes
better align our cost recovery with the way in which we incur
costs.

We continue to participate in FCC examinations of
further access reform. The FCC has undertaken a comprehensive
examination of intercarrier compensation  the
payments among telecommunications carriers resulting from use of
their respective interconnecting networks. In general, there are
two classes of intercarrier compensation: (1) reciprocal
compensation that applies to local calls; and (2) access
charges that apply to long distance calls. The objective of the
FCCs comprehensive examination is to examine existing
rules pertaining to intercarrier compensation and explore
alternative forms of intercarrier compensation. This examination
could lead to permanent changes in the way carriers compensate
one another and in the way carriers receive compensation from
their end-user customer. One alternative under consideration is
bill and keep, a policy that requires carriers to
exchange traffic freely with each other and to recover from
end-user customers the costs of transmitting traffic. Either in
this proceeding or in a separate proceeding, the FCC will
reconsider its methodology and rates for reciprocal compensation.


There are other aspects of access charges and
universal fund contribution requirements that continue to be
considered by state and federal commissions that could result in
greater expense levels or reduced revenues.


Universal service

Historically, network access charges paid by
other carriers were set at levels that subsidized the cost of
providing local residential service. The Telecommunications Act
of 1996 requires that the FCC identify and remove the historical
implicit local service subsidy from network access rates,
arrange for a universal service fund to ensure the continuation
of service to high-cost, low-income service areas and develop
the arrangements for payments into that fund by all carriers.
The FCCs universal service order established funding
mechanisms for high-cost and low-income service areas. We began
contributing to the new funds in 1998 and are recovering our
contributions through increased interstate charges to retail
end-users. We are receiving support for service to residents in
Alabama, Kentucky and Mississippi.

FCC interconnection
order

Under the Telecommunications Act of 1996, the FCC
is obliged to consider the extent to which we must make elements
of our network available to other providers of local service.
The FCC can require access to proprietary network elements only
when necessary. For non-proprietary elements, the FCC can order
access only when failure to do so will impair the ability of the
requesting carrier to provide services.

The FCC issued its most recent set of rules
governing the provision of elements with local competitors in
August 2003. The order establishing the rules is referred to as
the Triennial Review Order. The previous two sets of rules were
vacated by the courts. The most recent set of rules generally
presume that carriers will be impaired without access to our
unbundled switching when the competitor is serving a mass market
customer. The new rules assume that competitors will not be
impaired without such access if they are serving medium to large
business customers. The rules make other presumptions about our
transport and high capacity loop elements. These presumptions
are subject to proceedings that the FCC has delegated to the
state commissions. Under the new rules, the states are required
to conduct proceedings, all of which are to be completed by
July 2, 2004, and to determine the elements that the
carriers subject to the rules will have to provide, and to
specify the markets in which they will be provided.


The FCCs order establishing the rules has
been appealed and is pending before the DC Circuit Court of
Appeals. Some carriers, including BellSouth, have challenged the
Triennial Review Order as requiring too much unbundling of their
networks and delegating authority to the states that should be
exercised by the FCC. Other carriers, mostly new entrants since
the 1996 Act, have appealed the rules, contending that they
provide too little unbundling of our network. State commissions
have also challenged the order as being an illegal restriction
on their powers. Argument in the case occurred in late January,
and we expect a decision during the first half of 2004. While
the appeal is pending, we continue to participate in the state
proceedings required by the rule.


In addition, we asked the FCC to reconsider
certain different portions of its Triennial Review Order related
to the regulation of broadband facilities. We asked the FCC to
expand the unbundling freedom its Order provides to some
broadband facilities. Other parties have sought reconsideration
of many other portions of the Order.


If the appeal, reconsideration or state decisions
require us to increase the number or scope of elements we must




48 BELLSOUTH
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##### Table of Contents







provide, or if the appeal, reconsideration or
state decisions allow competitors greater ability to substitute
unbundled elements for special access services, or contain other
negative decisions, we could experience a material adverse
effect on revenues and results of operation.

Other state regulatory
matters

In each of our states, we are subject to
performance measurement plans that measure our service
performance to competitors against certain benchmarks and our
own retail performance. When we do not meet the relevant
standards, we make payments to the competitors or the
States treasury. In some states, if we continuously fail
to meet certain criteria, we also would suspend our marketing
and sale of long distance services. We made payments in all
states in 2002 and 2003, and likely will make payments in 2004.
The plans are reviewed regularly for necessary changes.

We are involved in numerous legal proceedings
associated with state and federal regulatory matters, the
disposition of which could materially impact our operating
results and prospects. See Note Q to our consolidated
financial statements.


PENSION AND RETIREE MEDICAL
COSTS

In 2003 equity markets rebounded from recent
declines, resulting in improvements to the funded status of our
pension and other postretirement benefit plans which will
translate into lower expense in 2004. Expense related to retiree
medical costs in 2004 will also benefit from the impact of the
Medicare Prescription Drug, Improvement and Modernization Act of
2003 (the Act). BellSouth remeasured its obligation as of
December 1, 2003 to incorporate the impact of the Act which
resulted in a reduction to the accumulated benefit obligation of
$572. Specific authoritative guidance on the accounting for the
federal Medicare subsidy is pending and that guidance, when
issued, could require BellSouth to change its estimated impact
on 2004 results.

Our current contract with non-management
employees expires in August 2004. Retirement benefits are
collectively bargained for as part of the overall contract with
the union. In accordance with the provisions of SFAS
No. 106, we account for non-management employee retirement
benefits based on the terms of the contract. The impacts of
future negotiations, including changes in benefit levels, could
have a material impact on our financial results.


LATIN AMERICA ECONOMIC
TRENDS

Economic conditions improved in much, but not
all, of Latin America during 2003. Argentinas economy
began to recover after four years of contraction, with the
economic data available at the end of the year implying that
real GDP grew 7 to 8 percent during 2003. The recovery is
fragile, however, and the risk of instability in 2004 is
significant.

Aided by stronger exports, real GDP growth in
Chile, Peru, and Colombia is projected to have been better than
3 percent in 2003. If the global economy improves as
expected, stronger gains are possible for 2004. The short-term
risks of political uncertainty and guerilla violence are likely
to remain high in Colombia.


Economic indicators show a mixed economic
performance for the remaining countries in which we have
operations. Central American economies grew 2 to
2.5 percent in 2003. The economies of Ecuador and Uruguay
showed little, if any, improvement in 2003. With a stronger
global economy, prospects for growth are better in 2004.


Venezuelas economy contracted sharply in
2003 as a result of the countrys ongoing political crisis.
A recovery is expected to be underway in 2004, but there is no
end to the political crisis in sight and the recovery is at risk.


In the Latin America Group companies, our overall
penetration of wireless services is 6.0%. As we increase
penetration into lower socio-economic groups, revenue per
customer declines. We are responding to these trends by seeking
new sources of revenue growth and by attempting to increase the
profitability of customers from lower socio-economic groups.


FOREIGN RISKS

Our reporting currency is the US Dollar. However,
most of our Latin America Group revenues are generated in the
currencies of the countries in which we operate. In addition,
many of our operations and equity investees hold US
Dollar-denominated short- and long-term debt. The currencies of
many Latin America countries have experienced substantial
volatility and depreciation. Declines in the value of the local
currencies in which we are paid relative to the US Dollar will
cause local currency-denominated revenues and expenses to
decrease in US Dollar terms and dollar-denominated assets and
liabilities, as well as interest expense, to increase in local
currency terms. 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 a 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. Where our local operations have
borrowed in US Dollars, a significant devaluation substantially
increases the costs in the local currency, in which our
operations generally earn revenues, of servicing and repaying
such loans in dollars. Due to our constantly changing currency
exposure and the potential substantial volatility of currency
exchange rates, we cannot quantify the anticipated effect of
exchange rate fluctuations on our business.




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2003      49




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MANAGEMENTS DISCUSSION
AND ANALYSIS OF 
 FINANCIAL CONDITION AND RESULTS OF
OPERATIONS CONTINUED


BELLSOUTH CORPORATION

Economic, social and political conditions in
Latin America are, in some countries, unfavorable and volatile,
which have adversely affected our operations. Many of these
conditions continued to exist at the end of 2003, particularly
in Venezuela. However, economic conditions began to improve in
much of Latin America in 2003. In particular, Argentinas
currency rebounded 16% by the end of 2003 and several countries
in the region are projected to have had modest GDP growth for
2003. Nonetheless, there are still significant economic risks in
2004.

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.


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


For a discussion of certain of the factors that
are currently affecting our operations in Latin America, see
Operating Environment  Latin America Economic
Trends.


COMPETITION

There are many competitive forces that impact our
businesses. The Telecommunications Act of 1996 removed the
regulatory barriers to local service competition in the wireline
market and required incumbent carriers such as us to open our
networks to other carriers. In the wireless market, the auction
of PCS licenses has created as many as six new wireless
competitors in domestic markets in addition to resellers, and
the deregulation of international communications markets has
introduced new global competitors to nearly all of our
international businesses.

Competitors primarily utilize our local network
under two methods: resale and through the use of UNE platform.
Lines provided on a resale basis include all of the components
necessary for a wholesale customer to provide complete service
delivery to an end-user. UNEs represent components of our
network that wholesale customers may combine with components of
their own networks, or with other UNEs purchased from us
(referred to as a UNE platform or UNE-P) to allow complete
service delivery to an end-user. Wholesale UNE prices are based
on a forward-looking cost model and the premise of a most
efficient, least cost network design. Because the pricing is not
based on actual cost, certain costs that exist in todays
network are not adequately addressed in the calculations. The
impact of competitors use of UNEs and the UNE platform on
us is two-fold in that it results in lower revenue per access
line and has a detrimental impact on our margins as we retain
the actual level of costs to maintain and to service the access
line. The impact is amplified due to the competitors
fashioning service bundles that target high revenue customers.
Under the legacy framework of state PSC-mandated subsidies,
business rates are artificially higher in order to subsidize
lower residence and rural rates. In addition, revenues from
non-UNE sources such as switching and calling features as well
as complimentary services such as inside wire maintenance,
operator services and directory assistance, are lost to UNE-P
provisioned lines.


The presence of six national competitors in the
domestic wireless market makes it more difficult for Cingular to
attract new customers and retain existing ones. Furthermore,
while Cingular does not compete solely on the basis of price,
low prices offered by competitors attempting to obtain market
share have pressured them to reduce prices and develop pricing
plans attractive to lower usage customers. These trends are
expected to continue and could adversely affect our results of
operations in the future. BellSouths Latin America
business has three major regional competitors 
America Movil, Telefonica Moviles and Telecom Italia Mobile. It
is likely that these three major players will increase their
share by acquisition.


We plan to compete through aggressive marketing,
competitive pricing, bundled services and technical innovation.
We will offer consumers a full range of services-local, long
distance, Internet access, wireless and more-while remaining
committed to our high level of customer service and value.


TECHNOLOGY

We are continually upgrading our networks with
digital and optical technologies, making them capable of
delivering a full complement of voice and data services. This
modernization of the network is critical to our success in
providing the data connectivity demanded by customers and to
compete with fiber networks being constructed or currently
utilized by start-ups and cable companies. This continuing
effort will require investment of significant amounts of capital
in the future.

Digital wireless technology is rapidly evolving
and the development of a common roaming platform for digital
wireless technologies could result in more intense competition
and have an adverse effect on our results of operations.


LEGAL MATTERS

We are involved in numerous legal proceedings
associated with state and federal regulatory matters, the
disposition of which could materially impact our operating
results and prospects. See Note Q to our consolidated
financial statements.

NEW ACCOUNTING
PRONOUNCEMENTS

See Note B to our consolidated financial
statements for new accounting pronouncements.



50 BELLSOUTH
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Critical Accounting Policies

We consider an accounting estimate to be critical
if: (1) the accounting estimate requires us to make
assumptions about matters that were highly uncertain at the time
the accounting estimate was made, and (2) changes in the
estimate that are reasonably likely to occur from period to
period, or use of different estimates that we reasonably could
have used, would have a material impact on our financial
condition or results of operations.

Senior management regularly discusses the
development and selection of these critical accounting estimates
with the Audit Committee of our Board of Directors and the Audit
Committee has reviewed the disclosure set forth below.


DEPRECIATION OF PROPERTY,
PLANT AND EQUIPMENT

See Note G to our consolidated financial
statements for more information regarding costs and assumptions
for Property, Plant and Equipment.

Nature of estimates
required

We use the group life method to depreciate the
assets of our telephone subsidiary. Telephone plant acquired in
a given year is grouped into similar categories and depreciated
over the remaining estimated useful life of the group. Due to
rapid changes in technology and new competitors, selecting the
estimated economic life of telecommunications plant and
equipment requires a significant amount of judgment. We
periodically review data on expected utilization of new
equipment, asset retirement activity and net salvage values to
determine adjustments to our depreciation rates. We also utilize
studies performed by outside consultants to assist us in our
determination. We have not made any changes to the lives of
assets resulting in a material impact in the three years
presented.

Sensitivity analysis

The effect of a one year change in the useful
lives of our telephone plant accounts is shown below:

|                                     |  |                           |       |  
|------------------------------------ |  | ------------------------- | ----- | -
|                                     |  | 2004 Depreciation Expense
|                                     |  | Higher/(Lower)           
|                                    
|                                    
|                                    
|Increasing economic life by one year |  |                           | $(250 | )
|Decreasing economic life by one year |  |                           | 350   |  

PENSIONS

See Note K to our consolidated financial
statements for more information regarding costs associated with
employee retirement benefits.

Nature of estimates
required

The measurement of our pension obligations, costs
and liabilities is dependent on a variety of assumptions
including estimates of the present value of projected future
pension payments to plan participants, consideration of the
likelihood of potential future events such as salary increases
and demographic experience. These assumptions may have an effect
on the amount and timing of future contributions, if any.
Additionally, the plan trustee conducts an independent valuation
of the fair value of pension plan assets. During 2002, we
reduced our estimated return on plan assets to 8.5% reflecting
lower expected long-term market returns.

Assumptions and approach
used

The assumptions in developing the required
estimates include the following key factors:



| |   |                               
| | - | ------------------------------
| |  | Discount rates                
| |  | Salary growth                 
| |  | Retirement rates              
| |  | Inflation                     
| |  | Expected return on plan assets
| |  | Mortality rates               

The discount rate enables us to state expected
future cash flows at a present value on the measurement date. We
have little latitude in selecting this rate, as it is required
to represent the market rate for high-quality fixed income
investments. A lower discount rate increases the present value
of benefit obligations. Our inflation assumption is based on an
evaluation of external market indicators. The salary growth
assumptions reflect our long-term actual experience, the
near-term outlook and assumed inflation. The expected return on
plan assets reflects asset allocations, investments strategy and
the views of investment managers and other large pension plan
sponsors. Retirement and mortality rates are based primarily on
actual plan experience. The effects of actual results differing
from our assumptions are accumulated and amortized into the
income statement in future periods.

Sensitivity analysis

The effect of the change in the selected
assumptions is shown below:

|                          |  |              |  |                   |  |               
|------------------------- |  | ------------ |  | ----------------- |  | --------------
|                          |  | Percentage   |  | December 31, 2003 |  |               
|                          |  | Point        |  | Obligation        |  | 2004 Expense  
|Assumption                |  | Change       |  | Higher/(Lower)    |  | Higher/(Lower)
|                         
|                         
|                         
|Discount rate             |  | +/- 0.5 pts. |  | $(452)/$470       |  | $15/$(18)     
|Expected return on assets |  | +/- 1.0 pts. |  |                  |  | (155)/155     



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MANAGEMENTS DISCUSSION
AND ANALYSIS OF 
 FINANCIAL CONDITION AND RESULTS OF
OPERATIONS CONTINUED


BELLSOUTH CORPORATION

OTHER POSTRETIREMENT
BENEFITS

See Note K to our consolidated financial
statements for more information regarding costs associated with
postretirement benefits.

Nature of estimates
required

We provide certain medical, dental and life
insurance benefits to substantially all retired employees under
various plans and accrue actuarially determined postretirement
benefit costs as active employees earn these benefits. For
postretirement benefit plans, the benefit obligation is the
accumulated postretirement benefit obligation, the
actuarial present value as of a date of all future benefits
attributed under the terms of the postretirement benefit plan to
employee service rendered to that date. The measurement of our
obligations associated with postretirement benefits (e.g.,
retiree health care) is dependent on a variety of assumptions.
This includes estimating the present value of projected future
payments to plan participants and consideration of the
likelihood of potential future events such as demographic
experience. These assumptions may have an effect on the amount
and timing of future payments. Additionally, the plan trustee
conducts an independent valuation of the fair value of plan
assets. For the periods presented we have adjusted the discount
rate used to determine the obligation based on declining
interest rates in the market.

Assumptions and approach
used

The assumptions used in developing the required
estimates include the following key factors:



| |   |                               
| | - | ------------------------------
| |  | Discount rates                
| |  | Health care cost trends       
| |  | Retirement rates              
| |  | Inflation                     
| |  | Expected return on plan assets
| |  | Mortality rates               

The discount rate enables us to state expected
future cash flows at a present value on the measurement date. We
have little latitude in selecting this rate, as it is required
to represent the market rate for high-quality fixed income
investments. A lower discount rate increases the present value
of benefit obligations. Our health care cost trend assumptions
are developed based on historical cost data, the near-term
outlook, and an assessment of likely long-term trends. Our
inflation assumption is based on an evaluation of external
market indicators. The expected return on plan assets reflects
asset allocations, investments strategy and the views of
investment managers and other large plan sponsors. Retirement
and mortality rates are based primarily on actual plan
experience. The effects of actual results differing from our
assumptions are accumulated and amortized into the income
statement in future periods.

Sensitivity analysis

The effect of the indicated increase/decrease in
the selected assumptions is shown below:

|                       |  |              |  |                   |  |               
|---------------------- |  | ------------ |  | ----------------- |  | --------------
|                       |  | Percentage   |  | December 31, 2003 |  |               
|                       |  | Point        |  | Obligation        |  | 2004 Expense  
|Assumption             |  | Change       |  | Higher/(Lower)    |  | Higher/(Lower)
|                      
|                      
|                      
|Discount rate          |  | +/- 0.5 pts. |  | $(362)/$384       |  | $(20)/$18     
|Health care cost trend |  | +/- 1.0 pts. |  | 487/(411)         |  | 70/(58)       

OTHER LOSS
CONTINGENCIES

Other loss contingencies are recorded as
liabilities when it is probable that a liability has been
incurred and the amount of the loss is reasonably estimable.
Disclosure is required when there is a reasonable possibility
that the ultimate loss will exceed the recorded provision.
Contingent liabilities are often resolved over long time
periods. Estimating probable losses requires analysis of
multiple forecasts that often depend on judgments about
potential actions by third parties such as regulators.

OTHER SIGNIFICANT
ACCOUNTING POLICIES

Other significant accounting polices, not
involving the same level of measurement uncertainties as those
discussed above, are nevertheless important to an understanding
of the financial statements. Policies related to revenue
recognition, stock-based compensation, uncollectible reserves
and tax valuation allowances require difficult judgments on
complex matters that are often subject to multiple sources of
authoritative guidance. Certain of these matters are among
topics currently under re-examination by accounting standard
setters and regulators. Although no specific conclusions reached
by these standard setters appear likely to cause a material
change in our accounting policies, outcomes cannot be predicted
with confidence. Also see Note A to our consolidated
financial statements, which discusses accounting policies that
we have selected from acceptable alternatives.




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-




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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, in addition to those contained
throughout this document, 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 could affect demand for our services;                                                                                                                                 
| |  | changes in US 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 pressures on the telecommunications
    industry from a financial, competitive and regulatory
    perspective;                                                                                                                                                                               
| |  | the intensity of competitive activity and its
    resulting impact on pricing strategies and new product offerings;                                                                                                                                                                                    
| |  | changes in the federal and state regulations
    governing the terms on which we offer wholesale services to our
    competitors;                                                                                                                                                                      
| |  | continued successful penetration of the interLATA
    long distance market;                                                                                                                                                                                                                            
| |  | the unwillingness of banks or other lenders to
    lend to our international operations or to restructure existing
    debt, particularly in Latin America;                                                                                                                                            
| |  | consolidation in the wireline and wireless
    industries in which we operate;                                                                                                                                                                                                                         
| |  | 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;                                                                                                                                                                                                      
| |  | continued deterioration in foreign currencies
    relative to the US Dollar in foreign countries in which we
    operate, particularly in Latin America;                                                                                                                                               
| |  | the impact of terrorist attacks on our business;                                                                                                                                                                                                                                                       
| |  | the impact and the success of the wireless joint
    venture with SBC, known as Cingular Wireless, including
    marketing and product development efforts, technological change,
    financial capacity and closing and integration of the pending
    acquisition of AT&T Wireless; and              
| |  | Cingular Wireless failure to realize, in
    the amounts and within the timeframe contemplated, the capital
    and expense synergies and other financial benefits expected from
    its proposed acquisition of AT&T Wireless as a result of
    technical, logistical, regulatory and other factors.



BELLSOUTH
2003      53




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##### Table of Contents






REPORT OF MANAGEMENT


BELLSOUTH CORPORATION

To the Shareholders of BellSouth Corporation:

These financial statements have been prepared in
conformity with generally accepted accounting principles and
have been audited by PricewaterhouseCoopers LLP, independent
auditors, whose report is contained herein. The integrity and
objectivity of the data in these financial statements, including
estimates and judgments relating to matters not concluded by the
end of the year, are the responsibility of the management of
BellSouth. Management has also prepared all other information
included therein unless indicated otherwise.

Management maintains a system of internal
controls over financial reporting, which is continuously
reviewed and evaluated. However, there are inherent limitations
that should be recognized in considering the assurances provided
by any system of internal controls. The concept of reasonable
assurance recognizes that the cost of a system of internal
controls should not exceed, in managements judgment, the
benefits to be derived. Management believes that
BellSouths system does provide reasonable assurance that
the transactions are executed in accordance with
managements general or specific authorizations and are
recorded properly to maintain accountability for assets and to
permit the preparation of financial statements in conformity
with generally accepted accounting principles. Management also
believes that this system provides reasonable assurance that
access to assets is permitted only in accordance with
managements authorizations, that the recorded
accountability for assets is compared with the existing assets
at reasonable intervals and that appropriate action is taken
with respect to any differences. Management also seeks to assure
the objectivity and integrity of its financial data by the
careful selection of its managers, by organizational
arrangements that provide an appropriate division of
responsibility and by communications programs aimed at assuring
that its policies, standards and managerial authorities are
understood throughout the organization. Management is also aware
that changes in operating strategy and organizational structure
can give rise to disruptions in internal controls. Special
attention is given to controls while the changes are being
implemented.


Management maintains a strong internal auditing
program that independently assesses the effectiveness of the
internal controls and recommends possible improvements thereto.
In addition, as part of its audit of these financial statements,
PricewaterhouseCoopers LLP completed a review of the internal
controls over financial reporting to establish a basis for
reliance thereon in determining the nature, timing and extent of
audit tests to be applied. Management has considered the
recommendations of the internal auditor and
PricewaterhouseCoopers LLP concerning the system of internal
controls and has taken actions that it believes are
cost-effective in the circumstances to respond appropriately to
these recommendations.


Management believes that the system of internal
controls was adequate to accomplish the objectives discussed
herein.


Management also recognizes its responsibility for
fostering a strong ethical climate so that BellSouths
affairs are conducted according to the highest standards of
personal and corporate conduct and in compliance with applicable
laws and regulations. This responsibility is communicated to all
employees through policies and guidelines addressing such issues
as conflict of interest, safeguarding of BellSouths real
and intellectual properties, providing equal employment
opportunities and ethical relations with customers, suppliers
and governmental representatives. BellSouth maintains a variety
of comprehensive programs to assess compliance with these
policies and our ethical standards through its Senior Vice
President  Corporate Compliance and Corporate
Secretary.


-s- F. Duane Ackerman

F. Duane Ackerman


CHAIRMAN OF THE BOARD, PRESIDENT AND


CHIEF EXECUTIVE OFFICER


-s- Ronald M. Dykes

Ronald M. Dykes


CHIEF FINANCIAL OFFICER


February 23, 2004



54 BELLSOUTH
2003




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##### Table of Contents



REPORT OF INDEPENDENT
AUDITORS


BELLSOUTH CORPORATION






To the Shareholders


BellSouth Corporation


In our opinion, based on our audits and the
report of other auditors, the accompanying consolidated balance
sheets and the related consolidated statements of income, cash
flows and shareholders equity and comprehensive income
present fairly, in all material respects, the financial position
of BellSouth Corporation and its subsidiaries at
December 31, 2003 and 2002, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2003 in conformity with
accounting principles generally accepted in the United State of
America. These financial statements are the responsibility of
the Companys management; our responsibility is to express
an opinion on these financial statements based on our audits. We
did not audit the financial statements of Cingular Wireless,
LLC, an equity method investee. BellSouths consolidated
financial statements include an investment of
$3,618 million and $3,202 million as of
December 31, 2003 and 2002, respectively, and equity method
income of $408 million, $497 million and
$675 million, respectively, for each of the three years in
the period ended December 31, 2003. Those statements were
audited by other auditors whose report thereon has been
furnished to us, and our opinion expressed herein, insofar as it
relates to the amounts included for Cingular Wireless, LLC, is
based solely on the report of the other auditors. We conducted
our audits of these statements in accordance with auditing
standards generally accepted in the United States of America,
which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles
used and significant estimates made by management, and
evaluating the overall financial statement presentation. We
believe that our audits and the report of other auditors provide
a reasonable basis for our opinion.

As discussed in Note C to the consolidated
financial statements, in 2003, BellSouth Corporation adopted
Financial Accounting Standards Board Statement No. 143,
changing its method of accounting for asset retirement costs and
changed its accounting for publication revenues from the
publication and delivery method to the deferral method as of
January 1, 2003. As discussed in Note F to the
consolidated financial statements, the Company adopted Financial
Accounting Standards Board Statement No. 142 and changed
its method of accounting for goodwill and other intangible
assets as of January 1, 2002.


-s- PricewaterhouseCoopers

Atlanta, Georgia


February 9, 2004, except with respect to
Note U, as to which the date is February 17, 2004


REPORT OF INDEPENDENT
AUDITORS

BELLSOUTH CORPORATION

Board of Directors and Shareowners

Cingular Wireless Corporation, Manager of


Cingular Wireless LLC


We have audited the consolidated balance sheets
of Cingular Wireless LLC as of December 31, 2002 and 2003,
and the related consolidated statements of income, changes in
members capital and cash flows for each of the three years
in the period ended December 31, 2003 (not presented
separately herein). These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with
auditing standards generally accepted in the United States.
Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.


In our opinion, the financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of Cingular Wireless LLC at
December 31, 2002 and 2003 and the consolidated results of
its operations and its cash flows for each of the three years in
the period ended December 31, 2003 in conformity with
accounting principles generally accepted in the United States.


As discussed in Note 4 to the financial
statements, in 2002 the Company adopted Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible
Assets.


-s- Ernst & Young

Atlanta, Georgia


February 6, 2004, except for Note 18, as to
which the date is February 17, 2004




BELLSOUTH
2003      55




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##### Table of Contents



CONSOLIDATED STATEMENTS OF
INCOME


BELLSOUTH CORPORATION






|                                                                                            |                                                                                                       |                                  |        |        |        |      |        |        |        |   |       |        |        |  |  | 
|------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------- | -------------------------------- | ------ | ------ | ------ | ---- | ------ | ------ | ------ | - | ----- | ------ | ------ |  |  | 
|                                                                                            |                                                                                                       |                                  |        |       
|                                                                                            |                                                                                                       | For the years ended December 31, |        |       
|                                                                                            |                                                                                                       |                                 
|                                                                                            |                                                                                                       |                                 
|                                                                                            |                                                                                                       |                                 
|(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)                                                     |                                                                                                       | 2001                             |        | 2002   |        | 2003 |        |       
|                                                                                           
|                                                                                           
|                                                                                           
|Operating Revenues:                                                                         |                                                                                                       |                                  |        |        |        |      |        |        |        |   |       |        |        | 
|                                                                                            | Communications Group                                                                                  |                                  | $      | 18,984 |        |      | $      | 18,226 |        |   | $     | 18,255 |        |  | 
|                                                                                            | Latin America Group                                                                                   |                                  |        | 2,910  |        |      |        | 2,233  |        |   |       | 2,294  |        |  | 
|                                                                                            | Advertising and Publishing Group                                                                      |                                  |        | 2,073  |        |      |        | 1,921  |        |   |       | 2,033  |        |  | 
|                                                                                            | All other                                                                                             |                                  |        | 163    |        |      |        | 60     |        |   |       | 53     |        |  | 
|                                                                                           
|                                                                                            |                                                                                                       | Total Operating Revenues         |        |        | 24,130 |      |        |        | 22,440 |   |       |        | 22,635 |  |  | 
|                                                                                           
|Operating Expenses:                                                                         |                                                                                                       |                                  |        |        |        |      |        |        |        |   |       |        |        | 
|                                                                                            | Cost of services and products (excludes
    depreciation
    and amortization shown separately below) |                                  |        | 8,049  |        |      |        | 7,512  |        |   |       | 7,988  |        |  | 
|                                                                                            | Selling, general, and administrative expenses                                                         |                                  |        | 4,803  |        |      |        | 4,542  |        |   |       | 4,353  |        |  | 
|                                                                                            | Depreciation and amortization                                                                         |                                  |        | 4,782  |        |      |        | 4,643  |        |   |       | 4,179  |        |  | 
|                                                                                            | Provisions for restructuring and asset impairments                                                    |                                  |        | 358    |        |      |        | 997    |        |   |       | 209    |        |  | 
|                                                                                           
|                                                                                            |                                                                                                       | Total Operating Expenses         |        |        | 17,992 |      |        |        | 17,694 |   |       |        | 16,729 |  |  | 
|                                                                                           
|Operating income                                                                            |                                                                                                       |                                  | 6,138  |        |        |      | 4,746  |        |        |   | 5,906 |        |        | 
|Interest expense                                                                            |                                                                                                       |                                  | 1,315  |        |        |      | 1,188  |        |        |   | 1,048 |        |        | 
|Net earnings of equity affiliates                                                           |                                                                                                       |                                  | 465    |        |        |      | 80     |        |        |   | 465   |        |        | 
|Gain (loss) on sale of operations                                                           |                                                                                                       |                                  | 38     |        |        |      | 1,261  |        |        |   | (229  | )      |        | 
|Foreign currency transaction gains (losses)                                                 |                                                                                                       |                                  | (81    | )      |        |      | (679   | )      |        |   | 159   |        |        | 
|Other income (expense), net                                                                 |                                                                                                       |                                  | (1,431 | )      |        |      | 196    |        |        |   | 347   |        |        | 
|                                                                                           
|Income Before Income Taxes and Cumulative Effect
    of
    Changes in Accounting Principle |                                                                                                       |                                  | 3,814  |        |        |      | 4,416  |        |        |   | 5,600 |        |        | 
|Provision for Income Taxes                                                                  |                                                                                                       |                                  | 1,367  |        |        |      | 1,808  |        |        |   | 2,011 |        |        | 
|                                                                                           
|Income Before Cumulative Effect of Changes in
    Accounting Principle                      |                                                                                                       |                                  | 2,447  |        |        |      | 2,608  |        |        |   | 3,589 |        |        | 
|Cumulative Effect of Changes in Accounting
    Principle, Net of Tax                        |                                                                                                       |                                  |       |        |        |      | (1,285 | )      |        |   | 315   |        |        | 
|                                                                                           
|                                                                                            |                                                                                                       | Net Income                       |        | $      | 2,447  |      |        | $      | 1,323  |   |       | $      | 3,904  |  |  | 
|                                                                                           
|Weighted-Average Common Shares Outstanding:                                                 |                                                                                                       |                                  |        |        |        |      |        |        |        |   |       |        |        | 
|                                                                                            | Basic                                                                                                 |                                  |        | 1,875  |        |      |        | 1,870  |        |   |       | 1,848  |        |  | 
|                                                                                            | Diluted                                                                                               |                                  |        | 1,888  |        |      |        | 1,876  |        |   |       | 1,852  |        |  | 
|Basic Earnings Per Share:                                                                   |                                                                                                       |                                  |        |        |        |      |        |        |        |   |       |        |        | 
|                                                                                            | Income Before Cumulative Effect of Changes in
    Accounting Principle                                |                                  | $      | 1.31   |        |      | $      | 1.39   |        |   | $     | 1.94   |        |  | 
|                                                                                            | Net Income                                                                                            |                                  | $      | 1.31   |        |      | $      | .71    |        |   | $     | 2.11   |        |  | 
|Diluted Earnings Per Share:                                                                 |                                                                                                       |                                  |        |        |        |      |        |        |        |   |       |        |        | 
|                                                                                            | Income Before Cumulative Effect of Changes in
    Accounting Principle                                |                                  | $      | 1.30   |        |      | $      | 1.39   |        |   | $     | 1.94   |        |  | 
|                                                                                            | Net Income                                                                                            |                                  | $      | 1.30   |        |      | $      | .71    |        |   | $     | 2.11   |        |  | 
|Dividends Declared Per Common Share                                                         |                                                                                                       | $                                | .76    |        |        | $    | .79    |        |        | $ | .92   |        |        | 

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



56 BELLSOUTH
2003




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##### Table of Contents



CONSOLIDATED BALANCE
SHEETS


BELLSOUTH CORPORATION






|                                                                                                   |  |              |        |      |  |   |        |   |  | 
|-------------------------------------------------------------------------------------------------- |  | ------------ | ------ | ---- |  | - | ------ | - |  | 
|                                                                                                   |  |             
|                                                                                                   |  | December 31,
|                                                                                                   |  |             
|                                                                                                   |  |             
|(IN MILLIONS)                                                                                      |  | 2002         |        | 2003 |  |  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|ASSETS                                                                                             |  |              |        |      |  |   |        |   |  | 
|Current Assets:                                                                                    |  |              |        |      |  |   |        |   |  | 
|Cash and cash equivalents                                                                          |  | $            | 2,482  |      |  | $ | 4,556  |   |  | 
|Accounts receivable, net of
    allowance for uncollectibles of $476 and $438                      |  |              | 4,129  |      |  |   | 2,928  |   |  | 
|Material and supplies                                                                              |  |              | 313    |      |  |   | 375    |   |  | 
|Other current assets                                                                               |  |              | 938    |      |  |   | 990    |   |  | 
|                                                                                                  
|Total current
    assets                                                                           |  |              | 7,862  |      |  |   | 8,849  |   |  | 
|                                                                                                  
|                                                                                                  
|Investments and advances                                                                           |  |              | 9,741  |      |  |   | 8,552  |   |  | 
|Property, plant and equipment, net                                                                 |  |              | 23,445 |      |  |   | 23,807 |   |  | 
|Deferred charges and other assets                                                                  |  |              | 5,726  |      |  |   | 5,855  |   |  | 
|Goodwill                                                                                           |  |              | 347    |      |  |   | 342    |   |  | 
|Intangible assets, net                                                                             |  |              | 2,358  |      |  |   | 2,297  |   |  | 
|                                                                                                  
|                                                                                                  
|Total assets                                                                                       |  | $            | 49,479 |      |  | $ | 49,702 |   |  | 
|                                                                                                  
|                                                                                                  
|LIABILITIES AND
    SHAREHOLDERS EQUITY                                                           |  |              |        |      |  |   |        |   |  | 
|Current Liabilities:                                                                               |  |              |        |      |  |   |        |   |  | 
|Debt maturing within one year                                                                      |  | $            | 5,114  |      |  | $ | 3,491  |   |  | 
|Accounts payable                                                                                   |  |              | 1,572  |      |  |   | 1,339  |   |  | 
|Other current liabilities                                                                          |  |              | 2,897  |      |  |   | 3,628  |   |  | 
|                                                                                                  
|                                                                                                  
|Total current
    liabilities                                                                      |  |              | 9,583  |      |  |   | 8,458  |   |  | 
|                                                                                                  
|                                                                                                  
|Long-term debt                                                                                     |  |              | 12,283 |      |  |   | 11,489 |   |  | 
|                                                                                                  
|                                                                                                  
|Noncurrent liabilities:                                                                            |  |              |        |      |  |   |        |   |  | 
|Deferred income taxes                                                                              |  |              | 4,452  |      |  |   | 5,349  |   |  | 
|Other noncurrent liabilities                                                                       |  |              | 5,255  |      |  |   | 4,694  |   |  | 
|                                                                                                  
|                                                                                                  
|Total
    noncurrent liabilities                                                                   |  |              | 9,707  |      |  |   | 10,043 |   |  | 
|                                                                                                  
|                                                                                                  
|Shareholders equity:                                                                              |  |              |        |      |  |   |        |   |  | 
|Common stock, $1 par value
    (8,650 shares authorized;   1,860 and 1,830
    shares outstanding) |  |              | 2,020  |      |  |   | 2,020  |   |  | 
|Paid-in capital                                                                                    |  |              | 7,546  |      |  |   | 7,729  |   |  | 
|Retained earnings                                                                                  |  |              | 14,531 |      |  |   | 16,540 |   |  | 
|Accumulated other comprehensive
    income (loss)                                                  |  |              | (740   | )    |  |   | (585   | ) |  | 
|Shares held in trust and
    treasury                                                              |  |              | (5,372 | )    |  |   | (5,992 | ) |  | 
|Guarantee of ESOP debt                                                                             |  |              | (79    | )    |  |   |       |   |  | 
|                                                                                                  
|                                                                                                  
|Total
    shareholders equity                                                                     |  |              | 17,906 |      |  |   | 19,712 |   |  | 
|                                                                                                  
|                                                                                                  
|Total
    liabilities and shareholders equity                                                     |  | $            | 49,479 |      |  | $ | 49,702 |   |  | 
|                                                                                                  

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



BELLSOUTH
2003      57




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##### Table of Contents



CONSOLIDATED STATEMENTS OF
CASH FLOWS


BELLSOUTH CORPORATION






|                                                         |                                                                   |                                  |        |        |   |      |        |        |   |   |        |        |   |  | 
|-------------------------------------------------------- | ----------------------------------------------------------------- | -------------------------------- | ------ | ------ | - | ---- | ------ | ------ | - | - | ------ | ------ | - |  | 
|                                                         |                                                                   |                                  |        |       
|                                                         |                                                                   | For the years ended December 31, |        |       
|                                                         |                                                                   |                                 
|                                                         |                                                                   |                                 
|                                                         |                                                                   |                                 
|(IN MILLIONS)                                            |                                                                   | 2001                             |        | 2002   |   | 2003 |        |       
|                                                        
|                                                        
|                                                        
|Cash Flows from Operating
    Activities:                |                                                                   |                                  |        |        |   |      |        |        |   |   |        |        |   | 
|Net Income                                               |                                                                   | $                                | 2,447  |        |   | $    | 1,323  |        |   | $ | 3,904  |        |   | 
|Adjustments to net income:                               |                                                                   |                                  |        |        |   |      |        |        |   |   |        |        |   | 
|                                                         | Depreciation and amortization                                     |                                  |        | 4,782  |   |      |        | 4,643  |   |   |        | 4,179  |   |  | 
|                                                         | Provision for uncollectibles                                      |                                  |        | 587    |   |      |        | 850    |   |   |        | 563    |   |  | 
|                                                         | Net losses (earnings) of equity affiliates                        |                                  |        | (465   | ) |      |        | (80    | ) |   |        | (465   | ) |  | 
|                                                         | Dividends received from equity affiliates                         |                                  |        | 369    |   |      |        |       |   |   |        |       |   |  | 
|                                                         | Minority interests in income (loss) of
    subsidiaries           |                                  |        | 25     |   |      |        | (74    | ) |   |        | 47     |   |  | 
|                                                         | Deferred income taxes and investment tax credits                  |                                  |        | (244   | ) |      |        | 1,179  |   |   |        | 958    |   |  | 
|                                                         | Net losses (gains) on sale or impairment of
    equity securities |                                  |        | 1,937  |   |      |        | 349    |   |   |        | (42    | ) |  | 
|                                                         | Pension income                                                    |                                  |        | (797   | ) |      |        | (826   | ) |   |        | (535   | ) |  | 
|                                                         | Pension settlement losses                                         |                                  |        |       |   |      |        | 167    |   |   |        | 47     |   |  | 
|                                                         | Stock-based compensation expense                                  |                                  |        | 215    |   |      |        | 171    |   |   |        | 137    |   |  | 
|                                                         | Curtailment and termination benefit charges                       |                                  |        | 97     |   |      |        | 60     |   |   |        |       |   |  | 
|                                                         | Unbilled receivable adjustment                                    |                                  |        |       |   |      |        | 163    |   |   |        |       |   |  | 
|                                                         | Asset impairments                                                 |                                  |        | 89     |   |      |        | 302    |   |   |        | 52     |   |  | 
|                                                         | Foreign currency transaction (gains) losses                       |                                  |        | 81     |   |      |        | 679    |   |   |        | (159   | ) |  | 
|                                                         | Cumulative effect of changes in accounting
    principles         |                                  |        |       |   |      |        | 1,285  |   |   |        | (539   | ) |  | 
|                                                         | (Gain) loss on sale of operations                                 |                                  |        | (38    | ) |      |        | (1,261 | ) |   |        | 229    |   |  | 
|Net change in:                                           |                                                                   |                                  |        |        |   |      |        |        |   |   |        |        |   | 
|                                                         | Accounts receivable and other current assets                      |                                  |        | (756   | ) |      |        | (204   | ) |   |        | (213   | ) |  | 
|                                                         | Accounts payable and other current liabilities                    |                                  |        | (452   | ) |      |        | (463   | ) |   |        | 280    |   |  | 
|                                                         | Deferred charges and other assets                                 |                                  |        | (22    | ) |      |        | 30     |   |   |        | 290    |   |  | 
|                                                         | Other liabilities and deferred credits                            |                                  |        | 41     |   |      |        | 4      |   |   |        | (284   | ) |  | 
|Other reconciling items, net                             |                                                                   |                                  | 102    |        |   |      | (51    | )      |   |   | 80     |        |   | 
|                                                        
|                                                         | Net cash provided by operating activities                         |                                  |        | 7,998  |   |      |        | 8,246  |   |   |        | 8,529  |   |  | 
|                                                        
|Cash Flows from Investing
    Activities:                |                                                                   |                                  |        |        |   |      |        |        |   |   |        |        |   | 
|Capital expenditures                                     |                                                                   |                                  | (5,997 | )      |   |      | (3,785 | )      |   |   | (3,200 | )      |   | 
|Investments in and advances to equity affiliates         |                                                                   |                                  | (2,032 | )      |   |      | (309   | )      |   |   |       |        |   | 
|Investments in debt and equity securities                |                                                                   |                                  | (319   | )      |   |      | (36    | )      |   |   | (261   | )      |   | 
|Proceeds from sale of debt and equity securities         |                                                                   |                                  | 1,210  |        |   |      | 1,473  |        |   |   | 166    |        |   | 
|Proceeds from sale of operations                         |                                                                   |                                  | 47     |        |   |      |       |        |   |   | 70     |        |   | 
|Purchase of short-term investments                       |                                                                   |                                  | (77    | )      |   |      |       |        |   |   |       |        |   | 
|Proceeds from disposition of short-term
    investments  |                                                                   |                                  | 96     |        |   |      | 2      |        |   |   |       |        |   | 
|Proceeds from repayment of loans and advances            |                                                                   |                                  | 17     |        |   |      | 885    |        |   |   | 1,899  |        |   | 
|Settlement of derivatives on advances                    |                                                                   |                                  |       |        |   |      | 85     |        |   |   | (352   | )      |   | 
|Other investing activities, net                          |                                                                   |                                  | 16     |        |   |      | (22    | )      |   |   | (20    | )      |   | 
|                                                        
|                                                         | Net cash used for investing activities                            |                                  |        | (7,039 | ) |      |        | (1,707 | ) |   |        | (1,698 | ) |  | 
|                                                        
|Cash Flows from Financing
    Activities:                |                                                                   |                                  |        |        |   |      |        |        |   |   |        |        |   | 
|Net repayments of short-term debt                        |                                                                   |                                  | (3,990 | )      |   |      | (1,408 | )      |   |   | (427   | )      |   | 
|Proceeds from long-term debt                             |                                                                   |                                  | 4,603  |        |   |      | 17     |        |   |   | 1      |        |   | 
|Repayments of long-term debt                             |                                                                   |                                  | (759   | )      |   |      | (1,223 | )      |   |   | (1,932 | )      |   | 
|Dividends paid                                           |                                                                   |                                  | (1,424 | )      |   |      | (1,460 | )      |   |   | (1,608 | )      |   | 
|Purchase of treasury shares                              |                                                                   |                                  |       |        |   |      | (591   | )      |   |   | (858   | )      |   | 
|Other financing activities, net                          |                                                                   |                                  | 142    |        |   |      | 16     |        |   |   | 67     |        |   | 
|                                                        
|                                                         | Net cash used by financing activities                             |                                  |        | (1,428 | ) |      |        | (4,649 | ) |   |        | (4,757 | ) |  | 
|                                                        
|Net (decrease) increase in cash and cash
    equivalents |                                                                   |                                  | (469   | )      |   |      | 1,890  |        |   |   | 2,074  |        |   | 
|Cash and cash equivalents at beginning of period         |                                                                   |                                  | 1,061  |        |   |      | 592    |        |   |   | 2,482  |        |   | 
|                                                        
|Cash and cash equivalents at end of period               |                                                                   | $                                | 592    |        |   | $    | 2,482  |        |   | $ | 4,556  |        |   | 
|                                                        

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



58 BELLSOUTH
2003




---



##### Table of Contents



CONSOLIDATED STATEMENTS OF
SHAREHOLDERS


EQUITY AND COMPREHENSIVE
INCOME


BELLSOUTH CORPORATION






|                                                              |                                                                     |                  |       |             |  |        |      |         |  |          |       |        |  |             |       |         |  |       |        |   |  |   |      |      |   |   |        |   |  |   |      |   |  |   |        |      |   |  | 
|------------------------------------------------------------- | ------------------------------------------------------------------- | ---------------- | ----- | ----------- |  | ------ | ---- | ------- |  | -------- | ----- | ------ |  | ----------- | ----- | ------- |  | ----- | ------ | - |  | - | ---- | ---- | - | - | ------ | - |  | - | ---- | - |  | - | ------ | ---- | - |  | 
|                                                              |                                                                     |                  |       |             |  |       
|                                                              |                                                                     | Number of Shares |       | Amount      |  |       
|                                                              |                                                                     |                  |       |            
|                                                              |                                                                     |                  |       |            
|                                                              |                                                                     |                  |       |            
|                                                              |                                                                     |                  |       |             |  | Accum. |      |        
|                                                              |                                                                     |                  |       |             |  | Other  |      |        
|                                                              |                                                                     |                  |       | Shares      |  |        |      | Compre- |  | Shares   |       | Guar-  |  |            
|                                                              |                                                                     |                  |       | Held in     |  |        |      | hensive |  | Held in  |       | antee  |  |            
|                                                              |                                                                     | Common           |       | Trust and   |  | Common |      | Paid-in |  | Retained |       | Income |  | Trust and   |       | of ESOP |  |      
|(IN MILLIONS)                                                 |                                                                     | Stock            |       | Treasury(a) |  | Stock  |      | Capital |  | Earnings |       | (Loss) |  | Treasury(a) |       | Debt    |  | Total |        |  
|                                                             
|                                                             
|                                                             
|Balance at December 31,
    2000                              |                                                                     |                  | 2,020 |             |  |        | (148 | )       |  | $        | 2,020 |        |  | $           | 7,030 |         |  | $     | 13,865 |   |  | $ | (488 | )    |   | $ | (5,222 | ) |  | $ | (212 | ) |  | $ | 16,993 |      |   | 
|                                                             
|Net Income                                                    |                                                                     |                  |       |             |  |        |      |         |  |          |       |        |  |             |       |         |  |       | 2,447  |   |  |   |      |      |   |   |        |   |  |   |      |   |  |   | 2,447  |      |   | 
|Other comprehensive income, net of tax                        |                                                                     |                  |       |             |  |        |      |         |  |          |       |        |  |             |       |         |  |       |        |   |  |   |      |      |   |   |        |   |  |   |      |   |  |   |        |      |   | 
|                                                              | Foreign currency translation
    adjustment(b)                      |                  |       |             |  |        |      |         |  |          |       |        |  |             |       |         |  |       |        |   |  |   |      | (30  | ) |   |        |   |  |   |      |   |  |   |        | (30  | ) |  | 
|                                                              | Net unrealized losses on securities(c)                              |                  |       |             |  |        |      |         |  |          |       |        |  |             |       |         |  |       |        |   |  |   |      | (277 | ) |   |        |   |  |   |      |   |  |   |        | (277 | ) |  | 
|                                                              | Adjustments for other-than- temporary losses
    included in income |                  |       |             |  |        |      |         |  |          |       |        |  |             |       |         |  |       |        |   |  |   |      | 595  |   |   |        |   |  |   |      |   |  |   |        | 595  |   |  | 
|                                                              | Net unrealized gains on derivatives                                 |                  |       |             |  |        |      |         |  |          |       |        |  |             |       |         |  |       |        |   |  |   |      | (71  | ) |   |        |   |  |   |      |   |  |   |        | (71  | ) |  | 
|                                                              | Minimum pension liability adjustment                                |                  |       |             |  |        |      |         |  |          |       |        |  |             |       |         |  |       |        |   |  |   |      | (23  | ) |   |        |   |  |   |      |   |  |   |        | (23  | ) |  | 
|                                                              |                                                                     |                  |       |             |  |        |      |         |  |          |       |        |  |             |       |         |  |       |        |   |  |   |      |      |   |   |        |   |  |   |      |   |  |  
|Total comprehensive income                                    |                                                                     |                  |       |             |  |        |      |         |  |          |       |        |  |             |       |         |  |       |        |   |  |   |      |      |   |   |        |   |  |   |      |   |  |   | 2,641  |      |   | 
|Dividends declared                                            |                                                                     |                  |       |             |  |        |      |         |  |          |       |        |  |             |       |         |  |       | (1,424 | ) |  |   |      |      |   |   |        |   |  |   |      |   |  |   | (1,424 | )    |   | 
|Share issuances for employee
    benefit plans                |                                                                     |                  |       |             |  |        | 5    |         |  |          |       |        |  |             | (4    | )       |  |       | (85    | ) |  |   |      |      |   |   | 230    |   |  |   |      |   |  |   | 141    |      |   | 
|Purchase of stock by grantor
    trusts                       |                                                                     |                  |       |             |  |        |      |         |  |          |       |        |  |             |       |         |  |       |        |   |  |   |      |      |   |   | (4     | ) |  |   |      |   |  |   | (4     | )    |   | 
|Stock-based compensation                                      |                                                                     |                  |       |             |  |        |      |         |  |          |       |        |  |             | 215   |         |  |       |        |   |  |   |      |      |   |   |        |   |  |   |      |   |  |   | 215    |      |   | 
|Tax benefit related to stock
    options                      |                                                                     |                  |       |             |  |        |      |         |  |          |       |        |  |             | 127   |         |  |       |        |   |  |   |      |      |   |   |        |   |  |   |      |   |  |   | 127    |      |   | 
|ESOP activities and related tax
    benefit                   |                                                                     |                  |       |             |  |        |      |         |  |          |       |        |  |             |       |         |  |       | 2      |   |  |   |      |      |   |   |        |   |  |   | 67   |   |  |   | 69     |      |   | 
|                                                             
|Balance at December 31,
    2001                              |                                                                     |                  | 2,020 |             |  |        | (143 | )       |  | $        | 2,020 |        |  | $           | 7,368 |         |  | $     | 14,805 |   |  | $ | (294 | )    |   | $ | (4,996 | ) |  | $ | (145 | ) |  | $ | 18,758 |      |   | 
|                                                             
|Net Income                                                    |                                                                     |                  |       |             |  |        |      |         |  |          |       |        |  |             |       |         |  |       | 1,323  |   |  |   |      |      |   |   |        |   |  |   |      |   |  |   | 1,323  |      |   | 
|Other comprehensive income, net of tax                        |                                                                     |                  |       |             |  |        |      |         |  |          |       |        |  |             |       |         |  |       |        |   |  |   |      |      |   |   |        |   |  |   |      |   |  |   |        |      |   | 
|                                                              | Foreign currency translation
    adjustment(b)                      |                  |       |             |  |        |      |         |  |          |       |        |  |             |       |         |  |       |        |   |  |   |      | (430 | ) |   |        |   |  |   |      |   |  |   |        | (430 | ) |  | 
|                                                              | Net unrealized losses on securities(c)                              |                  |       |             |  |        |      |         |  |          |       |        |  |             |       |         |  |       |        |   |  |   |      | (38  | ) |   |        |   |  |   |      |   |  |   |        | (38  | ) |  | 
|                                                              | Net unrealized gains on derivatives(d)                              |                  |       |             |  |        |      |         |  |          |       |        |  |             |       |         |  |       |        |   |  |   |      | 13   |   |   |        |   |  |   |      |   |  |   |        | 13   |   |  | 
|                                                              | Minimum pension liability adjustment                                |                  |       |             |  |        |      |         |  |          |       |        |  |             |       |         |  |       |        |   |  |   |      | 9    |   |   |        |   |  |   |      |   |  |   |        | 9    |   |  | 
|                                                              |                                                                     |                  |       |             |  |        |      |         |  |          |       |        |  |             |       |         |  |       |        |   |  |   |      |      |   |   |        |   |  |   |      |   |  |  
|Total comprehensive income                                    |                                                                     |                  |       |             |  |        |      |         |  |          |       |        |  |             |       |         |  |       |        |   |  |   |      |      |   |   |        |   |  |   |      |   |  |   | 877    |      |   | 
|Dividends declared                                            |                                                                     |                  |       |             |  |        |      |         |  |          |       |        |  |             |       |         |  |       | (1,477 | ) |  |   |      |      |   |   |        |   |  |   |      |   |  |   | (1,477 | )    |   | 
|Share issuances for employee
    benefit plans                |                                                                     |                  |       |             |  |        | 5    |         |  |          |       |        |  |             | (33   | )       |  |       | (104   | ) |  |   |      |      |   |   | 197    |   |  |   |      |   |  |   | 60     |      |   | 
|Purchase of treasury stock                                    |                                                                     |                  |       |             |  |        | (22  | )       |  |          |       |        |  |             |       |         |  |       |        |   |  |   |      |      |   |   | (591   | ) |  |   |      |   |  |   | (591   | )    |   | 
|Purchase of stock by grantor
    trusts                       |                                                                     |                  |       |             |  |        |      |         |  |          |       |        |  |             |       |         |  |       | (18    | ) |  |   |      |      |   |   | 18     |   |  |   |      |   |  |   |       |      |   | 
|Stock-based compensation                                      |                                                                     |                  |       |             |  |        |      |         |  |          |       |        |  |             | 171   |         |  |       |        |   |  |   |      |      |   |   |        |   |  |   |      |   |  |   | 171    |      |   | 
|Tax benefit related to stock
    options                      |                                                                     |                  |       |             |  |        |      |         |  |          |       |        |  |             | 40    |         |  |       |        |   |  |   |      |      |   |   |        |   |  |   |      |   |  |   | 40     |      |   | 
|ESOP activities and related tax
    benefit                   |                                                                     |                  |       |             |  |        |      |         |  |          |       |        |  |             |       |         |  |       | 2      |   |  |   |      |      |   |   |        |   |  |   | 66   |   |  |   | 68     |      |   | 
|                                                             
|Balance at December 31,
    2002                              |                                                                     |                  | 2,020 |             |  |        | (160 | )       |  | $        | 2,020 |        |  | $           | 7,546 |         |  | $     | 14,531 |   |  | $ | (740 | )    |   | $ | (5,372 | ) |  | $ | (79  | ) |  | $ | 17,906 |      |   | 
|                                                             
|Net Income                                                    |                                                                     |                  |       |             |  |        |      |         |  |          |       |        |  |             |       |         |  |       | 3,904  |   |  |   |      |      |   |   |        |   |  |   |      |   |  |   | 3,904  |      |   | 
|Other comprehensive income, net of tax                        |                                                                     |                  |       |             |  |        |      |         |  |          |       |        |  |             |       |         |  |       |        |   |  |   |      |      |   |   |        |   |  |   |      |   |  |   |        |      |   | 
|                                                              | Foreign currency translation
    adjustment(b)                      |                  |       |             |  |        |      |         |  |          |       |        |  |             |       |         |  |       |        |   |  |   |      | 165  |   |   |        |   |  |   |      |   |  |   |        | 165  |   |  | 
|                                                              | Net unrealized losses on securities(c)                              |                  |       |             |  |        |      |         |  |          |       |        |  |             |       |         |  |       |        |   |  |   |      | 7    |   |   |        |   |  |   |      |   |  |   |        | 7    |   |  | 
|                                                              | Net unrealized gains on derivatives(d)                              |                  |       |             |  |        |      |         |  |          |       |        |  |             |       |         |  |       |        |   |  |   |      | 1    |   |   |        |   |  |   |      |   |  |   |        | 1    |   |  | 
|                                                              | Minimum pension liability adjustment                                |                  |       |             |  |        |      |         |  |          |       |        |  |             |       |         |  |       |        |   |  |   |      | (18  | ) |   |        |   |  |   |      |   |  |   |        | (18  | ) |  | 
|                                                              |                                                                     |                  |       |             |  |        |      |         |  |          |       |        |  |             |       |         |  |       |        |   |  |   |      |      |   |   |        |   |  |   |      |   |  |  
|Total comprehensive income                                    |                                                                     |                  |       |             |  |        |      |         |  |          |       |        |  |             |       |         |  |       |        |   |  |   |      |      |   |   |        |   |  |   |      |   |  |   | 4,059  |      |   | 
|Dividends declared                                            |                                                                     |                  |       |             |  |        |      |         |  |          |       |        |  |             |       |         |  |       | (1,696 | ) |  |   |      |      |   |   |        |   |  |   |      |   |  |   | (1,696 | )    |   | 
|Share issuances for employee
    benefit plans                |                                                                     |                  |       |             |  |        | 5    |         |  |          |       |        |  |             | (19   | )       |  |       | (89    | ) |  |   |      |      |   |   | 169    |   |  |   |      |   |  |   | 61     |      |   | 
|Purchase of treasury stock                                    |                                                                     |                  |       |             |  |        | (35  | )       |  |          |       |        |  |             |       |         |  |       |        |   |  |   |      |      |   |   | (858   | ) |  |   |      |   |  |   | (858   | )    |   | 
|Purchases and sales of treasury
    stock with grantor trusts |                                                                     |                  |       |             |  |        |      |         |  |          |       |        |  |             | 43    |         |  |       | (112   | ) |  |   |      |      |   |   | 69     |   |  |   |      |   |  |   |       |      |   | 
|Stock-based compensation                                      |                                                                     |                  |       |             |  |        |      |         |  |          |       |        |  |             | 137   |         |  |       |        |   |  |   |      |      |   |   |        |   |  |   |      |   |  |   | 137    |      |   | 
|Tax benefit related to stock
    options                      |                                                                     |                  |       |             |  |        |      |         |  |          |       |        |  |             | 22    |         |  |       |        |   |  |   |      |      |   |   |        |   |  |   |      |   |  |   | 22     |      |   | 
|ESOP activities and related tax
    benefit                   |                                                                     |                  |       |             |  |        |      |         |  |          |       |        |  |             |       |         |  |       | 2      |   |  |   |      |      |   |   |        |   |  |   | 79   |   |  |   | 81     |      |   | 
|                                                             
|Balance at December 31,
    2003                              |                                                                     |                  | 2,020 |             |  |        | (190 | )       |  | $        | 2,020 |        |  | $           | 7,729 |         |  | $     | 16,540 |   |  | $ | (585 | )    |   | $ | (5,992 | ) |  | $ |     |   |  |   | 19,712 |      |   | 
|                                                             



|    |  |                                                                                                                                                                                                                        
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | Trust and treasury shares are not considered
    to be outstanding for financial reporting purposes. As of
    December 31, 2003, there were approximately 37 shares held
    in trust and 153 shares held in treasury.
|   
|(b) |  | Net unrealized foreign currency translation
    adjustments include realized gains of $1 in 2001 and $96 in 2002
    and realized losses of $268 in 2003.                                                              
|   
|(c) |  | Net unrealized losses on securities include
    adjustments for realized losses of $129 in 2001, realized gains
    of $19 in 2002, and realized gains of $26 in 2003.                                                 
|   
|(d) |  | Net unrealized gains on derivatives include an
    adjustment for realized gains of $33 in 2002 and $20 in
    2003.                                                                                                   

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



BELLSOUTH
2003      59




---



##### Table of Contents



NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS


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


BELLSOUTH CORPORATION






Note A  Accounting
Policies


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

ORGANIZATION

We are an international telecommunications
company headquartered in Atlanta, Georgia. For management
purposes, our operations are organized into four reportable
segments: Communications Group; Domestic Wireless; Latin America
Group; and Advertising and Publishing Group.

BASIS OF
PRESENTATION

The consolidated financial statements include the
accounts of BellSouths wholly-owned subsidiaries and
subsidiaries in which we have a controlling financial interest.
Investments in businesses that we do not control, but have the
ability to exercise significant influence over operations and
financial policies, are accounted for using the equity method.
We report our results on a calendar-year basis, except for our
international operations that we report on a one-month lag basis
to facilitate timely reporting of the consolidated results of
BellSouth. All significant intercompany transactions and
accounts have been eliminated. We own an approximate 40%
economic interest in Cingular Wireless, the nations second
largest wireless company, and share control with SBC
Communications. Accordingly, we account for this investment
under the equity method. Certain amounts in the prior period
consolidated financial statements have been reclassified to
conform to the current years presentation.

USE OF ESTIMATES

Our consolidated financial statements have been
prepared in accordance with Generally Accepted Accounting
Principles (US GAAP). We are required to make estimates and
assumptions that affect amounts reported in our financial
statements and the accompanying notes. Actual results could
differ from those estimates.

CASH AND CASH
EQUIVALENTS

We consider all highly liquid investments with an
original maturity of three months or less to be cash
equivalents. Investments with an original maturity of over three
months to one year are not considered cash equivalents and are
included as other current assets in the consolidated balance
sheets. Interest income on cash equivalents and temporary cash
investments was $82 for 2001, $95 for 2002, and $76 for 2003.

Included in the December 31, 2003 cash
balance of $4,556 are cash balances of $1,002 held by
subsidiaries in Latin America, which historically have not
remitted dividends to BellSouth. The local currency equivalent
of US $346 is held in local accounts in Venezuela. Due to
government restrictions, our ability to physically convert this
local currency to US Dollars is limited. In addition, $144 was
held in grantor trusts that is not available for general
corporate purposes.


MATERIAL AND
SUPPLIES

New and reusable material held at our telephone
subsidiary is carried in inventory, principally at average
original cost, except that specific costs are used in the case
of large individual items. Non-reusable material is carried at
estimated salvage value. Inventories of our other subsidiaries
are stated at the lower of cost or market, with cost determined
principally on either an average cost or first-in, first-out
basis.

PROPERTY, PLANT AND
EQUIPMENT

The investment in property, plant and equipment
is stated at original cost. For plant dedicated to providing
regulated telecommunications services, depreciation is based on
the group remaining life method of depreciation and
straight-line rates determined on the basis of equal life groups
of certain categories of telephone plant acquired in a given
year. This method requires the periodic revision of depreciation
rates. When depreciable telephone plant is disposed of, the
original cost less any net salvage proceeds is charged to
accumulated depreciation. We perform inventories of the
Telephone Plant to verify the existence of these assets and
reconcile these inventories to our property records. In
addition, the inventory reconciliation results allow us to
correct our records for investment moved from one location to
another and to account for delayed retirements. The cost of
other property, plant and equipment is depreciated using either
straight-line or accelerated methods over the estimated useful
lives of the assets. Depreciation of property, plant and
equipment was $4,195 for 2001, $4,039 for 2002, and $3,546 for
2003.

Gains or losses on disposal of other depreciable
property, plant and equipment are recognized in the year of
disposition as an element of Other income (expense), net. The
cost of maintenance and repairs of plant, including the cost of
replacing minor items not resulting in substantial betterments,
is charged to operating expenses. Interest expense and network
engineering costs incurred during the construction phase of our
networks are capitalized as part of property, plant and
equipment until the projects are completed and placed into
service.


VALUATION OF LONG-LIVED
ASSETS

Long-lived assets, including property, plant and
equipment and intangible assets with finite lives are reviewed
for impairment whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable. The
communications industry is rapidly evolving and therefore it is
reasonably possible that our long-lived assets could become
impaired as a result of technological or



60 BELLSOUTH
2003




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##### Table of Contents







other industry changes. For assets we intend to
hold for use, if the total of the expected future undiscounted
cash flows is less than the carrying amount of the asset, we
recognize a loss for the difference between the fair value and
carrying value of the asset. For assets we intend to dispose of,
we recognize a loss for the amount that the estimated fair
value, less costs to sell, is less than the carrying value of
the assets. We principally use the discounted cash flow method
to estimate the fair value of long-lived assets.

We hold equity interests in several wireless
properties (see Note D). These investments are accounted for
under the equity method of accounting. In accordance with
Accounting Principles Board (APB) Opinion No. 18, The
Equity Method of Accounting for Investments in Common Stock, we
periodically review equity method investments for impairment.
These reviews are performed to determine whether a decline in
the fair value of an investment below its carrying value is
deemed to be other than temporary.


FOREIGN CURRENCY

Assets and liabilities of foreign subsidiaries
and equity investees with a functional currency other than US
Dollars are translated into US Dollars at exchange rates in
effect at the end of the reporting period. Foreign entity
revenues and expenses are translated into US Dollars at the
average rates that prevailed during the period. The resulting
net translation gains and losses are reported as foreign
currency translation adjustments in shareholders equity as
a component of accumulated other comprehensive income (loss).
Operations in countries with hyperinflationary economies
consider the US Dollar the functional currency. Foreign currency
translation gains (losses) of $1 in 2001, $96 in 2002 and $(268)
in 2003 were recognized in gains (losses) on sale of operations.

Foreign currency gains and losses on transactions
and equity investments denominated in a currency other than
their functional currency are generally included in results of
operations as incurred unless the transactions are hedged.
Transaction gains and (losses) included in net income amounted
to $(81) for 2001, $(679) for 2002 and $159 for 2003.


DERIVATIVE FINANCIAL
INSTRUMENTS

We generally enter into derivative financial
instruments only for hedging purposes. In hedging the exposure
to variable cash flows or foreign currency impacts on forecasted
transactions, deferral accounting is applied when the derivative
reduces the risk of the underlying hedged item effectively as a
result of high inverse correlation with the value of the
underlying exposure. If a derivative instrument either initially
fails or later ceases to meet the criteria for deferral
accounting, any subsequent gains or losses are recognized
currently in income. In hedging the exposure to changes in the
fair value of a recognized asset or liability, the change in
fair value of both the derivative financial instrument and the
hedged item are recognized currently in income.

REVENUE RECOGNITION

Revenues are recognized when earned. Certain
revenues derived from local telephone and wireless services are
billed monthly in advance and are recognized the following month
when services are provided. Revenues derived from other
telecommunications services, principally network access, long
distance and wireless airtime usage, are recognized monthly as
services are provided. Marketing incentives, including cash
coupons, package discounts and free service are recognized as
revenue reductions and are accrued in the period the service is
provided. With respect to coupons, accruals are based on
historical redemption experience. While cash is generally
received at the time of sale, revenues from installation and
activation activities are deferred and recognized over the life
of the customer relationship, which is generally four years.
Print advertising and publishing revenues and related directory
costs are recognized ratably over the life of the related
directory, generally 12 months. Allowances for uncollectible
accounts are determined based on analysis of history and future
expectations. The provision for such uncollectible accounts was
$587 for 2001, $850 for 2002, and $563 for 2003.

ADVERTISING

We expense advertising costs as they are
incurred. These expenses include production, media and other
promotional and sponsorship costs. Our total advertising expense
was $268 for 2001, $309 for 2002, and $412 for 2003.

INCOME TAXES

The consolidated balance sheets reflect deferred
tax balances associated with the anticipated tax impact of
future income or deductions implicit in the consolidated balance
sheets in the form of temporary differences. Temporary
differences primarily result from the use of accelerated methods
and shorter lives in computing depreciation for tax purposes.

EARNINGS PER SHARE

Basic earnings per share are computed based on
the weighted-average number of common shares outstanding during
each year. Diluted earnings per share are 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



BELLSOUTH
2003      61




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##### Table of Contents



NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS CONTINUED


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


BELLSOUTH CORPORATION

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

|                                                            |  |      |       |      |  |      |       |  |  |  |       |  |  | 
|----------------------------------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- |  |  |  | ----- |  |  | 
|                                                            |  | 2001 |       | 2002 |  | 2003 |       | 
|                                                           
|                                                           
|                                                           
|Basic common shares outstanding                             |  |      | 1,875 |      |  |      | 1,870 |  |  |  | 1,848 |  |  | 
|Incremental shares from stock options and benefit
    plans |  |      | 13    |      |  |      | 6     |  |  |  | 4     |  |  | 
|                                                           
|Diluted common shares outstanding                           |  |      | 1,888 |      |  |      | 1,876 |  |  |  | 1,852 |  |  | 
|                                                           

The earnings amounts used for per-share
calculations are the same for both the basic and diluted
methods. Outstanding options of 51 million shares for 2001,
77 million shares for 2002, and 92 million shares for
2003 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 or the
effect was anti-dilutive.


GOODWILL AND INTANGIBLE
ASSETS

Intangible assets consist primarily of
capitalized software, wireless licenses and customer related
intangibles. Goodwill represents the excess of consideration
paid over the fair value of net assets acquired in purchase
business combinations. In 2001, goodwill, embedded goodwill
related to equity investments and certain wireless licenses were
amortized using the straight-line method over periods of benefit
that did not exceed 40 years. Effective with the adoption
of Statement of Financial Accounting Standards
(SFAS) No. 142 as of January 1, 2002, no
amortization was recognized on these assets in 2002 and 2003.
Customer-related intangible assets represent values placed on
customer lists, contracts and non-contractual relationships of
acquired businesses and are amortized over periods up to eight
years using the sum-of-the-years digits method. Capitalized
software costs are being amortized ratably over periods of three
to five years. Amortization of goodwill and intangibles was $587
for 2001, $604 for 2002, and $633 for 2003.

We test goodwill and other indefinite-lived
intangible assets for impairment on an annual basis.
Additionally, goodwill is tested for impairment between annual
tests if an event occurs or circumstances change that would more
likely than not reduce the fair value of an entity below its
carrying value. These events or circumstances would include a
significant change in the business climate, legal factors,
operating performance indicators, competition, sale or
disposition of a significant portion of the business or other
factors. Other indefinite-lived intangible assets are tested
between annual tests if events or changes in circumstances
indicate that the asset might be impaired.




|         |                                              
|-------- | ---------------------------------------------
|Note B  | Recently Issued Accounting
    Pronouncements

DERIVATIVE INSTRUMENTS AND
HEDGING ACTIVITIES

In April 2003, the FASB issued SFAS No. 149,
Amendment of Statement 133 on Derivative Instruments and
Hedging Activities. This standard amends and clarifies the
accounting for and definition of derivative instruments and
hedging activities under SFAS No. 133. This statement is
effective for contracts entered into or modified after
June 30, 2003, and for hedging relationships designated
after June 30, 2003. Adoption of this standard did not have
a material impact on our results of operations, financial
position or cash flows.

FINANCIAL INSTRUMENTS WITH
CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY

In May 2003, the FASB issued SFAS No. 150,
Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity. This
Statement establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of
both liabilities and equity. It requires that an issuer classify
a financial instrument that is within its scope as a liability
because that financial instrument embodies an obligation of the
issuer. This Statement was effective beginning July 1, 2003.

On November 7, 2003, FASB Staff Position
(FSP) FAS 150-3 was issued deferring the effective date for
the measurement provisions of paragraphs 9 and 10 of
FAS 150, as they apply to mandatorily redeemable
non-controlling interests (e.g., minority interests in
finite-lived entities). The FSP indicated, however, that the
disclosure requirements of FAS 150 continue to apply. The
majority of our consolidated entities in Latin America where we
have minority partners have finite lives, generally
99 years as a function of law. While there are no
provisions in the shareholder agreements that require
liquidation upon expiration of the corporations stated
life, the guidance in FAS 150 requires disclosure of the
settlement value as if the minority interest will be liquidated
at that time. The estimated fair value of mandatorily redeemable
non-controlling interests is approximately $300. This compares
to the liability for minority interests recorded in our balance
sheet of $209.


CONSOLIDATION OF VARIABLE
INTEREST ENTITIES

In January 2003, the FASB issued FASB
Interpretation No. 46, Consolidation of Variable Interest
Entities (FIN 46). FIN 46 clarified the application of
Accounting Research Bulletin No. 51, Consolidated Financial
Statements, to certain entities in which equity investors do not
have the characteristics of a controlling financial interest or
do not have sufficient equity at risk for the entity to finance
its activities without additional subordinated support from
other parties. FIN 46 requires existing unconsolidated variable
interest entities to be consolidated by their primary
beneficiaries if



62 BELLSOUTH
2003




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##### Table of Contents







the entities do not effectively disperse risks
among parties involved. We have completed an evaluation of this
guidance as it applies to our business and concluded that we do
not have business arrangements with entities, including our
interest in Cingular Wireless, that qualify as a variable
interest entity as described in FIN 46. Accordingly,
these entities did not qualify for consolidation under
FIN 46 and our accounting treatment of these entities
remains unchanged.

REVENUE RECOGNITION FOR
MULTI-ELEMENT DELIVERABLES

In November 2002, the Emerging Issues Task Force
(EITF) of the FASB reached a consensus on EITF
No. 00-21, Accounting for Revenue Arrangements with
Multiple Element Deliverables. The issue addresses how to
account for arrangements that may involve the delivery or
performance of multiple products, services and/or rights to use
assets. Revenue arrangements with multiple deliverables should
be divided into separate units of accounting if the deliverables
in the arrangement meet certain criteria. Arrangement
consideration should be allocated among the separate units of
accounting based on their relative fair values. The issue also
supersedes certain guidance set forth in Staff Accounting
Bulletin No. 101 (SAB 101), Revenue Recognition in
Financial Statements. The final consensus is applicable to
agreements entered into in quarters beginning after
June 15, 2003, with early adoption permitted. Additionally,
companies are permitted to apply the consensus guidance to all
existing arrangements as a cumulative effect of a change in
accounting principle. We adopted this new pronouncement
effective July 1, 2003 on a prospective basis. The impact
of adoption did not have a material impact on our results of
operations, financial position and cash flows.

EXIT COSTS AND DISPOSAL
ACTIVITIES

In January 2003, we adopted SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal
Activities (SFAS No. 146), which addresses financial
accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force
Issue No. 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a
Restructuring) (EITF 94-3). The principal difference
between SFAS No. 146 and EITF 94-3 relates to SFAS
No. 146s requirements for recognition of a liability
for a cost associated with an exit or disposal activity. SFAS
No. 146 requires that a liability for a cost associated
with an exit or disposal activity be recognized when the
liability is incurred. Under EITF 94-3, a liability for an
exit cost as generally defined in EITF 94-3 was recognized
at the date of an entitys commitment to an exit plan.



|         |                                    
|-------- | -----------------------------------
|Note C  | Changes in Accounting
    Principle

ASSET RETIREMENT
OBLIGATIONS

Effective January 1, 2003, we adopted SFAS
No. 143, Accounting for Asset Retirement
Obligations (SFAS No. 143). This statement 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 part of the book
value of the long-lived asset. SFAS No. 143 also precludes
companies from accruing removal costs that exceed gross salvage
in their depreciation rates and accumulated depreciation
balances if there is no legal obligation to remove the
long-lived assets. For our outside plant accounts, such as
telephone poles and cable, estimated cost of removal does exceed
gross salvage.

Although we have no legal obligation to remove
assets, we have historically included in our group depreciation
rates estimated net removal costs associated with these outside
plant assets in which estimated cost of removal exceeds gross
salvage. These costs have been reflected in the calculation of
depreciation expense, which results in greater periodic
depreciation expense and the recognition in accumulated
depreciation of future removal costs for existing assets. When
the assets are actually retired and removal costs are expended,
the net removal costs are recorded as a reduction to accumulated
depreciation.


In connection with the adoption of this standard,
we removed existing accrued net costs of removal in excess of
the related estimated salvage from our accumulated depreciation
for those accounts. The adjustment was reflected in the income
statement as a cumulative effect of accounting change adjustment
and on the balance sheet as an increase to net plant and
equipment of $1,334 and an increase to deferred income taxes of
$518. The cumulative effect of change increased net income by
$816 for the year ended December 31, 2003.


Since we have previously accrued for net cost of
removal through our depreciation rates, depreciation expense was
approximately $130 lower in 2003 than it otherwise would have
been absent this change in accounting. We are expensing net cost
of removal as incurred beginning January 1, 2003 for the
affected plant accounts. Cost of removal expensed in 2003 was
$36.


REVENUE RECOGNITION FOR
PUBLISHING REVENUES

Effective January 1, 2003, we changed our
method for recognizing revenues and expenses related to our
directory publishing business from the publication and delivery
method to the deferral method. Under the publication and
delivery method, we recognized 100% of the revenues and direct
expenses at the time the directories were published and
delivered to end-users. Under the deferral method,



BELLSOUTH
2003      63




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##### Table of Contents



NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS CONTINUED


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


BELLSOUTH CORPORATION

revenues and direct expenses are recognized
ratably over the life of the related directory, generally
12 months. The change in accounting method is reflected in
the income statement as a cumulative effect of accounting change
adjustment and on the balance sheet as a decrease to accounts
receivable of $845, increase to other current assets of $166,
increase to current liabilities of $129, and a decrease to
deferred income taxes of $307. The cumulative effect of the
change resulted in a decrease to net income of $501 for 2003.
Absent this one-time adjustment, the change in accounting did
not materially affect our annual results.

PRO FORMA IMPACT OF ACCOUNTING
CHANGES

The following table presents our 2002 and 2001
results adjusted to reflect the changes in accounting for asset
retirement obligations and revenue recognition for publishing
revenues:

|                                                                                        |                                                   |                                 |        |             |        |             |      |             |      |             |       |    |     |   |        |       |        |   |        |       |        |  |  | 
|--------------------------------------------------------------------------------------- | ------------------------------------------------- | ------------------------------- | ------ | ----------- | ------ | ----------- | ---- | ----------- | ---- | ----------- | ----- | -- | --- | - | ------ | ----- | ------ | - | ------ | ----- | ------ |  |  | 
|                                                                                        |                                                   |                                 |        |            
|                                                                                        |                                                   | For the Year Ended December 31, |        |            
|                                                                                        |                                                   |                                
|                                                                                        |                                                   |                                
|                                                                                        |                                                   |                                
|                                                                                        |                                                   |                                 |        | SFAS No.    |        | Directory   |      | 2001        |      | 2002        |       |   
|                                                                                        |                                                   | 2001                            |        | 143         |        | Publishing  |      | Pro Forma   |      | Pro Forma   |       |   
|                                                                                        |                                                   | (As reported)                   |        | (Unaudited) |        | (Unaudited) |      | (Unaudited) |      | (Unaudited) |       |   
|                                                                                       
|                                                                                       
|                                                                                       
|Total Operating Revenue                                                                 |                                                   | $                               | 24,130 |             |        | $           |     |             |      | $           | (1    | )  |     | $ | 24,129 |       |        | $ | 22,489 |       |        | 
|Operating Expenses                                                                      |                                                   |                                 |        |             |        |             |      |             |      |             |       |    |     |   |        |       |        |   |        |       |        | 
|                                                                                        | Cost of services and products                     |                                 |        | 8,049       |        |             |      | 34          |      |             |       | 29 |     |   |        | 8,112 |        |   |        | 7,642 |        |  | 
|                                                                                        | Selling, general, and administrative expenses     |                                 |        | 4,803       |        |             |      |            |      |             |       | 12 |     |   |        | 4,815 |        |   |        | 4,494 |        |  | 
|                                                                                        | Depreciation and amortization                     |                                 |        | 4,782       |        |             |      | (138        | )    |             |       |   |     |   |        | 4,644 |        |   |        | 4,510 |        |  | 
|                                                                                        | Provision for restructuring and asset impairments |                                 |        | 358         |        |             |      |            |      |             |       |   |     |   |        | 358   |        |   |        | 997   |        |  | 
|                                                                                       
|                                                                                        |                                                   | Total operating expenses        |        |             | 17,992 |             |      |             | (104 | )           |       |    | 41  |   |        |       | 17,929 |   |        |       | 17,643 |  |  | 
|Operating income                                                                        |                                                   |                                 | 6,138  |             |        |             | 104  |             |      |             | (42   | )  |     |   | 6,200  |       |        |   | 4,846  |       |        | 
|Non-operating income (expense), net                                                     |                                                   |                                 | (2,324 | )           |        |             |     |             |      |             |      |    |     |   | (2,324 | )     |        |   | (330   | )     |        | 
|                                                                                       
|Income before income taxes and cumulative effect
    of changes in accounting principle |                                                   |                                 | 3,814  |             |        |             | 104  |             |      |             | (42   | )  |     |   | 3,876  |       |        |   | 4,516  |       |        | 
|Provision for income taxes                                                              |                                                   |                                 | 1,367  |             |        |             | 40   |             |      |             | (15   | )  |     |   | 1,392  |       |        |   | 1,847  |       |        | 
|                                                                                       
|Income before cumulative effect of changes in
    accounting principle                  |                                                   |                                 | 2,447  |             |        |             | 64   |             |      |             | (27   | )  |     |   | 2,484  |       |        |   | 2,669  |       |        | 
|Cumulative effect of changes in accounting
    principle, net of tax                    |                                                   |                                 |       |             |        |             |     |             |      |             |      |    |     |   |       |       |        |   | (1,285 | )     |        | 
|                                                                                       
|                                                                                        |                                                   | Net Income                      |        | $           | 2,447  |             |      | $           | 64   |             |       | $  | (27 | ) |        | $     | 2,484  |   |        | $     | 1,384  |  |  | 
|                                                                                       
|Basic earnings per share*:                                                              |                                                   |                                 |        |             |        |             |      |             |      |             |       |    |     |   |        |       |        |   |        |       |        | 
|Income before cumulative effect of changes in
    accounting principle                  |                                                   | $                               | 1.31   |             |        | $           | 0.03 |             |      | $           | (0.01 | )  |     | $ | 1.32   |       |        | $ | 1.43   |       |        | 
|Net income                                                                              |                                                   | $                               | 1.31   |             |        | $           | 0.03 |             |      | $           | (0.01 | )  |     | $ | 1.32   |       |        | $ | 0.74   |       |        | 
|Diluted earnings per share*:                                                            |                                                   |                                 |        |             |        |             |      |             |      |             |       |    |     |   |        |       |        |   |        |       |        | 
|Income before cumulative effect of changes in
    accounting principle                  |                                                   | $                               | 1.30   |             |        | $           | 0.03 |             |      | $           | (0.01 | )  |     | $ | 1.32   |       |        | $ | 1.42   |       |        | 
|Net income                                                                              |                                                   | $                               | 1.30   |             |        | $           | 0.03 |             |      | $           | (0.01 | )  |     | $ | 1.32   |       |        | $ | 0.74   |       |        | 



64 BELLSOUTH
2003




---



##### Table of Contents







|                                                                                        |                                                                        |                                 |        |             |        |             |     |             |      |      |    |      |    |   |        |       |        |   |        |       |        | 
|--------------------------------------------------------------------------------------- | ---------------------------------------------------------------------- | ------------------------------- | ------ | ----------- | ------ | ----------- | --- | ----------- | ---- | ---- | -- | ---- | -- | - | ------ | ----- | ------ | - | ------ | ----- | ------ | 
|                                                                                        |                                                                        |                                
|                                                                                        |                                                                        | For the Year Ended December 31,
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                        |                                                                        | SFAS No.                        |        | Directory   |        | 2002 Pro    |     |            
|                                                                                        |                                                                        | 2002                            |        | 143         |        | Publishing  |     | Forma       |      |     
|                                                                                        |                                                                        | (As reported)                   |        | (Unaudited) |        | (Unaudited) |     | (Unaudited) |      | 2003
|                                                                                       
|                                                                                       
|                                                                                       
|Total Operating Revenue                                                                 |                                                                        | $                               | 22,440 |             |        | $           |    |             |      | $    | 49 |      |    | $ | 22,489 |       |        | $ | 22,635 |      
|Operating Expenses                                                                      |                                                                        |                                 |        |             |        |             |     |             |      |      |    |      |    |   |        |       |        |   |        |      
|                                                                                        | Cost of services and products                                          |                                 |        | 7,512       |        |             |     | 32          |      |      |    | 37   |    |   |        | 7,581 |        |   |        | 7,988 |       
|                                                                                        | Selling, general, and administrative expenses                          |                                 |        | 4,542       |        |             |     |            |      |      |    | 13   |    |   |        | 4,555 |        |   |        | 4,353 |       
|                                                                                        | Depreciation and amortization                                          |                                 |        | 4,643       |        |             |     | (133        | )    |      |    |     |    |   |        | 4,510 |        |   |        | 4,179 |       
|                                                                                        | Provision for restructuring and asset impairments                      |                                 |        | 997         |        |             |     |            |      |      |    |     |    |   |        | 997   |        |   |        | 209   |       
|                                                                                       
|                                                                                        |                                                                        | Total operating expenses        |        |             | 17,694 |             |     |             | (101 | )    |    |      | 50 |   |        |       | 17,643 |   |        |       | 16,729 | 
|Operating income                                                                        |                                                                        |                                 | 4,746  |             |        |             | 101 |             |      |      | (1 | )    |    |   | 4,846  |       |        |   | 5,906  |      
|Non-operating income (expense), net                                                     |                                                                        |                                 | (330   | )           |        |             |    |             |      |      |   |      |    |   | (330   | )     |        |   | (306   | )    
|                                                                                       
|Income before income taxes and cumulative effect
    of changes in accounting principle |                                                                        |                                 | 4,416  |             |        |             | 101 |             |      |      | (1 | )    |    |   | 4,516  |       |        |   | 5,600  |      
|Provision for income taxes                                                              |                                                                        |                                 | 1,808  |             |        |             | 39  |             |      |      |   |      |    |   | 1,847  |       |        |   | 2,011  |      
|                                                                                       
|Income before cumulative effect of changes in
    accounting principle                  |                                                                        |                                 | 2,608  |             |        |             | 62  |             |      |      | (1 | )    |    |   | 2,669  |       |        |   | 3,589  |      
|Cumulative effect of changes in accounting
    principle, net of tax                    |                                                                        |                                 | (1,285 | )           |        |             |    |             |      |      |   |      |    |   | (1,285 | )     |        |   | 315    |      
|                                                                                       
|                                                                                        |                                                                        | Net Income                      |        | $           | 1,323  |             |     | $           | 62   |      |    | $    | (1 | ) |        | $     | 1,384  |   |        | $     | 3,904  | 
|                                                                                       
|Basic earnings per share*:                                                              |                                                                        |                                 |        |             |        |             |     |             |      |      |    |      |    |   |        |       |        |   |        |      
|                                                                                        | Income before cumulative effect of changes in
    accounting principle |                                 | $      | 1.39        |        |             | $   | 0.03        |      |      | $  | 0.00 |    |   | $      | 1.43  |        |   | $      | 1.94  |       
|                                                                                        | Net income                                                             |                                 | $      | 0.71        |        |             | $   | 0.03        |      |      | $  | 0.00 |    |   | $      | 0.74  |        |   | $      | 2.11  |       
|Diluted earnings per share*:                                                            |                                                                        |                                 |        |             |        |             |     |             |      |      |    |      |    |   |        |       |        |   |        |      
|                                                                                        | Income before cumulative effect of changes in
    accounting principle |                                 | $      | 1.39        |        |             | $   | 0.03        |      |      | $  | 0.00 |    |   | $      | 1.42  |        |   | $      | 1.94  |       
|                                                                                        | Net income                                                             |                                 | $      | 0.71        |        |             | $   | 0.03        |      |      | $  | 0.00 |    |   | $      | 0.74  |        |   | $      | 2.11  |       

*Earnings per share amounts do not sum due to
rounding.

Note D  Investments and
Advances

We hold investments in various domestic and
international partnerships and ventures that are accounted for
under the equity method. We also hold investments in equity
securities that are accounted for under the cost method.
Investments and advances at December 31 consist of the
following:

|                                                  |  |      |       |      |  |   |       | 
|------------------------------------------------- |  | ---- | ----- | ---- |  | - | ----- | 
|                                                  |  | 2002 |       | 2003
|                                                 
|                                                 
|                                                 
|Investments accounted for under the equity method |  | $    | 3,502 |      |  | $ | 3,988 | 
|Investments accounted for under the cost method   |  |      | 134   |      |  |   | 382   | 
|Advances to and notes receivable                  |  |      | 5,772 |      |  |   | 3,932 | 
|Other investments                                 |  |      | 333   |      |  |   | 250   | 
|                                                 
|Investments and advances                          |  | $    | 9,741 |      |  | $ | 8,552 | 
|                                                 

EQUITY METHOD
INVESTMENTS

Ownership in equity investments at
December 31 is as follows:

|                         |  |            |       |            |  |            |       |            |  |  |       |  |  |   |       | 
|------------------------ |  | ---------- | ----- | ---------- |  | ---------- | ----- | ---------- |  |  | ----- |  |  | - | ----- | 
|                         |  |            |       |           
|                         |  | 2002       |       | 2003      
|                        
|                        
|                        
|                         |  | Ownership  |       | Investment |  | Ownership  |       | Investment
|                         |  | Percentage |       | Balance    |  | Percentage |       | Balance   
|                        
|                        
|                        
|Abiatar (Uruguay)        |  |            | 46.0% |            |  | $          | 25    |            |  |  | 46.0% |  |  | $ | 26    | 
|BellSouth Guatemala(1)   |  |            | 60.0% |            |  |            | 10    |            |  |  | 60.0% |  |  |   | 7     | 
|BellSouth Panama         |  |            | 43.7% |            |  |            | 73    |            |  |  | 43.7% |  |  |   | 86    | 
|BCP  São Paulo (Brazil) |  |            | 45.4% |            |  |            |      |            |  |  |      |  |  |   |      | 
|BSE  Northeast (Brazil) |  |            | 47.6% |            |  |            |      |            |  |  |      |  |  |   |      | 
|Cellcom (Israel)         |  |            | 34.8% |            |  |            | 144   |            |  |  | 34.8% |  |  |   | 191   | 
|Cingular Wireless        |  |            | 40.0% |            |  |            | 3,202 |            |  |  | 40.0% |  |  |   | 3,618 | 
|Sonofon (Denmark)        |  |            | 46.5% |            |  |            | 39    |            |  |  | 46.5% |  |  |   | 57    | 
|Other                    |  |            |      |            |  |            | 9     |            |  |  |      |  |  |   | 3     | 
|                        
|                         |  |            |       |            |  | $          | 3,502 |            |  |  |       |  |  | $ | 3,988 | 
|                        

|    |  |                                                                                                                                                                                                   
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) |  | This investment is accounted for under the
    equity method due to the existence of significant minority
    rights that limit our ability to exercise unilateral control
    over the operation.

Cingular

We own an approximate 40% economic interest in
Cingular Wireless, and share joint control of the venture with
SBC Communications, Inc. The following table presents 100% of



BELLSOUTH
2003      65




---



##### Table of Contents



NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS CONTINUED


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


BELLSOUTH CORPORATION

Cingulars assets, liabilities, and results
of operations for the years ended December 31:

|                               |  |      |        |      |  |   |        |  |  | 
|------------------------------ |  | ---- | ------ | ---- |  | - | ------ |  |  | 
|                               |  | 2002 |        | 2003 |  |  
|                              
|                              
|                              
|Balance Sheet
    Information: |  |      |        |      |  |   |        |  |  | 
|Current assets                 |  | $    | 2,731  |      |  | $ | 3,300  |  |  | 
|                              
|Noncurrent assets              |  | $    | 21,391 |      |  | $ | 22,226 |  |  | 
|                              
|Current liabilities            |  | $    | 2,787  |      |  | $ | 3,187  |  |  | 
|                              
|Noncurrent liabilities         |  | $    | 13,227 |      |  | $ | 13,196 |  |  | 
|                              
|Minority Interest              |  | $    | 567    |      |  | $ | 659    |  |  | 
|                              
|Members capital               |  | $    | 7,541  |      |  | $ | 8,484  |  |  | 
|                              

|                                                                      |  |      |        |      |  |      |        |   |  |   |        |  |  | 
|--------------------------------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ | - |  | - | ------ |  |  | 
|                                                                      |  | 2001 |        | 2002 |  | 2003 |        |  
|                                                                     
|                                                                     
|                                                                     
|Income Statement
    Information:                                     |  |      |        |      |  |      |        |   |  |  
|Revenues                                                              |  | $    | 14,268 |      |  | $    | 14,903 |   |  | $ | 15,483 |  |  | 
|                                                                     
|Operating Income                                                      |  | $    | 2,548  |      |  | $    | 2,521  |   |  | $ | 2,289  |  |  | 
|                                                                     
|Income Before Cumulative Effect of Change in
    Accounting Principle |  | $    | 1,692  |      |  | $    | 1,239  |   |  | $ | 1,022  |  |  | 
|                                                                     
|Cumulative Effect of Change in Accounting
    Principle               |  |      |       |      |  | $    | (32    | ) |  |   |       |  |  | 
|                                                                     
|Net Income                                                            |  | $    | 1,692  |      |  | $    | 1,207  |   |  | $ | 1,022  |  |  | 
|                                                                     

As of December 31, 2003, our book investment
exceeded our proportionate share of the net assets of Cingular
by $224.


E-Plus

We previously owned a 22.51% stake in E-Plus, a
German wireless carrier. In March 2002, we exercised an option
to exchange our stake in E-Plus for 234.7 million shares of
Dutch telecommunications provider Royal KPN N.V. (KPN). As a
result of this exchange, 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 our entire stake of 234.7 million shares in
March 2002 for $1,076 in proceeds and recognized a loss of $27,
or $17 after tax, on the sale.

Brazil (BCP and BSE)

We previously owned equity interests in two
wireless communications companies in Brazil (BCP and BSE). As a
result of the deteriorating financial condition of the companies
and subsequent loan defaults, we recorded an impairment loss of
approximately $383 during 2002, reducing the balance of our
investment and shareholder loans to zero. Because our investment
and net advances to BSE and BCP was reduced to zero and due to
the fact we had no further commitment or intention of financial
support, we ceased recognizing losses related to these
operations.

In May 2003, we sold our entire stake in BSE to
Telecom Americas, a subsidiary of America Movil. We received net
proceeds of $20 and recorded a loss of $75, or $73 net of tax,
which included the recognition of cumulative foreign currency
translation losses of $86. In October 2003, we closed a
settlement agreement and transferred our equity interests in BCP
to BCPs senior secured creditors. In addition, under a
separate agreement, we sold our debt in BCP to these creditors
for proceeds of $50. We recorded a loss of $154, or $161 with
tax impacts, which included the recognition of cumulative
foreign currency translation losses of $182. No tax benefit was
recognized for the capital losses generated by these sales due
to our current capital loss carryforward position.


Guatemala

As a result of difficult economic conditions and
increasing competition, we evaluated the long-term value of our
equity investment in Guatemala during 2002. The valuation and
assessment indicated that the decline in fair value below
carrying value was 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.

COST METHOD
INVESTMENTS

Cost method investments at December 31
consist of the following:

|                                                |  |      |     |      |  |   |     |  |  | 
|----------------------------------------------- |  | ---- | --- | ---- |  | - | --- |  |  | 
|                                                |  | 2002 |     | 2003 |  |  
|                                               
|                                               
|                                               
|Investments accounted for under the cost method |  | $    | 134 |      |  | $ | 382 |  |  | 
|                                               

We have investments in marketable securities,
primarily common stocks, which are accounted for under the cost
method. These investments are held primarily in grantor trusts
and our captive insurance subsidiary. Securities classified as
available-for-sale under SFAS No. 115 are carried at fair
value, with unrealized gains and losses, net of income taxes,
recorded in accumulated other comprehensive income
(loss) in the statement of changes in shareholders
equity and comprehensive income. The fair values of individual
investments in marketable securities are determined based on
market quotations. Equity securities that are restricted for
more than one year or not publicly traded are recorded at cost.

There were significant declines in public equity
markets in recent years, particularly in technology and
communications stocks. We concluded that the depressed market
for these investments, as well as the difficulties experienced
by similar companies, indicated that the decline was other than
temporary. As a result, we recorded other-than-temporary
impairments to reduce the carrying value of certain investments,
principally our investment in Qwest (see table below). These are
included in Other income (expense), net in the accompanying
consolidated statements of income.


Qwest

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



66 BELLSOUTH
2003




---



##### Table of Contents







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

|                  |      |        |      |          |     |           |        |             |      |        |        |  | 
|----------------- | ---- | ------ | ---- | -------- | --- | --------- | ------ | ----------- | ---- | ------ | ------ |  | 
|                  |      |        |      |          |     |           |        | Other-than- |      |       
|                  |      |        |      | Cash     |     | Losses on |        | Temporary   |      |       
|                  |      | Shares |      | Proceeds |     | Sales     |        | Impairments |      |       
|                 
|                 
|                 
|December 31, 2000 |      |        | 74.0 |          |     |           |        |             |      |        |        | 
|Less Sales:       |      |        |      |          |     |           |        |             |      |        |        | 
|                  | 2001 |        |      | 28.5     | (a) |           | $1,137 |             | $131 |        | $1,517 |  | 
|                  | 2002 |        |      | 45.5     |     |           | 300    |             | 129  |        | 207    |  | 
|                 
|December 31, 2002 |      |        | 0.0  |          |     | $1,437    |        | $260        |      | $1,724 |        | 
|                 



|    |  |                                                                           
|--- |  | --------------------------------------------------------------------------
|(a) |  | 1.7 million shares were exchanged for
    services (at book value of $81).

Tele Centro Oeste Celular
Participacoes SA (TCO)

In May 2000, we completed the purchase of a
combination of voting common stock and American Depositary
Receipts representing nonvoting preferred stock of TCO, a
Brazilian wireless company, for a total purchase price of
approximately $240. In 2001, we reduced the carrying value by
$138 for an other-than-temporary impairment. In 2002, we sold
the American Depositary Receipts for proceeds of $90 and
recognized a gain of $22, or $14 net of tax. In 2003, we sold
our remaining shares of TCO common stock for proceeds of $82 and
recognized a gain of $50, or $27 net of tax.

ADVANCES AND NOTES
RECEIVABLE

Advances and notes receivable at December 31
are as follows:

|         |                                     |      |       |       |  |   |       |       |  |  | 
|-------- | ----------------------------------- | ---- | ----- | ----- |  | - | ----- | ----- |  |  | 
|         |                                     | 2002 |       | 2003  |  |  
|        
|        
|        
|Cingular |                                     | $    | 3,817 |       |  | $ | 3,812 |       |  | 
|KPN      |                                     |      | 1,717 |       |  |   |      |       |  | 
|Other    |                                     |      | 238   |       |  |   | 120   |       |  | 
|        
|         | Total advances and notes receivable |      | $     | 5,772 |  |   | $     | 3,932 |  |  | 
|        

Effective July 1, 2003, BellSouth and SBC
Communications agreed to amend the terms of our notes with
Cingular. The amendment included reducing the fixed interest
rate from 7.5% to 6.0% per annum and extending the maturity date
from March 31, 2005 to June 30, 2008. We earned $287
in 2001, $284 in 2002, and $256 in 2003 from interest income on
this advance to Cingular. In addition, we have receivables and
payables incurred in the ordinary course of business recorded in
our balance sheets as follows:

|                         |  |              |    |      |  |   |    |  |  | 
|------------------------ |  | ------------ | -- | ---- |  | - | -- |  |  | 
|                         |  |              |    |     
|                         |  | As of        |    |     
|                         |  | December 31, |    |     
|                        
|                        
|                        
|                         |  | 2002         |    | 2003 |  |  
|                        
|                        
|                        
|Receivable from Cingular |  | $            | 49 |      |  | $ | 57 |  |  | 
|Payable to Cingular      |  | $            | 23 |      |  | $ | 33 |  |  | 
|                        

In April 2003, we received net proceeds of $1,458
resulting from an early repayment by KPN of the entire
outstanding balance of a Euro loan we had extended to KPN and
the settlement of related currency swaps. The net proceeds
include $1,802 for the full face value of the loan and $8 for
accrued interest, reduced by a settlement of a $352 liability
associated with foreign currency swap contracts. As a result of
the early repayment and settlement of the currency contracts, we
recorded a gain of $20, or $13 net of tax.


In June 2003, in connection with the sale of our
interest in two real estate partnerships, we received proceeds
of $97 for the repayment of loans we had extended to the
partnerships.


Interest income earned from advances other than
to Cingular was $93 in 2001, $117 in 2002, and $31 in 2003.


OTHER INVESTMENTS

Other investments at December 31, 2003
consist primarily of $244 in loan participation agreements
related to the Colombian operations. In January 2003, we
exercised a put in our loan participation agreement with our
Colombian partner and received proceeds of $35. As a result, no
gain or loss was recognized.

Note E  Acquisitions
and Divestitures

We have completed various transactions to further
our strategy of expanding our core operations and have divested
of interests that no longer meet our strategic objectives.

Acquisitions

In August 2003, we purchased an additional 21.7%
of our wireless operation in Argentina for a nominal amount. The
transaction increased our ownership of the operation to 86.7%.
We consolidated this operation prior to this additional
purchase. Additionally, we have been recording 100% of the
earnings/losses of the operation since 2002, when the minority
partners equity accounts were exhausted and we ceased
allocating losses to the minority interests. Accordingly, this
additional purchase did not impact the earnings or losses we
record from this operation. The assignment of the purchase price
to the estimated fair values of assets acquired and liabilities
assumed resulted in decreases to intangible assets of $15,
decreases to property, plant and equipment of $28 and a decrease
to the debt of $43. No goodwill was recorded as a result of the
purchase price allocation.

Divestitures

In June 2003, we sold our interests in two real
estate partnerships that held buildings, portions of which we
used for general and administrative space. We received proceeds
of $26 for our interest in the partnerships resulting in
recognition of a gain of $16, or $11 net of tax.

In November 2002, we sold our 100% ownership
interest in Listel, our remaining Brazilian yellow pages
operation, resulting in a pre-tax loss of $74, or $48 after tax.
In




BELLSOUTH
2003      67




---



##### Table of Contents



NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS CONTINUED


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


BELLSOUTH CORPORATION

January 2002, we exited our investment in OESP
Midea, a Brazilian yellow pages provider, through the exercise
of a put. There were no proceeds as the fair value of the put
was $0.

Note F  Intangible
Assets

Intangible assets are summarized as follows:

|                                               |  |                   |       |                   |  |          |       |              |  |   |       |  |  |   |       |  |  | 
|---------------------------------------------- |  | ----------------- | ----- | ----------------- |  | -------- | ----- | ------------ |  | - | ----- |  |  | - | ----- |  |  | 
|                                              
|                                              
|                                              
|                                               |  |                   |       |                   |  |         
|                                               |  | December 31, 2002 |       | December 31, 2003 |  |         
|                                               |  | Carrying          |       | Accumulated       |  | Carrying |       | Accumulated  |  |  
|                                               |  | Amount            |       | Amortization      |  | Amount   |       | Amortization |  |  
|                                              
|                                              
|                                              
|Intangible assets subject to amortization:     |  |                   |       |                   |  |          |       |              |  |   |       |  |  |   |       |  |  | 
|Capitalized Software                           |  | $                 | 2,557 |                   |  | $        | 957   |              |  | $ | 2,893 |  |  | $ | 1,303 |  |  | 
|Wireless Licenses                              |  |                   | 790   |                   |  |          | 277   |              |  |   | 764   |  |  |   | 294   |  |  | 
|Customer related intangible assets             |  |                   | 327   |                   |  |          | 265   |              |  |   | 330   |  |  |   | 288   |  |  | 
|Other                                          |  |                   | 37    |                   |  |          | 12    |              |  |   | 38    |  |  |   | 15    |  |  | 
|                                              
|Total                                          |  | $                 | 3,711 |                   |  | $        | 1,511 |              |  | $ | 4,025 |  |  | $ | 1,900 |  |  | 
|                                              
|Intangible assets not subject to amortization: |  |                   |       |                   |  |          |       |              |  |   |       |  |  |   |       |  |  | 
|Wireless Licenses                              |  | $                 | 145   |                   |  | $        | 7     |              |  | $ | 164   |  |  | $ | 12    |  |  | 
|MMDS Licenses                                  |  |                   | 20    |                   |  |          |      |              |  |   | 20    |  |  |   |      |  |  | 
|                                              
|Total                                          |  | $                 | 165   |                   |  | $        | 7     |              |  | $ | 184   |  |  | $ | 12    |  |  | 
|                                              
|Total Intangible Assets                        |  | $                 | 3,876 |                   |  | $        | 1,518 |              |  | $ | 4,209 |  |  | $ | 1,912 |  |  | 
|                                              

The following table presents current and expected
amortization expense of the existing intangible assets as of
December 31, 2003 for each of the following periods:

|                                                                    |                                          |      |   |     |     | 
|------------------------------------------------------------------- | ---------------------------------------- | ---- | - | --- | --- | 
|Aggregate amortization expense:                                     |                                          |      |   |    
|                                                                    | For the year ended
    December 31, 2003 |      | $ | 633 |    
|Expected amortization expense for the years
    ending December 31, |                                          |      |   |    
|                                                                    |                                          | 2004 |   |     | 610 | 
|                                                                    |                                          | 2005 |   |     | 476 | 
|                                                                    |                                          | 2006 |   |     | 330 | 
|                                                                    |                                          | 2007 |   |     | 207 | 
|                                                                    |                                          | 2008 |   |     | 120 | 

We adopted SFAS No. 142, Goodwill and
Other Intangible Assets, as a cumulative effect of change
in accounting principle on January 1, 2002. Accordingly,
our 2001 results presented herein are not comparable with those
in 2002 and 2003 results. On a pro forma basis, retroactively
applying the provisions of SFAS No. 142 to exclude
amortization of goodwill and indefinite-lived wireless licenses,
2001 income before income taxes and cumulative effect of changes
in accounting principle would have been $3,939, or $125 higher
than the reported $3,814, and diluted earnings per share would
have been $1.36, or $0.06 higher than the reported $1.30.

Intangible asset
impairments

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 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
America 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, completed its transitional impairment test in 2002
resulting in an impairment loss to BellSouth of $8 after tax.
These impairment losses are recorded as a cumulative effect of
change in accounting principle in the statements of income as of
January 1, 2002.


The changes in the carrying amount of goodwill by
operating segment for 2002 and 2003 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 changes                    |  |          | 6   |         |  |       | (21    | ) |  |   | (15    | ) |  | 
|                                
|Balance at December 31, 2002     |  | $        | 250 |         |  | $     | 97     |   |  | $ | 347    |   |  | 
|                                
|Other changes                    |  |          |    |         |  |       | (5     | ) |  |   | (5     | ) |  | 
|                                
|Balance at December 31,
    2003 |  | $        | 250 |         |  | $     | 92     |   |  | $ | 342    |   |  | 
|                                

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. Other changes above consist primarily of
foreign currency translation adjustments.

Other impairments of
intangible assets

As of December 31, 2001, we had Multichannel
Multipoint Distribution Service (MMDS) licenses classified
as held for sale under the transition provisions of SFAS
No. 144. During our 2002 quarterly assessment, we evaluated
the recoverability of the MMDS licenses for impairment. Based on
a probability weighted cash flow assessment, we determined that
the fair value of the licenses was less than the carrying
amount. Accordingly, we adjusted the carrying value to the
estimated fair value of $20, resulting in an impairment loss of
$221. The charge is included in the provision for restructuring
and asset impairments in the consolidated statements of income.
In addition, the MMDS licenses were reclassified to held and
used, as we no longer meet the criteria for held for sale
classification under the provisions of SFAS No. 144.

In September 2003, a decision was reached to
abandon a software project related to a network operations
system.




68 BELLSOUTH
2003




---



##### Table of Contents







The project was terminated due to changes in the
business since the initiation of the project and an assessment
of the remaining costs to complete the project. As a result, we
recorded an asset impairment charge of $52 to write-off
capitalized software associated with the project.



|         |                                                         
|-------- | --------------------------------------------------------
|Note G  | Supplemental Balance Sheet and Cash
    Flow Information

PROPERTY, PLANT AND
EQUIPMENT

Property, plant and equipment is summarized as
follows at December 31:

|                                   |                   |             |       |           |  |      |      |      |  |   |        |        |  |   |        |        |  |  | 
|---------------------------------- | ----------------- | ----------- | ----- | --------- |  | ---- | ---- | ---- |  | - | ------ | ------ |  | - | ------ | ------ |  |  | 
|                                   |                   | Estimated   |       |           |  |      |      |      |  |  
|                                   |                   | Depreciable |       | Average   |  |      |      |      |  |  
|                                   |                   | Lives       |       | Remaining |  |      |      |      |  |  
|                                   |                   | (In Years)  |       | Life      |  | 2002 |      | 2003 |  |  
|                                  
|                                  
|                                  
|Central office equipment           |                   |             | 811  |           |  |      | 4.8  |      |  | $ | 25,823 |        |  | $ | 26,066 |        |  | 
|Outside plant:                     |                   |             |       |           |  |      |      |      |  |   |        |        |  |   |        |        |  | 
|                                   | Copper cable      |             |       | 1516     |  |      |      | 6.8  |  |   |        | 19,577 |  |   |        | 19,975 |  |  | 
|                                   | Fiber cable       |             |       | 20        |  |      |      | 11.2 |  |   |        | 2,949  |  |   |        | 3,094  |  |  | 
|                                   | Poles and conduit |             |       | 3655     |  |      |      | 28.3 |  |   |        | 3,516  |  |   |        | 3,567  |  |  | 
|Operating and
    other equipment  |                   |             | 515  |           |  |      | 3.2  |      |  |   | 4,289  |        |  |   | 4,419  |        |  | 
|Building and building improvements |                   |             | 2545 |           |  |      | 28.0 |      |  |   | 4,532  |        |  |   | 4,780  |        |  | 
|Furniture and fixtures             |                   |             | 1015 |           |  |      | 8.9  |      |  |   | 2,388  |        |  |   | 2,478  |        |  | 
|Station equipment                  |                   |             | 6     |           |  |      | 2.8  |      |  |   | 722    |        |  |   | 763    |        |  | 
|Land                               |                   |             |      |           |  |      |     |      |  |   | 285    |        |  |   | 293    |        |  | 
|Plant under construction           |                   |             |      |           |  |      |     |      |  |   | 354    |        |  |   | 280    |        |  | 
|                                  
|                                   |                   |             |       |           |  |      |      |      |  |   | 64,435 |        |  |   | 65,715 |        |  | 
|Less: accumulated depreciation     |                   |             |       |           |  |      |      |      |  |   | 40,990 |        |  |   | 41,908 |        |  | 
|                                  
|Property, plant and equipment, net |                   |             |       |           |  |      |      |      |  | $ | 23,445 |        |  | $ | 23,807 |        |  | 
|                                  

DEFERRED CHARGES AND OTHER
ASSETS

Deferred charges and other assets are summarized
as follows at December 31:

|                                              |                                   |      |       |       |  |   |       |       |  |  | 
|--------------------------------------------- | --------------------------------- | ---- | ----- | ----- |  | - | ----- | ----- |  |  | 
|                                              |                                   | 2002 |       | 2003  |  |  
|                                             
|                                             
|                                             
|Deferred activation and installation expenses |                                   | $    | 1,800 |       |  | $ | 1,614 |       |  | 
|Prepaid pension and postretirement benefits   |                                   |      | 3,357 |       |  |   | 3,851 |       |  | 
|Other                                         |                                   |      | 569   |       |  |   | 390   |       |  | 
|                                             
|                                              | Deferred charges and other assets |      | $     | 5,726 |  |   | $     | 5,855 |  |  | 
|                                             

OTHER CURRENT
LIABILITIES

Other current liabilities are summarized as
follows at December 31:

|                                       |  |      |       |      |  |   |       |  |  | 
|-------------------------------------- |  | ---- | ----- | ---- |  | - | ----- |  |  | 
|                                       |  | 2002 |       | 2003 |  |  
|                                      
|                                      
|                                      
|Advanced billing and customer deposits |  | $    | 791   |      |  | $ | 863   |  |  | 
|Interest and rents accrued             |  |      | 438   |      |  |   | 470   |  |  | 
|Taxes payable                          |  |      | 225   |      |  |   | 632   |  |  | 
|Dividends payable                      |  |      | 380   |      |  |   | 461   |  |  | 
|Salaries and wages payable             |  |      | 329   |      |  |   | 359   |  |  | 
|Accrued compensated absences           |  |      | 222   |      |  |   | 224   |  |  | 
|Restructuring and severance accrual    |  |      | 115   |      |  |   | 72    |  |  | 
|Other                                  |  |      | 397   |      |  |   | 547   |  |  | 
|                                      
|Other current liabilities              |  | $    | 2,897 |      |  | $ | 3,628 |  |  | 
|                                      

OTHER NONCURRENT
LIABILITIES

Other noncurrent liabilities are summarized as
follows at December 31:

|                                                |  |      |       |      |  |   |       |  |  | 
|----------------------------------------------- |  | ---- | ----- | ---- |  | - | ----- |  |  | 
|                                                |  | 2002 |       | 2003 |  |  
|                                               
|                                               
|                                               
|Deferred installation and activation revenues   |  | $    | 1,800 |      |  | $ | 1,614 |  |  | 
|Accrued pension and postretirement benefits     |  |      | 1,001 |      |  |   | 983   |  |  | 
|Deferred credits                                |  |      | 790   |      |  |   | 724   |  |  | 
|Compensation related accruals                   |  |      | 664   |      |  |   | 747   |  |  | 
|Minority interests in consolidated subsidiaries |  |      | 205   |      |  |   | 209   |  |  | 
|Postemployment benefits                         |  |      | 265   |      |  |   | 237   |  |  | 
|Derivatives liability                           |  |      | 374   |      |  |   | 80    |  |  | 
|Other                                           |  |      | 156   |      |  |   | 100   |  |  | 
|                                               
|Other noncurrent liabilities                    |  | $    | 5,255 |      |  | $ | 4,694 |  |  | 
|                                               

SUPPLEMENTAL CASH FLOW
INFORMATION

|               |  |      |       |      |  |      |       |  |  |   |       |  |  | 
|-------------- |  | ---- | ----- | ---- |  | ---- | ----- |  |  | - | ----- |  |  | 
|               |  | 2001 |       | 2002 |  | 2003 |       | 
|              
|              
|              
|Cash paid for: |  |      |       |      |  |      |       |  |  |   |       |  |  | 
|Income taxes   |  | $    | 1,371 |      |  | $    | 940   |  |  | $ | 754   |  |  | 
|              
|Interest       |  | $    | 1,321 |      |  | $    | 1,238 |  |  | $ | 1,023 |  |  | 
|              

During 2003, we purchased a building and land,
which we were previously using under an operating lease, for $21
in cash and an assumed mortgage with a balance of $33.

During 2001, we tendered 1.7 million shares
of our investment in Qwest as payment for services rendered in
connection with a wholesale services agreement.


FLORIDA LATE PAYMENT
REFUND

In 2000, the Florida Public Service Commission
(PSC) 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 PSC issued an order adopting its
proposed action. We appealed to the Florida Supreme Court and
continued to bill and collect the charges subject to refund. On
October 31, 2002, the



BELLSOUTH
2003      69




---



##### Table of Contents



NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS CONTINUED


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


BELLSOUTH CORPORATION

Florida Supreme Court affirmed the decision of
the PSC. This required a one-time refund to affected customers
in Florida. Based on this decision, we recorded a reduction to
revenues of $108 and additional interest expense of $6 in the
third quarter of 2002. Refunds related to the accrual were made
during 2003.

WORLDCOM BANKRUPTCY

On July 21, 2002, WorldCom (currently known
as MCI) and certain of its subsidiary corporations filed
voluntary petitions for relief under Chapter 11 of the
United States Bankruptcy Code. A plan of reorganization was
filed in April 2003 and confirmation hearings commenced in
September 2003. On October 31, 2003, the Bankruptcy Court
confirmed the plan. On July 25, 2003, WorldCom filed a
motion with the Bankruptcy court requesting approval of a
settlement with us regarding pre-petition and post-petition
claims through April 30, 2003. As of April 30, 2003,
we had not paid certain pre-petition amounts due WorldCom
primarily related to a billing and collection agreement pending
this settlement. In addition, WorldCom had not paid us a lesser
amount they owed us for purchases of telecommunications
services. As a result of the settlement, we will make a net
payment of approximately $81 to WorldCom representing the
negotiated difference between the amounts owed. The settlement
also resolves numerous business issues that existed between the
parties and with certain exceptions, releases all claims arising
on or before April 30, 2003. The settlement will be final
upon the effective date of the plan of reorganization.

Note H  Debt

DEBT MATURING WITHIN ONE
YEAR

Debt maturing within one year is summarized as
follows at December 31:

|                          |                                      |                               |   |       |       |  |   |       |       | 
|------------------------- | ------------------------------------ | ----------------------------- | - | ----- | ----- |  | - | ----- | ----- | 
|                          |                                      | 2002                          |   | 2003 
|                          |                                      |                               |   |      
|                         
|                         
|                         
|Short-term notes payable: |                                      |                               |   |       |       |  |   |      
|                          | Bank loans                           |                               | $ | 22    |       |  | $ | 29    |      
|                          | Argentina bank loans(1)              |                               |   | 138   |       |  |   | 138   |      
|                          | Commercial paper                     |                               |   | 1,883 |       |  |   | 1,470 |      
|                          | Current maturities of long-term debt |                               |   | 3,071 |       |  |   | 1,854 |      
|                         
|                          |                                      | Debt maturing within one year |   | $     | 5,114 |  |   | $     | 3,491 | 
|                         

Weighted-average interest rate at end of period:


|                        |  |      |       |      |  |  |       |  |  | 
|----------------------- |  | ---- | ----- | ---- |  |  | ----- |  |  | 
|                        |  | 2002 |       | 2003 |  | 
|                        |  |      |       |      |  | 
|                       
|                       
|                       
|Bank loans              |  |      | 5.60% |      |  |  | 6.35% |  |  | 
|Argentina bank loans(1) |  |      | 5.02% |      |  |  | 5.02% |  |  | 
|Commercial paper        |  |      | 1.33% |      |  |  | 1.04% |  |  | 
|                       



|    |  |                                                                                                                                                                                                                 
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) |  | CRM, our subsidiary in Argentina, is in
    default on $490 of its US Dollar-denominated debt, which
    includes bank loans; therefore we have shown the balances and
    rates separately in the above tables.

|                                                 |  |      |       |      |  |   |       |  |  | 
|------------------------------------------------ |  | ---- | ----- | ---- |  | - | ----- |  |  | 
|                                                
|                                                
|                                                
|Credit lines at end of period:                   |  | 2002 |       | 2003 |  |  
|                                                 |  |      |       |      |  |  
|                                                
|                                                
|                                                
|Available domestic committed credit lines        |  | $    | 2,019 |      |  | $ | 1,500 |  |  | 
|Borrowings under domestic credit lines           |  | $    |      |      |  | $ |      |  |  | 
|Available international uncommitted credit lines |  | $    | 40    |      |  | $ | 118   |  |  | 
|Borrowings under international credit lines      |  | $    | 11    |      |  | $ | 12    |  |  | 

There are no significant commitment fees or
requirements for compensating balances associated with any lines
of credit.

LONG-TERM DEBT

Interest rates and maturities in the table below
are for the amounts outstanding at December 31:

|                                             |  |                                          |        |      |        |      |         |   |        |  |  | 
|-------------------------------------------- |  | ---------------------------------------- | ------ | ---- | ------ | ---- | ------- | - | ------ |  |  | 
|                                             |  |                                          |        | 2002 |        | 2003 |         |  
|                                            
|                                            
|                                            
|Issued by BellSouth Telecommunications, Inc. |  |                                          |        |      |        |     
|5.85%5.88%                                  |  | 20092045                                |        | $    | 437    |      |         | $ | 437    |  |  | 
|6.13%7%                                     |  | 20032033(1)                             |        |      | 2,600  |      |         |   | 2,151  |  |  | 
|7.5%7.63%                                   |  | 20332035                                |        |      | 600    |      |         |   | 300    |  |  | 
|7%                                           |  | 2095                                     |        |      | 500    |      |         |   | 500    |  |  | 
|1.24%2.42%                                  |  | Extendible Liquidity Securities due 2006 |        |      | 1,800  |      |         |   | 745    |  |  | 
|6.65%                                        |  | Zero-to-Full Debentures due 2095         |        |      | 196    |      |         |   | 217    |  |  | 
|6.3%                                         |  | Amortizing Debentures due 2015           |        |      | 299    |      |         |   | 277    |  |  | 
|Issued by BellSouth Corporation              |  |                                          |        |      |        |     
|5%7.38%                                     |  | 20062039(1)                             |        |      | 3,849  |      |         |   | 3,852  |  |  | 
|7.75%7.88%                                  |  | 20102030                                |        |      | 2,000  |      |         |   | 2,000  |  |  | 
|7.12%                                        |  | 2097                                     |        |      | 500    |      |         |   | 500    |  |  | 
|4.11%                                        |  | 20-put-1 Securities due 2021             |        |      | 1,000  |      |         |   | 1,000  |  |  | 
|9.13%9.19%                                  |  | Guarantee of ESOP Debt                   |        |      | 108    |      |         |   |       |  |  | 
|Issued by Foreign Operations                 |  |                                          |        |      |        |     
|3.30%9.25%                                  |  | Argentina due 2003-2008(2)               |        |      | 350    |      |         |   | 350    |  |  | 
|1.72%                                        |  | Chile due 2004                           |        |      | 180    |      |         |   | 180    |  |  | 
|2.95%14.18%                                 |  | Colombia due 20052006                   |        |      | 722    |      |         |   | 641    |  |  | 
|4.19%4.59%                                  |  | Venezuela due 2004                       |        |      | 23     |      |         |   | 23     |  |  | 
|1.79%2.06%                                  |  | Peru due 2005                            |        |      | 200    |      |         |   | 200    |  |  | 
|Capital leases and other                     |  |                                          | 68     |      |        |      | 86      |   |        | 
|Unamortized discount, net of premium         |  |                                          | (78    | )    |        |      | (116    | ) |        | 
|                                            
|                                             |  |                                          |        |      | 15,354 |      |         |   | 13,343 |  |  | 
|Current maturities                           |  |                                          | (3,071 | )    |        |      | (1,854  | ) |        | 
|Long-term debt                               |  | $                                        | 12,283 |      |        |      | $11,489 |   |        | 
|                                            



|    |  |                                                                                                                                                                                                                                      
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) |  | These debt maturities are affected by FAS 133
    accounting requirements to mark hedged debt to fair
    value.                                                                                                                     
|   
|(2) |  | CRM, our subsidiary in Argentina, is in
    default on $490 of its US Dollar-denominated debt. The debt is
    classified as current in our consolidated December 31, 2003
    balance sheet. This debt is non-recourse to BellSouth.

Several issues of long-term debt contain embedded
options, which may require us to repurchase the debt or



70 BELLSOUTH
2003




---



##### Table of Contents







will alter the interest rate associated with that
debt. Those issues, and their related options, are as follows:

|                                |  |                   
|------------------------------- |  | ------------------
|Issue                           |  | Date of Put Option
|                               
|                               
|                               
|20-put-1 Securities             |  | Annually in April 
|Extendible Liquidity Securities |  | Quarterly         
|Putable $281 debentures         |  | November 2006     

If the holders of the put options on the 20-put-1
Securities do not require us to repurchase the securities, the
interest rates for these securities will be reset based on
current market conditions. Since the 20-put-1 Securities can be
put to us annually, the balance is included in current
maturities of long-term debt in our balance sheet. The
extendible liquidity securities may be extended in
thirteen-month increments by the holders of the notes but will
not extend later than January 2006. The extendible liquidity
securities bear interest at the three-month LIBOR, plus or minus
a spread ranging from minus 0.02% to plus 0.06%. A portion of
the extendibles have not been extended. Holders of our 6.04%
bond maturing November 15, 2026, have a one-time ability to
put the bond back to us on November 15, 2006.

The Amortizing Debentures pay against principal
on a semi-annual basis and were issued with an original
principal balance of $375. The Zero-to-Full Debentures will
accrete to a total principal balance of $500 in 2015, at which
time we will begin paying interest through the maturity in 2095.


Maturities of long-term debt outstanding, in
principal amounts, at December 31, 2003 are summarized
below. Maturities after the year 2008 include the final
principal amount of $500 for the Zero-to-Full Debentures due in
2095.


|           |  |   |        |  |  | 
|---------- |  | - | ------ |  |  | 
|Maturities |  |   |        |  |  | 
|2004       |  | $ | 1,897  |  |  | 
|2005       |  |   | 941    |  |  | 
|2006       |  |   | 2,348  |  |  | 
|2007       |  |   | 25     |  |  | 
|2008       |  |   | 631    |  |  | 
|Thereafter |  |   | 7,900  |  |  | 
|          
|Total      |  | $ | 13,742 |  |  | 
|          

At December 31, 2003, we had a shelf
registration statement on file with the Securities and Exchange
Commission under which $2,250 of debt securities could be
publicly offered.

During the second quarter of 2003 we redeemed
$300 of 40-year, 7.5% debentures, due June 15, 2033. The
redemption price was 104.75% of the principal amount resulting
in a loss of $18, or $11 net of tax, on the early extinguishment
of this debt.


Note I  Income
Taxes

The consolidated balance sheets reflect the
anticipated tax impact of future taxable income or deductions
implicit in the consolidated balance sheets in the form of
temporary differences. These temporary differences reflect the
difference between the basis in assets and liabilities as
measured in the consolidated financial statements and as
measured by tax laws using enacted tax rates.

The provision for income taxes is summarized as
follows:


|                                 |         |      |       |       |   |      |       |       |   |   |       |       |   |  | 
|-------------------------------- | ------- | ---- | ----- | ----- | - | ---- | ----- | ----- | - | - | ----- | ----- | - |  | 
|                                 |         | 2001 |       | 2002  |   | 2003 |       |      
|                                
|                                
|                                
|Current                          |         |      |       |       |   |      |       |       |   |   |       |       |   | 
|                                 | Federal |      | $     | 1,440 |   |      | $     | 494   |   |   | $     | 1,022 |   |  | 
|                                 | State   |      |       | 88    |   |      |       | 36    |   |   |       | 129   |   |  | 
|                                 | Foreign |      |       | 97    |   |      |       | 109   |   |   |       | 120   |   |  | 
|                                
|                                 |         |      | 1,625 |       |   |      | 639   |       |   |   | 1,271 |       |   | 
|                                
|Deferred, net                    |         |      |       |       |   |      |       |       |   |   |       |       |   | 
|                                 | Federal |      |       | (277  | ) |      |       | 1,127 |   |   |       | 737   |   |  | 
|                                 | State   |      |       | 41    |   |      |       | 113   |   |   |       | 85    |   |  | 
|                                 | Foreign |      |       | 25    |   |      |       | (34   | ) |   |       | (48   | ) |  | 
|                                
|                                 |         |      | (211  | )     |   |      | 1,206 |       |   |   | 774   |       |   | 
|                                
|Investment tax credits, net      |         |      |       |       |   |      |       |       |   |   |       |       |   | 
|                                 | Federal |      |       | (33   | ) |      |       | (27   | ) |   |       | (27   | ) |  | 
|                                 | Foreign |      |       | (14   | ) |      |       | (10   | ) |   |       | (7    | ) |  | 
|                                
|                                 |         |      | (47   | )     |   |      | (37   | )     |   |   | (34   | )     |   | 
|                                
|Total provision for income taxes |         | $    | 1,367 |       |   | $    | 1,808 |       |   | $ | 2,011 |       |   | 
|                                

Temporary differences which gave rise to deferred
tax assets and (liabilities) at December 31 were as follows:

|                                            |  |      |        |      |  |   |        |   |  | 
|------------------------------------------- |  | ---- | ------ | ---- |  | - | ------ | - |  | 
|                                            |  | 2002 |        | 2003 |  |  
|                                           
|                                           
|                                           
|Loan impairments                            |  | $    | 112    |      |  | $ |       |   |  | 
|Operating loss and tax credit carryforwards |  |      | 869    |      |  |   | 718    |   |  | 
|Capital loss carryforwards                  |  |      | 326    |      |  |   | 781    |   |  | 
|Severance accrual                           |  |      | 65     |      |  |   | 58     |   |  | 
|Allowance for uncollectibles                |  |      | 112    |      |  |   | 183    |   |  | 
|Regulatory accruals                         |  |      | 25     |      |  |   | 39     |   |  | 
|Other                                       |  |      | 85     |      |  |   | 184    |   |  | 
|                                           
|                                            |  |      | 1,594  |      |  |   | 1,963  |   |  | 
|                                           
|Valuation Allowance                         |  |      | (906   | )    |  |   | (1,135 | ) |  | 
|                                           
|Deferred tax assets                         |  | $    | 688    |      |  | $ | 828    |   |  | 
|                                           
|Property related                            |  | $    | (3,075 | )    |  | $ | (3,705 | ) |  | 
|Equity investments                          |  |      | (982   | )    |  |   | (1,647 | ) |  | 
|Issue basis accounting                      |  |      | (246   | )    |  |   |       |   |  | 
|Licenses                                    |  |      | (126   | )    |  |   | (69    | ) |  | 
|Compensation related                        |  |      | (190   | )    |  |   | (286   | ) |  | 
|Other                                       |  |      | (176   | )    |  |   | (165   | ) |  | 
|                                           
|Deferred tax liabilities                    |  |      | (4,795 | )    |  |   | (5,872 | ) |  | 
|                                           
|Unamortized investment tax credits          |  |      | (27    | )    |  |   |       |   |  | 
|                                           
|Net deferred tax liability                  |  | $    | (4,134 | )    |  | $ | (5,044 | ) |  | 
|                                           

The valuation allowance on deferred tax assets
increased by $229 in 2003. The valuation allowance relates to
excess U.S. capital losses, foreign and state operating losses,
and state credits that may not be utilized during the
carryforward period. The carryforward periods for the excess
capital losses expire in 2007 and 2008. Approximately 45% of the
operating losses are in foreign jurisdictions with expirations
in years between 2004 and 2009. The remainder are state losses
and credit carryforwards expiring in various years beginning in
2004.

At December 31, 2003, net deferred tax
liabilities include a deferred tax asset of $267 relating to
compensa-




BELLSOUTH
2003      71




---



##### Table of Contents



NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS CONTINUED


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


BELLSOUTH CORPORATION

tion expense under SFAS 123, Accounting for
Stock-Based Compensation. The provisions of SFAS No. 123 do
not allow a valuation allowance to be recorded unless future
taxable income is expected to be insufficient to recover the
asset. Full realization of the deferred asset requires stock
options to be exercised at a price equaling the sum of the
strike price plus the fair value at the grant date. A
significant number of the options for which a tax benefit has
been recognized have a combined strike price and fair value at
grant date in excess of $45. Accordingly, there can be no
assurance that the stock price of BellSouth will rise to levels
sufficient to realize the entire tax benefit currently reflected
in our balance sheet.

The net deferred tax liability at
December 31, 2003 included a current asset balance of $305
and a noncurrent liability balance of $5,349. At
December 31, 2003, deferred investment tax credits were
fully amortized. The net deferred tax liability at
December 31, 2002 included a current asset balance of $318
and a noncurrent liability balance, including investment tax
credits, of $4,452.


A reconciliation of the federal statutory income
tax rate to our effective tax rate follows:


|                                                                           |  |      |      |      |  |      |      |   |  |  |      |   |  | 
|-------------------------------------------------------------------------- |  | ---- | ---- | ---- |  | ---- | ---- | - |  |  | ---- | - |  | 
|                                                                           |  | 2001 |      | 2002 |  | 2003 |      |  
|                                                                          
|                                                                          
|                                                                          
|Federal statutory tax rate                                                 |  |      | 35.0 | %    |  |      | 35.0 | % |  |  | 35.0 | % |  | 
|State income taxes, net of federal income tax
    benefit                  |  |      | 2.3  |      |  |      | 2.2  |   |  |  | 2.5  |   |  | 
|Net earnings (losses) of equity affiliates                                 |  |      | 1.9  |      |  |      | (0.3 | ) |  |  | (0.4 | ) |  | 
|Change in valuation allowance                                              |  |      | 1.8  |      |  |      | 7.1  |   |  |  | 0.7  |   |  | 
|Investment tax credits                                                     |  |      | (0.9 | )    |  |      | (0.6 | ) |  |  | (0.3 | ) |  | 
|Book / tax differences on dispositions of
    subsidiaries and investments |  |      | (3.2 | )    |  |      | (0.9 | ) |  |  |     |   |  | 
|Other                                                                      |  |      | (1.1 | )    |  |      | (1.6 | ) |  |  | (1.6 | ) |  | 
|                                                                          
|Effective tax rate                                                         |  |      | 35.8 | %    |  |      | 40.9 | % |  |  | 35.9 | % |  | 
|                                                                          

At December 31, 2003, we had approximately
$954 of cumulative unrepatriated earnings on consolidated
foreign subsidiaries and equity investments in unconsolidated
businesses. The deferred tax liability related to these
unrepatriated earnings was excluded under SFAS No. 109
because such earnings are intended to be reinvested
indefinitely. The determination of the deferred tax liability is
not practicable at this time.



|         |                                          
|-------- | -----------------------------------------
|Note J  | Workforce Reduction and
    Restructuring

WORKFORCE REDUCTION
CHARGES

Based on ongoing challenges in the telecom
industry, continued economic pressures, the uncertainty
resulting from regulatory rulings and productivity improvements,
we have initiated workforce reductions and recorded charges
related to approximately 13,400 employees in the last three
years. These downsizings were implemented on a voluntary and
non-voluntary basis. The positions were both management and
non-management, primarily in network operations where the volume
of work has substantially decreased. Charges to earnings have
been recognized in accordance with provisions of SFAS
No. 112, Employers Accounting for
Postemployment Benefits (SFAS No. 112), and consisted
primarily of cash severance, outplacement and payroll taxes
under pre-existing separation pay plans. The following table
summarizes the charges by year:

|     |  |             |  |         |  | 
|---- |  | ----------- |  | ------- |  | 
|     |  | Employee    |  | Related |  | 
|     |  | separations |  | charge  |  | 
|    
|    
|    
|2001 |  | 6,100       |  | $232    |  | 
|2002 |  | 3,800       |  | $430    |  | 
|2003 |  | 3,500       |  | $132    |  | 

ASSET IMPAIRMENTS

In 2002, we announced we were eliminating certain
service offerings, including our own line of e-business services
and some products within our wholesale long distance portfolio.
We also discontinued operations at our multi-media Internet
exchange in Miami. In connection with the previously announced
exit of our public telephone operations, our periodic evaluation
of the undiscounted cash flows indicated an impairment.

As a result of these combined events, we recorded
a charge of $134 in accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets and Emerging Issues Task Force Issue No. 94-3,
Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity. This charge
includes asset impairments, early termination penalties on
contracts and leases, and severance for affected employees.


RESTRUCTURING
LIABILITY

As of December 31, 2003, the aggregate
liability related to the charges described above, excluding
postretirement and pension impacts, was $72. As of
December 31, 2003 announced workforce reductions are
expected to be completed by the end of the first quarter 2004.

|                             |  |              |      |            |  |       |     |   |  |   |      |   |  | 
|---------------------------- |  | ------------ | ---- | ---------- |  | ----- | --- | - |  | - | ---- | - |  | 
|                             |  |              |      |           
|                             |  | Type of Cost |      |           
|                            
|                            
|                            
|                             |  | Employee     |      | Other Exit |  |      
|                             |  | Separations  |      | Costs      |  | Total |     |  
|                            
|                            
|                            
|Balance at December 31, 2001 |  | $            | 202  |            |  | $     |    |   |  | $ | 202  |   |  | 
|Additions                    |  |              | 430  |            |  |       | 38  |   |  |   | 468  |   |  | 
|                            
|Deductions                   |  |              | (548 | )          |  |       | (7  | ) |  |   | (555 | ) |  | 
|                            
|                            
|Balance at December 31, 2002 |  | $            | 84   |            |  | $     | 31  |   |  | $ | 115  |   |  | 
|                            
|Additions                    |  |              | 132  |            |  |       | 1   |   |  |   | 133  |   |  | 
|Deductions                   |  |              | (150 | )          |  |       | (26 | ) |  |   | (176 | ) |  | 
|                            
|Balance at December 31, 2003 |  | $            | 66   |            |  | $     | 6   |   |  | $ | 72   |   |  | 
|                            

The $132 in additions to the accrual associated
with employee separations relates to accruals for estimated
payments for the current year workforce reductions. Deductions
of $150 consist of $125 in cash severance payments and $25 for
adjustments to the accrual due to



72 BELLSOUTH
2003




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##### Table of Contents







estimated demographics being different than
actual demographics of employees that separated from the
company. Deductions from the accrual for other exit costs
consist primarily of cash payments of $18 settling liabilities
for early contract terminations.

Note K  Employee Benefit
Plans

PENSION AND OTHER
POSTRETIREMENT BENEFIT PLANS

Substantially all of our employees are covered by
noncontributory defined benefit pension plans, as well as
postretirement health and life insurance welfare plans
(other benefits). The company uses a
December 31 measurement date for its plans.

Pension Plans

For defined benefit pension plans, the benefit
obligation is the projected benefit obligation, the
actuarial present value as of a date of all benefits attributed
by the pension benefit formula to employee service rendered to
that date. The pension plan covering management employees is a
cash balance plan, which provides pension benefits determined by
a combination of compensation-based service and additional
credits and individual account-based interest credits. The
projected benefit obligations assume additional credits greater
than the minimum levels specified in the written plan.

For non-management employees, pension benefits
earned prior to 1999 are based on specified benefit amounts and
years of service through 1998. Benefits earned in 1999 and
subsequent years are calculated under a cash balance plan that
is based on an initial cash balance amount, negotiated pension
band increases and interest credits. Non-management pension
obligations include the pension band increases.


Other Benefits

We provide certain medical, dental and life
insurance benefits to substantially all retired employees under
various plans and accrue actuarially determined postretirement
benefit costs as active employees earn these benefits. We
maintain Voluntary Employee Beneficiary Association (VEBA)
trusts to partially fund these postretirement benefits; however,
there are no ERISA or other regulations requiring these
postretirement benefit plans to be funded annually.

For postretirement benefit plans, the benefit
obligation is the accumulated postretirement benefit
obligation, the actuarial present value as of a date of
all future benefits attributed under the terms of the
postretirement benefit plan to employee service rendered to that
date.


In determining the accumulated benefit obligation
of the management health care plan, we anticipate cost sharing
adjustments for eligible employees who retire after
December 31, 1991. The written plan provides for an annual
dollar value cap for the purpose of determining contributions
required from retirees. However, because of past practice, some
level of cost sharing of medical trend inflation above the caps
is considered in the valuation.


For our non-management labor contracts that
contain an annual dollar value cap for the purpose of
determining contributions required from retirees, we have waived
the cap during the current contract periods and thus not
collected contributions from those non-management retirees. The
caps are set at each bargaining cycle in connection with the
negotiation of the overall contract. In accordance with the
provisions of SFAS No. 106, we account for non-management
retiree health benefits based on the terms of the contract.


Medicare Prescription Drug,
Improvement and Modernization Act of 2003

Other postretirement benefit amounts include the
estimated impact of the Medicare Prescription Drug, Improvement
and Modernization Act of 2003 (the Act), which was signed into
law on December 8, 2003. A plan sponsors eligibility
for the federal subsidy depends on whether the plans
prescription drug benefit is at least actuarially
equivalent to the Medicare Part D benefit. To
determine actuarial equivalence, we compared the
Medicare Part D standard drug coverage to BellSouths
retiree prescription drug coverage. We calculated the actuarial
values based on nationwide statistics published in a
standardized rating manual, and adjusted for historical
utilization by BellSouth retirees. After taking retiree premiums
and cost sharing provisions of each plan into consideration, the
BellSouth plan still provides a more valuable benefit to
retirees. Thus we believe that BellSouth should be eligible for
subsidies into the foreseeable future.

We remeasured our obligation as of
December 1, 2003 to incorporate the impact of the Act which
resulted in a reduction to the accumulated benefit obligation by
$572. The remeasurement resulted in a reduction of net
postretirement benefit cost of $26 in 2003. Specific
authoritative guidance on the accounting for the federal subsidy
is pending and that guidance, when issued, could require
BellSouth to change its estimated impact on 2004 results.


Key assumptions included in the calculation of
the decrease in the obligation included:




| |   |                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------
| |  | Federal subsidy of $690 per participant beginning
    in 2006, increasing with the assumed health care cost trend rate
    after 2006;
| |  | receipt of reimbursements from Medicare in the
    same year that we pay our drug claims;                                             
| |  | estimated changes in retiree participation rates
    and                                                                              
| |  | no adjustment for taxation of the subsidy.                                                                                            

In December 2003, the FASB revised SFAS
No. 132, Employers Disclosures about Pensions
and Other Postretirement Benefits. It requires additional
disclosures to those in the original SFAS No. 132 about the
plan assets, benefit obligations, cash flows, and net periodic
benefit cost of defined benefit plans and other postretirement
benefit plans. The requirements of this statement are presented
below.



BELLSOUTH
2003      73




---



##### Table of Contents



NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS CONTINUED


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


BELLSOUTH CORPORATION

The following tables summarize benefit costs, as
well as the assumptions, benefit obligations, changes in plan
assets and funded status at or for the years ended
December 31:

|                                                                                                |  |                  |        |                |  |      |        |      |  |   |        |   |  |   |        |   |  | 
|----------------------------------------------------------------------------------------------- |  | ---------------- | ------ | -------------- |  | ---- | ------ | ---- |  | - | ------ | - |  | - | ------ | - |  | 
|                                                                                                |  |                  |        |                |  |     
|                                                                                                |  | Pension Benefits |        | Other Benefits |  |     
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                                |  | 2002             |        | 2003           |  | 2002 |        | 2003 |  |  
|                                                                                                |  |                  |        |                |  |      |        |      |  |  
|                                                                                               
|                                                                                               
|                                                                                               
|Change in benefit
    obligation:                                                               |  |                  |        |                |  |      |        |      |  |   |        |   |  |   |        |   |  | 
|Benefit obligation at the beginning of the year                                                 |  | $                | 11,928 |                |  | $    | 11,386 |      |  | $ | 6,315  |   |  | $ | 7,387  |   |  | 
|Service cost                                                                                    |  |                  | 177    |                |  |      | 181    |      |  |   | 51     |   |  |   | 50     |   |  | 
|Interest cost                                                                                   |  |                  | 809    |                |  |      | 742    |      |  |   | 453    |   |  |   | 478    |   |  | 
|Amendments                                                                                      |  |                  |       |                |  |      |       |      |  |   |       |   |  |   | (572   | ) |  | 
|Actuarial (gain) loss                                                                           |  |                  | 437    |                |  |      | 803    |      |  |   | 916    |   |  |   | 293    |   |  | 
|Benefits and lump sums paid                                                                     |  |                  | (2,000 | )              |  |      | (1,492 | )    |  |   | (400   | ) |  |   | (480   | ) |  | 
|Curtailment                                                                                     |  |                  | 34     |                |  |      |       |      |  |   | 39     |   |  |   |       |   |  | 
|Special termination benefits                                                                    |  |                  | 1      |                |  |      |       |      |  |   | 13     |   |  |   |       |   |  | 
|                                                                                               
|Benefit obligation at the end of the year                                                       |  | $                | 11,386 |                |  | $    | 11,620 |      |  | $ | 7,387  |   |  | $ | 7,156  |   |  | 
|                                                                                               
|                                                                                               
|Change in plan
    assets:                                                                      |  |                  |        |                |  |      |        |      |  |   |        |   |  |   |        |   |  | 
|Fair value of plan assets at the beginning of the
    year                                      |  | $                | 16,617 |                |  | $    | 13,338 |      |  | $ | 3,163  |   |  | $ | 2,820  |   |  | 
|Actual return (loss) on plan assets                                                             |  |                  | (1,279 | )              |  |      | 2,759  |      |  |   | (461   | ) |  |   | 761    |   |  | 
|Employer contribution                                                                           |  |                  |       |                |  |      |       |      |  |   | 493    |   |  |   | 563    |   |  | 
|Plan participants contributions                                                                |  |                  |       |                |  |      |       |      |  |   | 25     |   |  |   | 29     |   |  | 
|Benefits and lump sums paid                                                                     |  |                  | (2,000 | )              |  |      | (1,492 | )    |  |   | (400   | ) |  |   | (480   | ) |  | 
|                                                                                               
|Fair value of plan assets at the end of year                                                    |  | $                | 13,338 |                |  | $    | 14,605 |      |  | $ | 2,820  |   |  | $ | 3,693  |   |  | 
|                                                                                               
|                                                                                               
|Funded status:                                                                                  |  |                  |        |                |  |      |        |      |  |   |        |   |  |   |        |   |  | 
|As of the end of the year                                                                       |  | $                | 1,952  |                |  | $    | 2,985  |      |  | $ | (4,567 | ) |  | $ | (3,463 | ) |  | 
|Unrecognized prior service cost                                                                 |  |                  | (472   | )              |  |      | (432   | )    |  |   | 335    |   |  |   | (49    | ) |  | 
|Unrecognized net (gain) loss                                                                    |  |                  | 1,535  |                |  |      | 942    |      |  |   | 3,213  |   |  |   | 2,923  |   |  | 
|Unrecognized net (asset) obligation                                                             |  |                  | (5     | )              |  |      |       |      |  |   | 365    |   |  |   | (38    | ) |  | 
|                                                                                               
|Prepaid (accrued) benefit cost                                                                  |  | $                | 3,010  |                |  | $    | 3,495  |      |  | $ | (654   | ) |  | $ | (627   | ) |  | 
|                                                                                               
|                                                                                               
|Amounts recognized in the
    consolidated balance sheets at December 31:                       |  |                  |        |                |  |      |        |      |  |   |        |   |  |   |        |   |  | 
|Prepaid benefit cost                                                                            |  | $                | 3,088  |                |  | $    | 3,572  |      |  | $ | 269    |   |  | $ | 279    |   |  | 
|Accrued benefit cost                                                                            |  |                  | (78    | )              |  |      | (77    | )    |  |   | (923   | ) |  |   | (906   | ) |  | 
|                                                                                               
|Net amount recognized                                                                           |  | $                | 3,010  |                |  | $    | 3,495  |      |  | $ | (654   | ) |  | $ | (627   | ) |  | 
|                                                                                               
|                                                                                               
|Weighted-average assumptions
    used to determine benefit obligations at
    December 31:      |  |                  |        |                |  |      |        |      |  |   |        |   |  |   |        |   |  | 
|Discount rate                                                                                   |  |                  | 6.75%  |                |  |      | 6.25%  |      |  |   | 6.75%  |   |  |   | 6.25%  |   |  | 
|Rate of compensation increase                                                                   |  |                  | 5.10%  |                |  |      | 5.10%  |      |  |   | 4.80%  |   |  |   | 4.80%  |   |  | 
|Health care cost trend rate assumed for next year
    (Pre-age 65)                              |  |                  |       |                |  |      |       |      |  |   | 10.00% |   |  |   | 9.00%  |   |  | 
|Rate to which the cost trend rate is assumed to
    decline (the ultimate trend rate)  Pre-65  |  |                  |       |                |  |      |       |      |  |   | 5.50%  |   |  |   | 5.00%  |   |  | 
|Year that the rate reaches the ultimate trend
    rate  Pre-65                                 |  |                  |       |                |  |      |       |      |  |   | 2012   |   |  |   | 2010   |   |  | 
|Health care cost trend rate assumed for next year
    (Post-age 65)                             |  |                  |       |                |  |      |       |      |  |   | 12.00% |   |  |   | 13.00% |   |  | 
|Rate to which the cost trend rate is assumed to
    decline (the ultimate trend rate)  Post-65 |  |                  |       |                |  |      |       |      |  |   | 5.50%  |   |  |   | 5.00%  |   |  | 
|Year that the rate reaches the ultimate trend
    rate  Post-65                                |  |                  |       |                |  |      |       |      |  |   | 2013   |   |  |   | 2010   |   |  | 
|                                                                                               



Assumed health care cost trend rates have a
significant effect on the amounts reported for the health care
plan. A one-percentage point change in assumed health care cost
trend rates would have the following effects as of
December 31, 2003:


|                                                         |  |                |     |                |  |   |      |  
|-------------------------------------------------------- |  | -------------- | --- | -------------- |  | - | ---- | -
|                                                         |  | 1-Percentage   |     | 1-Percentage  
|                                                         |  | Point Increase |     | Point Decrease
|                                                        
|                                                        
|                                                        
|Effect on total service and interest cost
    components |  | $              | 45  |                |  | $ | (32  | )
|Effect on other postretirement benefit obligation        |  | $              | 487 |                |  | $ | (411 | )

In contrast to the projected benefit obligation,
the accumulated benefit obligation represents the actuarial
present value of benefits based on employee service and
compensation as of a certain date and does not include an
assumption about future compensation levels. The accumulated
benefit obligation for the qualified defined benefit pension
plans was $10,741 and $11,164 at December 31, 2002 and 2003
respectively.

The Other benefits funded status above of
$(4,567) and $(3,463) includes a plan with a positive funded
status. For the remaining plans the unfunded status was $(4,740)
and $(3,754).




74 BELLSOUTH
2003




---



##### Table of Contents







|                                                                                                              |                              |                  |        |                |  |      |        |      |   |      |        |      |  |   |        |    |  |   |        |    |  |   |        |   |  |  | 
|------------------------------------------------------------------------------------------------------------- | ---------------------------- | ---------------- | ------ | -------------- |  | ---- | ------ | ---- | - | ---- | ------ | ---- |  | - | ------ | -- |  | - | ------ | -- |  | - | ------ | - |  |  | 
|                                                                                                              |                              |                  |        |                |  |     
|                                                                                                              |                              | Pension Benefits |        | Other Benefits |  |     
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                              |                              | 2001             |        | 2002           |  | 2003 |        | 2001 |   | 2002 |        | 2003 |  |  
|                                                                                                             
|                                                                                                             
|                                                                                                             
|Components of net periodic
    benefit cost:                                                                  |                              |                  |        |                |  |      |        |      |   |      |        |      |  |   |        |    |  |   |        |    |  |   |        |   |  | 
|Service cost                                                                                                  |                              | $                | 209    |                |  | $    | 177    |      |   | $    | 181    |      |  | $ | 42     |    |  | $ | 51     |    |  | $ | 50     |   |  | 
|Interest cost                                                                                                 |                              |                  | 919    |                |  |      | 809    |      |   |      | 742    |      |  |   | 428    |    |  |   | 453    |    |  |   | 478    |   |  | 
|Expected return on plan assets                                                                                |                              |                  | (1,655 | )              |  |      | (1,598 | )    |   |      | (1,386 | )    |  |   | (299   | )  |  |   | (323   | )  |  |   | (315   | ) |  | 
|Amortization of prior service cost                                                                            |                              |                  | (31    | )              |  |      | (50    | )    |   |      | (39    | )    |  |   | 65     |    |  |   | 164    |    |  |   | 149    |   |  | 
|Amortization of actuarial (gain) loss                                                                         |                              |                  | (220   | )              |  |      | (145   | )    |   |      | (28    | )    |  |   | 31     |    |  |   | 34     |    |  |   | 108    |   |  | 
|Amortization of transition (asset) obligation                                                                 |                              |                  | (19    | )              |  |      | (19    | )    |   |      | (5     | )    |  |   | 79     |    |  |   | 75     |    |  |   | 66     |   |  | 
|                                                                                                             
|                                                                                                             
|Net periodic benefit
    cost                                                                                 |                              | $                | (797   | )              |  | $    | (826   | )    |   | $    | (535   | )    |  | $ | 346    |    |  | $ | 454    |    |  | $ | 536    |   |  | 
|                                                                                                              | Curtailment (gain) loss      |                  |        |               |  |      |        | (21  | ) |      |        |     |  |   |        | 97 |  |   |        | 66 |  |   |        |  |  |  | 
|                                                                                                              | Settlement (gain) loss       |                  |        |               |  |      |        | 181  |   |      |        | 49   |  |   |        |   |  |   |        |   |  |   |        |  |  |  | 
|                                                                                                              | Special termination benefits |                  |        |               |  |      |        |     |   |      |        |     |  |   |        |   |  |   |        | 13 |  |   |        |  |  |  | 
|                                                                                                             
|Net periodic benefit cost with adjustments                                                                    |                              | $                | (797   | )              |  | $    | (666   | )    |   | $    | (486   | )    |  | $ | 443    |    |  | $ | 533    |    |  | $ | 536    |   |  | 
|                                                                                                             
|                                                                                                             
|Weighted-average assumptions
    used to determine net periodic benefit cost for years ended
    December 31: |                              |                  |        |                |  |      |        |      |   |      |        |      |  |   |        |    |  |   |        |    |  |   |        |   |  | 
|Discount rate                                                                                                 |                              |                  | 7.75%  |                |  |      | 7.25%  |      |   |      | 6.75%  |      |  |   | 7.75%  |    |  |   | 7.25%  |    |  |   | 6.75%  |   |  | 
|Expected return on plan assets                                                                                |                              |                  | 9.00%  |                |  |      | 9.00%  |      |   |      | 8.50%  |      |  |   | 8.25%  |    |  |   | 8.25%  |    |  |   | 8.00%  |   |  | 
|Rate of compensation increase                                                                                 |                              |                  | 5.30%  |                |  |      | 5.10%  |      |   |      | 5.10%  |      |  |   | 4.80%  |    |  |   | 4.80%  |    |  |   | 4.80%  |   |  | 
|Health care cost trend rate pre-age 65                                                                        |                              |                  |        |                |  |      |        |      |   |      |        |      |  |   | 8.50%  |    |  |   | 8.00%  |    |  |   | 10.00% |   |  | 
|Health care cost trend rate post-age 65                                                                       |                              |                  |        |                |  |      |        |      |   |      |        |      |  |   | 11.10% |    |  |   | 10.50% |    |  |   | 12.00% |   |  | 

Curtailments and
Settlements

In 2001, we recognized curtailment losses of $97
related to other postretirement benefits: $72 related to
accelerated recognition of prior service cost in excess of the
decrease in our postretirement benefit obligation for the
wireless employees that are covered under Cingulars
postretirement benefit plans, and $25 related to work force
reduction activity. Work force reduction activity in 2002
resulted in that years curtailment gain for pensions and
the curtailment and special termination benefits charges for
other postretirement benefits.

In 2002 and 2003, lump-sum distributions from the
pension plans exceeded the settlement threshold equal to the sum
of the service cost and interest cost components of net periodic
pension cost. Of the $181 and $49 in settlement charges noted
above, $167 ($100 after tax) for 2002 and $47 ($29 after tax)
for 2003 were recognized in operating results because a portion
of the settlement charges were capitalized.


Expected Return on Assets
Assumption

As of December 2003 the 5-year average return on
BellSouth pension assets was 5.9%, the 10-year average return
was 9.4%, and the average return since inception was 10.9%. Our
asset returns for 2003 were in excess of 22%. The expected
return on plan assets reflects asset allocations, investments
strategy and the views of investment managers and other large
pension plan sponsors as well as historical returns. The
postretirement benefits rate is slightly lower than the pension
rate due to the use of a taxable postretirement benefits trust.

Plan Assets

BellSouths weighted-average target
allocations and actual asset allocations by asset category are:

|                  |       |             |        |         |  |             |     |          |  |      |     |      |  |  |        |  |  |  |     |      |  |  |     |      |  |  | 
|----------------- | ----- | ----------- | ------ | ------- |  | ----------- | --- | -------- |  | ---- | --- | ---- |  |  | ------ |  |  |  | --- | ---- |  |  | --- | ---- |  |  | 
|                  |       |             |        |         |  |             |     |          |  |      |     |     
|                  |       |             |        |         |  |             |     | Other    |  |     
|                  |       |             |        | Pension |  |             |     | Benefits |  |     
|                 
|                 
|                 
|                  |       |             |        |         |  |             |     |         
|                  |       | At          |        |         |  | At          |     |         
|                  |       | December 31 |        |         |  | December 31 |     |         
|                  |       |            
|                  |       |            
|                  |       |            
|Asset Category    |       | Target      |        | 2002    |  | 2003        |     | Target   |  | 2002 |     | 2003 |  | 
|                 
|                 
|                 
|Equity securities |       |             | 45-75% |         |  |             | 56% |          |  |      | 57% |      |  |  | 50-85% |  |  |  | 75% |      |  |  | 78% |      |  | 
|Debt securities   |       |             | 10-25  |         |  |             | 20  |          |  |      | 19  |      |  |  | 0-10   |  |  |  | 7   |      |  |  | 5   |      |  | 
|Real estate       |       |             | 5-15   |         |  |             | 10  |          |  |      | 10  |      |  |  | 5-15   |  |  |  | 5   |      |  |  | 4   |      |  | 
|Other             |       |             | 5-15   |         |  |             | 14  |          |  |      | 14  |      |  |  | 15-25  |  |  |  | 13  |      |  |  | 13  |      |  | 
|                 
|                  | Total |             |        |         |  |             |     | 100%     |  |      |     | 100% |  |  |        |  |  |  |     | 100% |  |  |     | 100% |  |  | 
|                 

BellSouth has established and maintains separate
investment policies for assets held in each employee benefit
trust. Our investment strategies are of a long-term nature and
are designed to meet the following objectives:



| |   |                                                                           
| | - | --------------------------------------------------------------------------
| |  | Ensure that funds are available to pay benefits
    as they become due    
| |  | maximize the trusts total return subject to
    prudent risk taking      
| |  | and preserve and/or improve the funded status of
    the trusts over time.

Investment policies and strategies are
periodically reviewed to ensure the objectives of the trusts are
met considering any changes in benefit plan design, market
conditions or other material items.

Derivatives are permitted in the investment
portfolio to gain investment exposure as a substitute for
physical securities and to manage risk. Derivatives are not
permitted for speculative or leverage purposes. Trust
investments in BellSouth securities are immaterial.




BELLSOUTH
2003      75




---



##### Table of Contents



NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS CONTINUED


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


BELLSOUTH CORPORATION

Cash Flows

Due to the funded status of our plans, we do not
expect to make contributions to the pension plans in 2004.
Consistent with prior years, we expect to contribute cash to the
VEBA trusts to fund benefit payments. Contributions for 2004 are
estimated to be in the range of $475 to $525.

Supplemental Executive
Retirement Plan

The pension amounts reported above do not include
the supplemental executive retirement plan (SERP), which is an
unfunded nonqualified plan. The net periodic benefit cost
associated with this plan was $55 in 2001, $58 in 2002 and $53
in 2003. Additional information for the plan, which has an
accumulated benefit obligation in excess of plan assets, is:

|                                                                                    |  |             |      |      |  |   |      |   |  | 
|----------------------------------------------------------------------------------- |  | ----------- | ---- | ---- |  | - | ---- | - |  | 
|                                                                                    |  |             |      |     
|                                                                                    |  | December 31 |      |     
|                                                                                    |  |            
|                                                                                    |  |            
|                                                                                    |  |            
|                                                                                    |  | 2002        |      | 2003 |  |  
|                                                                                   
|                                                                                   
|                                                                                   
|Projected benefit obligation                                                        |  | $           | 443  |      |  | $ | 473  |   |  | 
|Accumulated benefit obligation (net amount
    recognized pre-tax)                  |  |             | 374  |      |  |   | 429  |   |  | 
|Fair value of plan assets                                                           |  |             | 0    |      |  |   | 0    |   |  | 
|                                                                                   
|Amounts recognized in the
    consolidated balance sheets at December 31:           |  |             |      |      |  |   |      |   |  | 
|Amount recognized as accrued benefit cost                                           |  |             | (265 | )    |  |   | (293 | ) |  | 
|Additional minimum liability recognized in other
    comprehensive income (pre-tax) |  |             | (109 | )    |  |   | (136 | ) |  | 
|                                                                                   

DEFINED CONTRIBUTION
PLANS

We maintain several contributory savings plans
that cover substantially all employees. The BellSouth Retirement
Savings Plan and the BellSouth Savings and Security Plan
(collectively, the Savings Plans) are tax-qualified defined
contribution plans. Assets of the plans are held by two trusts
(the Trusts), which, in turn, are part of the BellSouth Master
Savings Trust.

In 1990, we incorporated a leveraged Employee
Stock Ownership Plan (ESOP) into the Savings Plans. The Trusts
borrowed $850 by issuing amortizing notes that were guaranteed
by BellSouth. The Trusts used the loan proceeds to purchase
shares of BellSouth common stock in the open market. These
shares were held in suspense accounts in the Trusts; a scheduled
number of shares were released for allocation to participants as
each semiannual loan payment was made. The Trusts serviced the
debt with contributions from us and with dividends paid on the
shares held by the Trusts. None of the shares held by the Trusts
are subject to repurchase.


We match a portion of employees eligible
contributions to the Savings Plans at rates determined annually
by the Board of Directors. Our matching obligation is fulfilled
with shares released from the suspense accounts semiannually for
allocation to participants. The number of shares allocated to
each participants account is based on the market price of
the shares at the time of allocation. If shares released for
allocation do not fulfill our matching obligation, we will make
further contributions to the Trusts to fund the purchase of
additional shares in the open market to fulfill the remaining
obligation.


During 2003, the final debt service payments were
made on the loans to the Trusts and all remaining shares held by
the leveraged ESOP were allocated to participants, thus
terminating the leveraged ESOP arrangement. Future contributions
by participants will be matched at approved rates in cash.


We recognized expense using the shares allocated
accounting method, which combines the cost of the shares
allocated for the period plus interest incurred, reduced by the
dividends used to service the ESOP debt. Dividends on all ESOP
shares are recorded as a reduction to retained earnings, and all
ESOP shares are included in the computation of earnings per
share.


|                                                               |  |      |      |      |  |      |      |  |  |   |      | 
|-------------------------------------------------------------- |  | ---- | ---- | ---- |  | ---- | ---- |  |  | - | ---- | 
|                                                               |  | 2001 |      | 2002 |  | 2003
|                                                              
|                                                              
|                                                              
|Compensation cost                                              |  | $    | 37   |      |  | $    | 38   |  |  | $ | 55   | 
|Interest expense                                               |  | $    | 15   |      |  | $    | 9    |  |  | $ | 2    | 
|Actual interest on ESOP Notes                                  |  | $    | 22   |      |  | $    | 12   |  |  | $ | 2    | 
|Cash contributions, excluding dividends paid to
    the trusts |  | $    | 79   |      |  | $    | 84   |  |  | $ | 86   | 
|Dividends paid to the trusts, used for debt
    service        |  | $    | 39   |      |  | $    | 34   |  |  | $ | 14   | 
|Shares allocated to participants (millions)                    |  |      | 53.4 |      |  |      | 58.6 |  |  |   | 63.5 | 
|Shares unallocated (millions)                                  |  |      | 10.1 |      |  |      | 4.9  |  |  |   | 0.0  | 

Note L  Financial
Instruments

The recorded amounts of cash and cash
equivalents, temporary cash investments, bank loans and
commercial paper approximate fair value due to the short-term
nature of these instruments. The fair value for BSTs
long-term debt is estimated based on the closing market prices
for each issue at December 31, 2002 and 2003. Fair value
estimates for the Guarantee of ESOP Debt, BellSouth Corporation
long-term debt, foreign exchange contracts, foreign currency
swaps and interest rate swaps are based on quotes from dealers.
Since judgment is required to develop the estimates, the
estimated amounts presented herein may not be indicative of the
amounts that we could realize in a current market exchange.



76 BELLSOUTH
2003




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##### Table of Contents







Following is a summary of financial instruments
comparing the fair values to the recorded amounts as of
December 31:

|      |                                       |          |        |            |   |   |        |        |  
|----- | ------------------------------------- | -------- | ------ | ---------- | - | - | ------ | ------ | -
|      |                                       |         
|      |                                       | 2002    
|     
|     
|     
|      |                                       | Recorded |        | Estimated 
|      |                                       | Amount   |        | Fair Value
|     
|     
|     
|Debt: |                                       |          |        |            |   |   |        |       
|      | Issued by BST                         |          | $      | 6,439      |   |   | $      | 6,738  |  
|      | Issued by BellSouth Corporation       |          |        | 9,231      |   |   |        | 10,047 |  
|      | Issue by Latin America entities       |          |        | 1,634      |   |   |        | 1,198  |  
|      | Other debt and discounts              |          |        | (15        | ) |   |        | (15    | )
|      | Guarantee of ESOP debt                |          |        | 108        |   |   |        | 108    |  
|      |                                       |         
|      |                                       | $        | 17,397 |            |   | $ | 18,076 |       
|      | Interest rate swaps, net liability    |          | $      | 111        |   |   | $      | 111    |  
|      | Foreign currency swaps, net liability |          | $      | 263        |   |   | $      | 263    |  

|      |                                    |          |        |            |   |   |        |       |  
|----- | ---------------------------------- | -------- | ------ | ---------- | - | - | ------ | ----- | -
|      |                                    |         
|      |                                    | 2003    
|     
|     
|     
|      |                                    | Recorded |        | Estimated 
|      |                                    | Amount   |        | Fair Value
|     
|     
|     
|Debt: |                                    |          |        |            |   |   |        |      
|      | Issued by BST                      |          | $      | 4,713      |   |   | $      | 4,950 |  
|      | Issued by BellSouth Corporation    |          |        | 8,822      |   |   |        | 9,528 |  
|      | Issue by Latin America entities    |          |        | 1,556      |   |   |        | 1,458 |  
|      | Other debt and discounts           |          |        | (111       | ) |   |        | (111  | )
|      |                                    |         
|      |                                    | $        | 14,980 |            |   | $ | 15,825 |      
|      | Interest rate swaps, net liability |          | $      | 75         |   |   | $      | 75    |  

DERIVATIVE FINANCIAL
INSTRUMENTS

We are, from time to time, party to currency swap
agreements, interest rate swap agreements and foreign exchange
forward contracts in our normal course of business for purposes
other than trading. These financial instruments are used to
mitigate foreign currency and interest rate risks, although to
some extent they expose us to market risks and credit risks. We
control the credit risks associated with these instruments
through the evaluation and continual monitoring of the
creditworthiness of the counter parties. In the event that a
counter party fails to meet the terms of a contract or
agreement, our exposure is limited to the current value at that
time of the currency rate or interest rate differential, not the
full notional or contract amount. We believe that such contracts
and agreements have been executed with creditworthy financial
institutions. As such, we consider the risk of nonperformance to
be remote.

INTEREST RATE SWAPS

We enter into interest rate swap agreements to
exchange fixed and variable rate interest payment obligations
without the exchange of the underlying principal amounts. We
were a party to various interest rate swaps, which qualify for
hedge accounting and we believe are 100% effective. The
following table summarizes the weighted average rates and
notional amounts of these agreements for the years:

|                                               |                 |      |   |       |  |  |   |       |  |  | 
|---------------------------------------------- | --------------- | ---- | - | ----- |  |  | - | ----- |  |  | 
|                                               |                 | 2002 |   | 2003  |  | 
|                                              
|                                              
|                                              
|Pay fixed/receive variable (cash flow hedge):  |                 |      |   |       |  | 
|                                               | Notional amount |      | $ | 1,144 |  |  | $ | 1,120 |  |  | 
|                                               | Rate paid       |      |   | 5.84% |  |  |   | 5.75% |  |  | 
|                                               | Rate received   |      |   | 1.79% |  |  |   | 1.22% |  |  | 
|Pay variable/receive fixed (fair value hedge): |                 |      |   |       |  | 
|                                               | Notional amount |      | $ | 230   |  |  | $ | 125   |  |  | 
|                                               | Rate paid       |      |   | 0.93% |  |  |   | 1.09% |  |  | 
|                                               | Rate received   |      |   | 2.75% |  |  |   | 2.22% |  |  | 

The change in fair market value for derivatives
designated as hedging the exposure to variable cash flows of a
forecasted transaction is recognized as a component of other
comprehensive income, net of tax impacts. As of
December 31, 2003, there are unrecognized losses of $56
recorded in other comprehensive income. The change in fair
market value for derivatives designated as hedging the exposure
to changes in the fair value of a recognized asset or liability,
is recognized in earnings in the period of change together with
the offsetting loss or gain on the hedged item attributable to
the risk being hedged. During 2003, the change in value of our
fair value hedges of $5 was completely offset by the change in
the fair value of the hedged items, resulting in no impact to
net income. The cash flow swaps mature in 2005 and the fair
value swaps mature in 2008.

FOREIGN CURRENCY
SWAPS

In March 2002 we entered into three foreign
currency swap contracts, which qualify as cash flow hedges, to
mitigate foreign currency risk on loans we extended to KPN for
approximately
2,154. As a
result of the early repayment of the KPN advances in April 2003,
we settled these currency swaps and recorded a gain of $20, or
$13 net of tax.

CONCENTRATIONS OF CREDIT
RISK

Financial instruments that potentially subject us
to credit risk consist principally of trade accounts receivable.
Concentrations of credit risk with respect to these receivables,
other than those from long distance carriers, are limited due to
the composition of the customer base, which includes a large
number of individuals and businesses. Accounts receivable from
long distance carriers totaled $165 at December 31, 2003
and $275 at December 31, 2002.

Note M  Shareholders
Equity

COMMON STOCK
AUTHORIZED

Our articles of incorporation authorize the
issuance of 8,650,000,000 shares of common stock, par value $1
per share. Our Board of Directors is authorized to create from
the unissued common stock one or more series, and, prior



BELLSOUTH
2003      77




---



##### Table of Contents



NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS CONTINUED


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


BELLSOUTH CORPORATION

to the issuance of any shares in any particular
series, to fix the voting powers, preferences, designations,
rights, qualifications, limitations or restrictions of such
series. The Board has not created any series of common stock.

PREFERRED STOCK
AUTHORIZED

Our articles of incorporation authorize
100 million shares of cumulative first preferred stock
having a par value of $1 per share, of which 30 million
shares have been reserved and designated series B for
possible issuance under a shareholder rights plan. As of
December 31, 2003, no preferred shares had been issued. The
series A first preferred stock was created for a previous
shareholder rights plan which has expired.

SHAREHOLDER RIGHTS
PLAN

In 1999, we adopted a shareholder rights plan by
declaring a dividend of one right for each share of common stock
then outstanding and to be issued thereafter. Each right
entitles shareholders to buy one one-thousandth of a share of
series B first preferred stock for $200.00 per share. The
rights may be exercised only if a person or group acquires 10%
of the common stock of BellSouth without the prior approval of
the Board of Directors or announces a tender or exchange offer
that would result in ownership of 10% or more of the common
stock. If a person or group acquires 10% of BellSouths
stock without prior Board approval, other shareholders are then
allowed to purchase BellSouth common stock, or units of
preferred stock with the same voting and economic
characteristics, at half price. The rights currently trade with
BellSouth common stock and may be redeemed by the Board of
Directors for one cent per right until they become exercisable,
and thereafter under certain circumstances. The rights expire in
December 2009.

SHARES HELD IN TRUST AND
TREASURY

Shares held in trust and treasury, at cost, as of
December 31 are comprised of the following:

|                                  |  |               |     |        |  |               |       |        |  |  |     |  |  |   |       | 
|--------------------------------- |  | ------------- | --- | ------ |  | ------------- | ----- | ------ |  |  | --- |  |  | - | ----- | 
|                                  |  |               |     |       
|                                  |  | 2002          |     | 2003  
|                                 
|                                 
|                                 
|                                  |  | Shares        |     |        |  | Shares        |       |       
|                                  |  | (in millions) |     | Amount |  | (in millions) |       | Amount
|                                 
|                                 
|                                 
|Shares held in treasury           |  |               | 123 |        |  | $             | 4,757 |        |  |  | 153 |  |  | $ | 5,333 | 
|Shares held by grantor trust      |  |               | 37  |        |  |               | 615   |        |  |  | 37  |  |  |   | 659   | 
|                                 
|Shares held in trust and treasury |  |               | 160 |        |  | $             | 5,372 |        |  |  | 190 |  |  | $ | 5,992 | 
|                                 

Treasury Shares

Shares held in trust and treasury include
treasury share purchases made by the company primarily in open
market transactions under repurchase plans and to satisfy shares
issued in connection with employee and director share plans. In
July 2002, we announced our intention to purchase up to
$2 billion of our outstanding common stock through
December 31, 2003. Purchases under that program were as
follows:

|     |       |               |      |           |  |           |     |       |  |   |       |       |  |  | 
|---- | ----- | ------------- | ---- | --------- |  | --------- | --- | ----- |  | - | ----- | ----- |  |  | 
|     |       | Number of     |      |           |  |           |     |      
|     |       | shares        |      | Aggregate |  | Average   |     |      
|     |       | purchased     |      | purchase  |  | price     |     |      
|     |       | (in millions) |      | price     |  | per share |     |      
|    
|    
|    
|2002 |       |               | 14.8 |           |  | $         | 356 |       |  | $ | 24.13 |       |  | 
|2003 |       |               | 35.0 |           |  | $         | 858 |       |  | $ | 24.50 |       |  | 
|    
|     | Total |               |      | 49.8      |  |           | $   | 1,214 |  |   | $     | 24.39 |  |  | 
|    

In addition, we purchased 7.6 million shares
for an aggregate of $235 prior to the commencement of the
$2 billion program. We reissued 4.9 million shares in
2002 and 4.5 million shares in 2003 in connection with
various employee and director benefit plans.


Grantor Trusts

We have grantor trusts that are designed to
provide funding for the benefits payable under certain
nonqualified benefit plans. The trusts are funded with shares of
BellSouth stock and marketable securities. The trusts are
irrevocable, and assets contributed to the trusts can only be
used to pay such benefits with certain exceptions. These trusts
are wholly owned by BellSouth and its subsidiaries and are
consolidated in our financial statements. Accordingly, the
shares of BellSouth stock held by the trusts have been
classified as a reduction to shareholders equity in the
consolidated balance sheets and are not considered in the
computation of shares outstanding for financial reporting
purposes.

GUARANTEE OF ESOP
DEBT

The amount equivalent to the guarantee of the
amortizing notes issued by our ESOP trusts is presented as a
reduction to shareholders equity. The amount recorded as a
decrease in shareholders equity represents the cost of
unallocated BellSouth common stock purchased with the proceeds
of the amortizing notes and the timing difference resulting from
the shares allocated accounting method. See Note K for
further information.



78 BELLSOUTH
2003




---



##### Table of Contents







OTHER COMPREHENSIVE
INCOME

Accumulated other comprehensive income (loss) is
comprised of the following components as of December 31:

|                                                   |  |      |      |      |  |   |      |   |  | 
|-------------------------------------------------- |  | ---- | ---- | ---- |  | - | ---- | - |  | 
|                                                   |  | 2002 |      | 2003 |  |  
|                                                  
|                                                  
|                                                  
|Cumulative foreign currency translation adjustment |  | $    | (609 | )    |  | $ | (444 | ) |  | 
|Minimum pension liability adjustment               |  |      | (71  | )    |  |   | (89  | ) |  | 
|Net unrealized losses on derivatives               |  |      | (57  | )    |  |   | (56  | ) |  | 
|Net unrealized gains (losses) on securities        |  |      | (3   | )    |  |   | 4    |   |  | 
|                                                  
|                                                   |  | $    | (740 | )    |  | $ | (585 | ) |  | 
|                                                  

Note N  Stock
Compensation Plans

Effective January 1, 2003, we adopted the
fair value recognition provisions of SFAS No. 123,
Accounting for Stock-Based Compensation, for
stock-based employee compensation by retroactive restatement of
all periods presented. As a result, stock-based compensation
cost related to stock options of $203 ($123 net of tax or
$0.07 per share) for 2001, $159 ($100 net of tax or
$0.05 per share) for 2002 and $114 ($72 net of tax or
$0.04 per share) for 2003 is included in our results of
operations. Net income and earnings per share for 2001, 2002,
and 2003 were decreased by the net amounts shown above. The
balances for retained earnings for all periods presented have
been adjusted for the effect (net of income taxes) of applying
retroactively the fair value method of accounting for
stock-based compensation.

At December 31, 2003, we have stock options
outstanding under several stock-based compensation plans. The
BellSouth Corporation Stock Plan (the Stock Plan) provides for
grants to key employees of stock options and various other
stock-based awards. One share of BellSouth common stock is the
underlying security for any award. The number of shares
available for future grant under the BellSouth Corporation Stock
Plan (as amended on December 5, 2000) is equal to 1.25% of
total BellSouth shares outstanding at the time of grant, plus,
for each prior calendar year since the effective date of the
plan, the excess of shares available for grant in that calendar
year over the number of shares granted in that calendar year.
Prior to adoption of the Stock Plan, stock options were granted
under the BellSouth Corporation Stock Option Plan. Stock options
granted under both plans entitle an optionee to purchase shares
of BellSouth common stock within prescribed periods at a price
either equal to, or in excess of, the fair market value on the
date of grant. Options granted under these plans generally
become exercisable at the end of three to five years and have a
term of 10 years.


|                                                                                        |  |      |            |      |  |      |             |   |  |  |             |  
|--------------------------------------------------------------------------------------- |  | ---- | ---------- | ---- |  | ---- | ----------- | - |  |  | ----------- | -
|                                                                                        |  | 2001 |            | 2002 |  | 2003
|                                                                                       
|                                                                                       
|                                                                                       
|Options outstanding at January 1                                                        |  |      | 84,814,050 |      |  |      | 93,467,300  |   |  |  | 106,328,465 |  
|Options granted                                                                         |  |      | 16,361,471 |      |  |      | 19,376,330  |   |  |  | 14,374,127  |  
|Options exercised                                                                       |  |      | (5,344,850 | )    |  |      | (3,757,663  | ) |  |  | (4,495,974  | )
|Options forfeited                                                                       |  |      | (2,363,371 | )    |  |      | (2,757,502  | ) |  |  | (3,365,745  | )
|Options outstanding at December 31                                                      |  |      | 93,467,300 |      |  |      | 106,328,465 |   |  |  | 112,840,873 |  
|                                                                                       
|Weighted-average option prices per common share:                                        |  |      |            |      |  |      |             |   |  |  |             |  
|Outstanding at January 1                                                                |  |      | $33.09     |      |  |      | $35.10      |   |  |  | $35.68      |  
|Granted at fair market value                                                            |  |      | $42.10     |      |  |      | $35.98      |   |  |  | $21.96      |  
|Exercised                                                                               |  |      | $21.02     |      |  |      | $17.55      |   |  |  | $17.94      |  
|Forfeited                                                                               |  |      | $44.25     |      |  |      | $42.44      |   |  |  | $38.85      |  
|Outstanding at December 31                                                              |  |      | $35.10     |      |  |      | $35.68      |   |  |  | $34.52      |  
|Weighted-average fair value of options granted at
    fair market value during the year |  |      | $10.99     |      |  |      | $ 9.39      |   |  |  | $ 4.20      |  
|Options exercisable at December 31                                                      |  |      | 53,116,756 |      |  |      | 64,431,978  |   |  |  | 70,615,852  |  
|Shares available for grant at December 31                                               |  |      | 46,102,961 |      |  |      | 48,345,455  |   |  |  | 54,881,922  |  

The fair value of each option
grant is estimated on the grant date using the Black-Scholes
option-pricing model with the following weighted-average
assumptions:

|                        |  |      |       |      |  |      |       |  |  |  |       | 
|----------------------- |  | ---- | ----- | ---- |  | ---- | ----- |  |  |  | ----- | 
|                        |  | 2001 |       | 2002 |  | 2003
|                       
|                       
|                       
|Expected life (years)   |  |      | 5     |      |  |      | 5     |  |  |  | 5     | 
|Dividend yield          |  |      | 1.81% |      |  |      | 2.19% |  |  |  | 3.87% | 
|Expected volatility     |  |      | 26.0% |      |  |      | 29.0% |  |  |  | 29.0% | 
|Risk-free interest rate |  |      | 4.74% |      |  |      | 4.03% |  |  |  | 2.65% | 

The following table summarizes
information about stock options outstanding at December 31,
2003:

|            |                 |             |  |         |             |          |  |            |      |          |  |   |       |  |  |  |            |  |  |   |       | 
|----------- | --------------- | ----------- |  | ------- | ----------- | -------- |  | ---------- | ---- | -------- |  | - | ----- |  |  |  | ---------- |  |  | - | ----- | 
|            |                 |            
|Outstanding |                 | Exercisable
|           
|           
|           
|            |                 | Average     |  |         |             | Average 
|Exercise    |                 | Options     |  | Average |             | Exercise |  | Options    |      | Exercise
|Price Range |                 | (millions)  |  | Life(a) |             | Price    |  | (millions) |      | Price   
|           
|           
|           
|            | $14.77 - $20.67 |             |  |         | 4,316,331   |          |  |            | 1.11 |          |  | $ | 16.58 |  |  |  | 4,302,031  |  |  | $ | 16.58 | 
|            | $20.91 - $22.19 |             |  |         | 28,212,879  |          |  |            | 5.78 |          |  | $ | 21.76 |  |  |  | 14,729,529 |  |  | $ | 21.78 | 
|            | $22.20 - $30.91 |             |  |         | 17,977,203  |          |  |            | 5.58 |          |  | $ | 29.83 |  |  |  | 12,780,781 |  |  | $ | 30.66 | 
|            | $31.03 - $41.00 |             |  |         | 16,856,941  |          |  |            | 7.77 |          |  | $ | 38.95 |  |  |  | 4,527,913  |  |  | $ | 38.49 | 
|            | $41.26 - $51.78 |             |  |         | 45,477,519  |          |  |            | 6.22 |          |  | $ | 44.37 |  |  |  | 34,275,598 |  |  | $ | 44.99 | 
|           
|            | $14.77 - $51.78 |             |  |         | 112,840,873 |          |  |            | 6.04 |          |  | $ | 34.52 |  |  |  | 70,615,852 |  |  | $ | 35.40 | 



|    |  |                                                 
|--- |  | ------------------------------------------------
|(a) |  | Average contractual life remaining in
    years.

Note O  Segment
Information

We have four reportable operating segments:
(1) Communications Group; (2) Domestic Wireless;
(3) Latin America Group; and (4) Advertising and
Publishing Group.

We own an approximate 40% economic interest in
Cingular Wireless, and share joint control of the venture with
SBC Communications, Inc. We account for the investment under the
equity method. For management purposes




BELLSOUTH
2003      79




---



##### Table of Contents



NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS CONTINUED


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


BELLSOUTH CORPORATION

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 40% of Cingulars results.

The following table provides information for each
operating segment:


|                                           |                        |      |        |        |  |      |        |        |  |   |        |        |  |  | 
|------------------------------------------ | ---------------------- | ---- | ------ | ------ |  | ---- | ------ | ------ |  | - | ------ | ------ |  |  | 
|                                           |                        | 2001 |        | 2002   |  | 2003 |        |       
|                                          
|                                          
|                                          
|Communications Group                       |                        |      |        |        |  |      |        |        |  |   |        |        |  | 
|External revenues                          |                        | $    | 18,927 |        |  | $    | 18,334 |        |  | $ | 18,255 |        |  | 
|Intersegment revenues                      |                        |      | 144    |        |  |      | 155    |        |  |   | 193    |        |  | 
|                                           | Total segment revenues |      |        | 19,071 |  |      |        | 18,489 |  |   |        | 18,448 |  |  | 
|Depreciation and amortization              |                        |      | 4,114  |        |  |      | 4,161  |        |  |   | 3,771  |        |  | 
|Segment operating income                   |                        |      | 5,611  |        |  |      | 4,916  |        |  |   | 4,843  |        |  | 
|Interest expense                           |                        |      | 597    |        |  |      | 498    |        |  |   | 407    |        |  | 
|Income taxes                               |                        |      | 1,838  |        |  |      | 1,671  |        |  |   | 1,645  |        |  | 
|Segment net income                         |                        | $    | 3,208  |        |  | $    | 2,751  |        |  | $ | 2,829  |        |  | 
|Segment assets                             |                        | $    | 32,525 |        |  | $    | 31,925 |        |  | $ | 32,354 |        |  | 
|Capital expenditures                       |                        | $    | 5,125  |        |  | $    | 3,337  |        |  | $ | 2,824  |        |  | 
|                                          
|Domestic Wireless                          |                        |      |        |        |  |      |        |        |  |   |        |        |  | 
|External revenues                          |                        | $    | 5,707  |        |  | $    | 5,961  |        |  | $ | 6,193  |        |  | 
|Intersegment revenues                      |                        |      |       |        |  |      |       |        |  |   |       |        |  | 
|                                           | Total segment revenues |      |        | 5,707  |  |      |        | 5,961  |  |   |        | 6,193  |  |  | 
|Depreciation and amortization              |                        |      | 767    |        |  |      | 740    |        |  |   | 835    |        |  | 
|Segment operating income                   |                        |      | 1,020  |        |  |      | 1,086  |        |  |   | 915    |        |  | 
|Interest expense                           |                        |      | 328    |        |  |      | 364    |        |  |   | 343    |        |  | 
|Net earnings (losses) of equity affiliates |                        |      | (29    | )      |  |      | (106   | )      |  |   | (129   | )      |  | 
|Income taxes                               |                        |      | 251    |        |  |      | 224    |        |  |   | 159    |        |  | 
|Segment net income                         |                        | $    | 425    |        |  | $    | 357    |        |  | $ | 261    |        |  | 
|Segment assets                             |                        | $    | 9,012  |        |  | $    | 9,649  |        |  | $ | 10,210 |        |  | 
|Capital expenditures                       |                        | $    | 1,262  |        |  | $    | 1,234  |        |  | $ | 1,094  |        |  | 
|                                          
|Latin America Group                        |                        |      |        |        |  |      |        |        |  |   |        |        |  | 
|External revenues                          |                        | $    | 2,910  |        |  | $    | 2,233  |        |  | $ | 2,294  |        |  | 
|Intersegment revenues                      |                        |      | 25     |        |  |      | 5      |        |  |   | 4      |        |  | 
|                                           | Total segment revenues |      |        | 2,935  |  |      |        | 2,238  |  |   |        | 2,298  |  |  | 
|Depreciation and amortization              |                        |      | 605    |        |  |      | 440    |        |  |   | 367    |        |  | 
|Segment operating income                   |                        |      | 268    |        |  |      | 279    |        |  |   | 329    |        |  | 
|Interest expense                           |                        |      | 195    |        |  |      | 138    |        |  |   | 121    |        |  | 
|Interest income                            |                        |      | 36     |        |  |      | 23     |        |  |   | 30     |        |  | 
|Net earnings (losses) of equity affiliates |                        |      | (36    | )      |  |      | (10    | )      |  |   | 18     |        |  | 
|Income tax expense (benefit)               |                        |      | 66     |        |  |      | (28    | )      |  |   | 27     |        |  | 
|Segment net income (loss)                  |                        | $    | (46    | )      |  | $    | 108    |        |  | $ | 161    |        |  | 
|Segment assets                             |                        | $    | 6,574  |        |  | $    | 3,717  |        |  | $ | 3,895  |        |  | 
|Equity method investments                  |                        |      | 127    |        |  |      | 108    |        |  |   | 119    |        |  | 
|Capital expenditures                       |                        | $    | 500    |        |  | $    | 247    |        |  | $ | 268    |        |  | 
|Advertising and Publishing
    Group       |                        |      |        |        |  |      |        |        |  |  
|External revenues                          |                        | $    | 2,072  |        |  | $    | 2,134  |        |  | $ | 2,033  |        |  | 
|Intersegment revenues                      |                        |      | 18     |        |  |      | 23     |        |  |   | 17     |        |  | 
|                                           | Total segment revenues |      |        | 2,090  |  |      |        | 2,157  |  |   |        | 2,050  |  |  | 
|Depreciation and amortization              |                        |      | 29     |        |  |      | 29     |        |  |   | 26     |        |  | 
|Segment operating income                   |                        |      | 982    |        |  |      | 898    |        |  |   | 973    |        |  | 
|Interest expense                           |                        |      | 16     |        |  |      | 12     |        |  |   | 7      |        |  | 
|Income taxes                               |                        |      | 374    |        |  |      | 340    |        |  |   | 368    |        |  | 
|Segment net income                         |                        | $    | 596    |        |  | $    | 545    |        |  | $ | 600    |        |  | 
|Segment assets                             |                        | $    | 1,843  |        |  | $    | 1,703  |        |  | $ | 1,002  |        |  | 
|Capital expenditures                       |                        | $    | 63     |        |  | $    | 29     |        |  | $ | 28     |        |  | 

RECONCILIATION TO

CONSOLIDATED FINANCIAL
INFORMATION


|                                                           |  |      |        |      |  |      |        |   |  |   |        |   |  | 
|---------------------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | - |  | 
|                                                           |  | 2001 |        | 2002 |  | 2003 |        |  
|                                                          
|                                                          
|                                                          
|Operating revenues                                         |  |      |        |      |  |      |        |   |  |   |        |   |  | 
|Total reportable segments                                  |  | $    | 29,803 |      |  | $    | 28,845 |   |  | $ | 28,989 |   |  | 
|Cingular proportional consolidation                        |  |      | (5,707 | )    |  |      | (5,961 | ) |  |   | (6,193 | ) |  | 
|Advertising and publishing accounting change               |  |      | 1      |      |  |      | (49    | ) |  |   |       |   |  | 
|Unbilled receivable adjustment                             |  |      |       |      |  |      | (163   | ) |  |   |       |   |  | 
|Refund of customer late fees in Florida                    |  |      |       |      |  |      | (108   | ) |  |   |       |   |  | 
|Corporate, eliminations and other                          |  |      | 33     |      |  |      | (124   | ) |  |   | (161   | ) |  | 
|                                                          
|Total consolidated                                         |  | $    | 24,130 |      |  | $    | 22,440 |   |  | $ | 22,635 |   |  | 
|                                                          
|                                                          
|Operating income                                           |  |      |        |      |  |      |        |   |  |   |        |   |  | 
|Total reportable segments                                  |  | $    | 7,881  |      |  | $    | 7,179  |   |  | $ | 7,060  |   |  | 
|Cingular proportional consolidation                        |  |      | (1,020 | )    |  |      | (1,086 | ) |  |   | (915   | ) |  | 
|Advertising and publishing accounting change               |  |      | 41     |      |  |      | 1      |   |  |   |       |   |  | 
|Unbilled receivable adjustment                             |  |      |       |      |  |      | (163   | ) |  |   |       |   |  | 
|Restructuring charge and asset impairment                  |  |      | (431   | )    |  |      | (914   | ) |  |   | (162   | ) |  | 
|Pension settlement loss                                    |  |      |       |      |  |      | (167   | ) |  |   | (47    | ) |  | 
|Adjustment to ISP accrual                                  |  |      | (143   | )    |  |      |       |   |  |   |       |   |  | 
|Refund of customer late fees in Florida                    |  |      |       |      |  |      | (108   | ) |  |   |       |   |  | 
|Corporate, eliminations and other                          |  |      | (190   | )    |  |      | 4      |   |  |   | (30    | ) |  | 
|                                                          
|Total consolidated                                         |  | $    | 6,138  |      |  | $    | 4,746  |   |  | $ | 5,906  |   |  | 
|                                                          
|                                                          
|Net Income                                                 |  |      |        |      |  |      |        |   |  |   |        |   |  | 
|Total reportable segments                                  |  | $    | 4,183  |      |  | $    | 3,761  |   |  | $ | 3,851  |   |  | 
|Advertising and publishing accounting change               |  |      | 27     |      |  |      | 1      |   |  |   |       |   |  | 
|Unbilled receivable adjustment                             |  |      |       |      |  |      | (101   | ) |  |   |       |   |  | 
|Restructuring charge and asset impairments                 |  |      | (274   | )    |  |      | (589   | ) |  |   | (99    | ) |  | 
|Pension settlement loss                                    |  |      |       |      |  |      | (100   | ) |  |   | (29    | ) |  | 
|Adjustment to ISP accrual                                  |  |      | (88    | )    |  |      |       |   |  |   |       |   |  | 
|Refund of customer late fees in Florida                    |  |      |       |      |  |      | (70    | ) |  |   |       |   |  | 
|Foreign currency transaction gains (losses)                |  |      | (230   | )    |  |      | (597   | ) |  |   | 110    |   |  | 
|Brazil loan impairments                                    |  |      |       |      |  |      | (263   | ) |  |   |       |   |  | 
|Net gain (loss) on ownership transactions                  |  |      | 28     |      |  |      | 806    |   |  |   | (234   | ) |  | 
|Net gains (losses) on sale or impairment of
    securities |  |      | (1,263 | )    |  |      | (274   | ) |  |   | 22     |   |  | 
|Cumulative effect of changes in accounting
    principle   |  |      |       |      |  |      | (1,285 | ) |  |   | 315    |   |  | 
|Early extinguishment of debt                               |  |      |       |      |  |      | (22    | ) |  |   |       |   |  | 
|Corporate, eliminations and other                          |  |      | 64     |      |  |      | 56     |   |  |   | (32    | ) |  | 
|                                                          
|Total consolidated                                         |  | $    | 2,447  |      |  | $    | 1,323  |   |  | $ | 3,904  |   |  | 
|                                                          

The Cingular proportional consolidation shown
above represents the amount necessary to reconcile the
proportional results of Cingular to GAAP results.




80 BELLSOUTH
2003




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##### Table of Contents







Reconciling 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. Net gain (loss) on ownership transactions include:
for 2001, gains from the sale of investments in SkyCell and
BellSouth International Wireless Services; in 2002, a gain from
the conversion of our ownership interest in E-Plus and a loss
associated with the disposal of one of our Brazilian advertising
and publishing companies; and for 2003, losses from the sale of
two Brazilian wireless companies.

Net revenues to external customers are based on
the location of the customer. Geographic information as of
December 31 is as follows:


|      |                   |        |   |               |  |       |   |       |  |  |   |        |  |  | 
|----- | ----------------- | ------ | - | ------------- |  | ----- | - | ----- |  |  | - | ------ |  |  | 
|      |                   | United |   |               |  |       |   |      
|      |                   | States |   | International |  | Total |   |      
|     
|     
|     
|2001: |                   |        |   |               |  |       |   |       |  |  |   |        |  | 
|      | Revenues          |        | $ | 21,220        |  |       | $ | 2,910 |  |  | $ | 24,130 |  |  | 
|      | Long-lived assets |        |   | 39,936        |  |       |   | 5,255 |  |  |   | 45,191 |  |  | 
|     
|2002: |                   |        |   |               |  |       |   |       |  |  |   |        |  | 
|      | Revenues          |        | $ | 20,207        |  |       | $ | 2,233 |  |  | $ | 22,440 |  |  | 
|      | Long-lived assets |        |   | 39,106        |  |       |   | 2,511 |  |  |   | 41,617 |  |  | 
|     
|2003: |                   |        |   |               |  |       |   |       |  |  |   |        |  | 
|      | Revenues          |        | $ | 20,341        |  |       | $ | 2,294 |  |  | $ | 22,635 |  |  | 
|      | Long-lived assets |        |   | 38,537        |  |       |   | 2,316 |  |  |   | 40,853 |  |  | 

Note P  Foreign
Currency

Argentina

In Argentina, we own an 86.7% interest in CRM, a
wireless communications company, which we consolidate in our
financial statements. In January 2002, the Argentine government
announced economic reforms, including a devaluation of its
national currency, the Argentine Peso. The Argentine Peso lost
over 71% of its value as compared to the US Dollar in 2002.
Based on the net monetary position of CRM, we recorded foreign
currency transaction losses of $683 during 2002. We are
recording a valuation allowance on the net operating losses,
deferring recognition of the tax benefits generated by these
losses due to the potentially limited tax carry forward period
in Argentina. The value of the Argentine Peso as compared to the
US Dollar slightly recovered during 2003 resulting in the
recognition of foreign currency transaction gains of $104 during
2003.

Venezuela

In Venezuela, we own a 78.2% interest in Telcel,
a wireless communications company, which we also consolidate in
our financial statements. In February 2002, the Venezuelan
government let the Bolivar float freely. The Bolivar
subsequently devalued approximately 44% since the beginning of
our fiscal period 2002. Based on Telcels net monetary
position, we recorded foreign currency transaction gains of $89
in 2002 and $5 in 2003. In addition, Venezuela is no longer
considered a hyper inflationary economy, which resulted in a
change in the functional currency from the US Dollar to the
Bolivar. As a result, remeasurement of non-monetary assets and
liabilities is reflected as a foreign currency translation
adjustment in the other comprehensive income portion of
shareholders equity.

During February 2003, the Venezuelan government
announced a new foreign exchange control regime and set a fixed
exchange rate of 1,600 Bolivars to the US Dollar. There are
currently currency restrictions in place in Venezuela that limit
our ability to physically convert local currency to US Dollars.
Because of the currency controls, we are accumulating
significant balances in Bolivars held in local banks. We are
currently analyzing available alternatives in order to convert
the currency into US Dollars. During February 2004, the official
exchange rate was adjusted by the government to 1,920 Bolivars
to the US Dollar, but the currency exchange restrictions were
not lifted. This devaluation will result in a reduction to
revenues and net income of our Venezuelan operation beginning in
the first quarter of 2004. The government has established
procedures for the conversion of Bolivars into US Dollars for
the import of a limited number of goods and services. Our local
operation has been able to make limited purchases of dollars for
the import of cellular handsets used in its business.


Due to the currency controls, there is no free
market currency exchange rate. Therefore, in preparing our
consolidated financial statements, we used the exchange rate
established by the Venezuelan government of 1,600 Bolivars to
the US Dollar to translate the local currency financial
statements into our reporting currency, the US Dollar. When the
Bolivar resumes trading on the open market, the exchange rate
may be different than the rate set by the government. A
significant devaluation of the local currency would result in a
decline in revenues and, to a lesser extent, operating expenses
when reported in the US Dollar. To the extent permissible by
regulatory and market conditions, a portion of the effect of a
devaluation could be offset by local rate increases. As an
example, a devaluation in the Venezuelan currency from the 1,600
rate used in our financial statements to 3,000 Bolivars to the
US Dollar would equate to a decrease in revenues of
approximately $421 for 2003, not taking into consideration any
potential impacts from offsetting local rate increases. Such a
change in the exchange rate would also result in a reduction in
the companys net assets of approximately $339, which would
be reported as a reduction in shareholders equity through
the cumulative foreign currency translation adjustment. Because
certain expenses are settled in US Dollars, determination of the
net income impact of such a devaluation is not practicable.


We are monitoring the situation, but continue to
believe it is temporary in nature. Therefore, we have continued
to consolidate the financial statements of this operation in
accordance with SFAS No. 94. In the event the currency
restrictions are deemed other-than-temporary, we would cease to
consolidate this operation and would reflect the investment
using the cost method of accounting.




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2003      81




---



##### Table of Contents



NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS CONTINUED


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


BELLSOUTH CORPORATION



|         |                              
|-------- | -----------------------------
|Note Q  | Commitments and Contingencies

LEASES

We have entered into operating leases for
facilities and equipment used in operations. Rental expense
under operating leases was $319 for 2001, $329 for 2002, and
$345 for 2003. Capital leases currently in effect are not
significant. The following table summarizes the approximate
future minimum rentals under noncancelable operating leases in
effect at December 31, 2003:

| |  |            |  |                 |     |  |  | 
| |  | ---------- |  | --------------- | --- |  |  | 
| |  |            |  | Minimum Rentals |     | 
|
|
|
| |  | 2004       |  | $               | 160 |  |  | 
| |  | 2005       |  |                 | 139 |  |  | 
| |  | 2006       |  |                 | 119 |  |  | 
| |  | 2007       |  |                 | 104 |  |  | 
| |  | 2008       |  |                 | 90  |  |  | 
| |  | Thereafter |  |                 | 376 |  |  | 
|
| |  | Total      |  | $               | 988 |  |  | 
|

OUTSIDE PLANT

We currently self-insure all of our outside plant
against casualty losses. Such outside plant, located in the nine
southeastern states served by BST, is susceptible to damage from
severe weather conditions and other perils. The net book value
of outside plant was $7,308 at December 31, 2002 and $8,527
at December 31, 2003.

GUARANTEES

In most of our sale and divestiture transactions
we indemnify the purchaser for various items including labor and
general litigation as well as certain tax matters. Generally,
the terms last one to five years for general and specific
indemnities and for the statutory review periods for tax
matters. The events or circumstances that would require us to
perform under the indemnity are transaction and circumstance
specific. We regularly evaluate the probability of having to
incur costs associated with these indemnifications and have
accrued for expected losses that are probable. In addition, in
the normal course of business, we indemnify counterparties in
certain agreements. The nature and terms of these indemnities
vary by transaction. Historically, we have not incurred
significant costs related to performance under these types of
indemnities.

PURCHASE OBLIGATIONS

As of December 31, 2003, we have contracts
in place to outsource certain services, principally information
technology. We also have several significant commitments with
large vendors to purchase telecommunications equipment, software
and services.

The following table discloses aggregate
information about these purchase obligations and the periods in
which payments are due:


|                                      |  |                        |       |        |  |           |     |           |  |            |       |  |  |   |     |  |  |  |   |  |  | 
|------------------------------------- |  | ---------------------- | ----- | ------ |  | --------- | --- | --------- |  | ---------- | ----- |  |  | - | --- |  |  |  | - |  |  | 
|                                      |  |                        |       |       
|                                      |  | Payments Due by Period |       |       
|                                     
|                                     
|                                     
|                                      |  | Less than              |       |       
|                                      |  | Total                  |       | 1 year |  | 2005-2007 |     | 2008-2010 |  | After 2010 |       | 
|                                     
|                                     
|                                     
|Unconditional purchase obligations(1) |  | $                      | 3,563 |        |  | $         | 807 |           |  | $          | 2,156 |  |  | $ | 600 |  |  |  |  |  |  | 
|                                     



|    |  |                                                                                                                                                                                                                                                                                                                             
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) |  | The total unconditional purchase obligation
    includes $323 related to agreements with Qwest and Accenture
    that do not stipulate annual minimum purchases. The agreement
    with Qwest expires in 2006 and the Accenture agreement expires
    in 2007. These amounts are included in the 2005-2007 column
    above.

PUT-CALL PROVISIONS

Venezuela

We own a 78.2% interest in Telcel, our Venezuelan
operation. Telcels other major shareholder holds an
indirect 21% interest in Telcel. Under a Stock Purchase
Agreement, that shareholder has the right to initiate a process
that could require us to purchase (the puts), and we have the
right to initiate a process that could require that shareholder
to sell (the calls) to us, the shareholders interest in
Telcel. Notice of the initiation of the process with respect to
approximately half of that shareholders interest was to be
given in 2000 and notice with respect to the remaining balance
was to be given in 2002. If we exercise our call right, we would
purchase that shareholders interest at between 100% and
120% of its appraised fair value. If we are required to purchase
the interest, we would do so at between 80% and 100% of its
appraised fair value.

In 2000, the shareholder initiated a process for
appraising the value of approximately half of its interest in
Telcel, but the process was not completed. The shareholder also
has sent a letter purporting to exercise the balance of the puts
under the Stock Purchase Agreement. We are currently in
arbitration with the shareholder over alleged breaches by
BellSouth and the shareholder of the Stock Purchase Agreement,
including the timing of the valuation and whether the process
was properly initiated in 2000. The arbitration does not
directly involve the valuation of the balance of the puts. The
shareholder is seeking damages and specific performance, and
BellSouth is seeking, among other things, unspecified damages
and a ruling that it has not breached the Stock Purchase
Agreement in any respect. The arbitration also related to an
alleged oral agreement to buy out the shareholders entire
interest in Telcel, which we argue does not exist. The first
stage of the hearing on these matters occurred in early 2004,
with additional hearings scheduled for the second quarter of
2004. If the arbitration panel rules against BellSouth, it is
possible that the appraised fair value of the shareholders
interest in Telcel could be substantially in excess of current
value. At this time, the likely outcome of this arbitration
cannot be predicted, nor can a reasonable estimate of the amount
of loss, if any, be made.




82 BELLSOUTH
2003




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##### Table of Contents







Colombia

We own approximately 66% of BellSouth Colombia.
Our principal partner holds approximately 34%. We have agreed
with our partner to a series of related put and call agreements
whereby we can acquire, or could be compelled by our partner to
acquire, additional shares of the Colombian operation currently
held by our partner for a price equal to the appraised fair
value. During the first put/call period, we have the right, but
not the obligation, to call and our partner has the right, but
not the obligation, to put to us approximately one-third of our
partners holding in the Colombian operation. In February
2004, we exercised our call right with respect to the first
put/call provision. As a result, we agreed to purchase 11.6% of
the Colombian operation from our partner. The purchase price for
the additional interest is $32 and will be funded from cash on
hand. Under a second put/call option, the remaining balances of
our partners shares (100% of the partners shares if
the first put/call expires unexercised) can be called by us or
put to us beginning in 2006 until 2009. We cannot predict if
either party will exercise its rights under the second put/call
option provision.

RECIPROCAL
COMPENSATION

Following the enactment of the Telecommunications
Act of 1996, our telephone company subsidiary, BellSouth
Telecommunications, Inc. (BST), and various competitive local
exchange carriers entered into interconnection agreements
providing for, among other things, the payment of reciprocal
compensation for local calls initiated by the customers of one
carrier that are completed on the network of the other carrier.
These agreements were the subject of litigation before various
regulatory commissions. After an FCC ruling in April 2001
prescribing new rates, BellSouth settled its claims with
competitors for traffic occurring through mid-June 2001, and
entered into agreements that contained the FCC rates for traffic
occurring from mid-June 2001 forward. The District of Columbia
Circuit Court of Appeals, in the second quarter of 2002,
remanded the ruling to the FCC to implement a rate methodology
consistent with the Courts opinion. The FCCs
previous rules and rates remain in effect while it reconsiders
them. A change in the rules or rates could increase our expenses.

REGULATORY MATTERS

Beginning in 1996, we operated under a price
regulation plan approved by the South Carolina Public Service
Commission (PSC) 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 state statute, adopted subsequent to the PSC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 PSC. The election became
effective during August 1999. The South Carolina Consumer
Advocate petitioned the PSC seeking review of the level of our
earnings during the 1996-1998 period when we operated under the
subsequently invalidated price regulation plan. The PSC
dismissed 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 PSCs dismissal of the
petition. In January 2004, the court hearing the appeal affirmed
the PSCs decision. An appeal of this decision to the South
Carolina Supreme Court is probable. If the Consumer Advocate
prevails, the case could be remanded to the PSC, which could,
after considering evidence, order refunds to customers in South
Carolina, which in the aggregate may be material to the company.
At this time, we are unable to predict the outcome of this
appeal and, therefore, cannot determine the impact, if any, this
matter may have on future earnings.

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 USC. Section 1981. Plaintiffs purport to bring the
claims on behalf of two classes: a class of all African-American
hourly workers employed by BellSouth at any time since
April 29, 1998, and a class of all African-American
salaried workers employed by BellSouth 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 time, the likely outcome of the case cannot be predicted,
nor can a reasonable estimate of the amount of loss, if any, be
made.

From August through October 2002 several
individual shareholders filed substantially identical class
action lawsuits against BellSouth and three of its senior
officers alleging violations of the federal securities laws. The
cases have been consolidated in the United States District Court
for the Northern District of Georgia and are captioned In re
BellSouth Securities Litigation. Pursuant to the provisions of
the Private Securities Litigation Reform Act of 1995, the court
has appointed a Lead Plaintiff. The Lead Plaintiff filed a
Consolidated and Amended Class Action Complaint on or about
July 15, 2003 and named four outside directors as
additional defendants. The Consolidated and Amended Class Action
Complaint alleges that during the period November 7, 2000
through February 19, 2003, the Company (1) overstated
the unbilled receivables balance of its advertising and
publishing subsidiary; (2) failed to properly implement SAB
101 with regard to its recognition of advertising and publishing
revenues; (3) improperly billed competitive local exchange
carriers (CLEC) to




BELLSOUTH
2003      83




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##### Table of Contents



NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS CONTINUED


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


BELLSOUTH CORPORATION

inflate revenues; (4) failed to take a
reserve for refunds that ultimately came due following
litigation over late payment charges; and (5) failed to
properly write down goodwill of its Latin American operations.
The plaintiffs are seeking an unspecified amount of damages, as
well as attorneys fees and costs. At this time, the likely
outcome of the case cannot be predicted, nor can a reasonable
estimate of loss, if any, be made.

In February 2003, a similar complaint was filed
in the Superior Court of Fulton County, Georgia on behalf of
participants in BellSouths Direct Investment Plan alleging
violations of Section 11 of the Securities Act. Defendants
removed this action to federal court pursuant to the provisions
of the Securities Litigation Uniform Standards Act of 1998. On
or about July 3, 2003, the federal court issued a ruling
that the case should be remanded to Fulton County Superior
Court. The plaintiffs are seeking an unspecified amount of
damages, as well as attorneys fees and costs. At this
time, the likely outcome of the case cannot be predicted, nor
can a reasonable estimate of loss, if any, be made.


In September and October 2002 three substantially
identical class action lawsuits were filed in the United States
District Court for the Northern District of Georgia against
BellSouth, its directors, three of its senior officers, and
other individuals, alleging violations of the Employee
Retirement Income Security Act (ERISA). The cases
have been consolidated and on April 21, 2003, a
Consolidated Complaint was filed. The plaintiffs, who seek to
represent a putative class of participants and beneficiaries of
BellSouths 401(k) plan (the Plan), allege in
the Consolidated Complaint that the company and the individual
defendants breached their fiduciary duties in violation of
ERISA, by among other things, (1) failing to provide
accurate information to the Plan participants and beneficiaries;
(2) failing to ensure that the Plans assets were
invested properly; (3) failing to monitor the Plans
fiduciaries; (4) failing to disregard Plan directives that
the defendants knew or should have known were imprudent and
(5) failing to avoid conflicts of interest by hiring
independent fiduciaries to make investment decisions. The
plaintiffs are seeking an unspecified amount of damages,
injunctive relief, attorneys fees and costs. Certain
underlying factual allegations regarding BellSouths
advertising and publishing subsidiary and its Latin American
operation are substantially similar to the allegations in the
putative securities class action captioned In re BellSouth
Securities Litigation, which is described above. At this time,
the likely outcome of the cases cannot be predicted, nor can a
reasonable estimate of loss, if any, be made.


In October 2002, a number of antitrust class
action lawsuits were filed against BellSouth in federal district
courts in Atlanta, Georgia and Ft. Lauderdale, Florida. The
plaintiffs purport to represent putative classes consisting of
all BellSouth local telephone service subscribers and/or all
subscribers of competitive local exchange carriers in nine
southeastern states since 1996. The plaintiffs allege that
BellSouth engaged in unlawful anticompetitive conduct in
violation of state and federal antitrust laws by, among other
things, (1) denying competitors access to certain essential
facilities necessary for competitors to provide local telephone
service; (2) using its monopoly power in the wholesale
market for local telephone service as leverage to maintain a
monopoly in the retail market; and (3) failing to provide
the same quality of service, access and billing to competitors
that it provides its own retail customers. The plaintiffs are
seeking an unspecified amount of treble damages, injunctive
relief, as well as attorneys fees and costs. At this time,
the likely outcome of the cases cannot be predicted, nor can a
reasonable estimate of loss, if any, be made.


A consumer class action alleging antitrust
violations of Section 1 of the Sherman Antitrust Act was
recently filed against BellSouth, Verizon, SBC and Qwest in
Federal Court in the Southern District of New York. The
complaint alleged that defendants conspired to restrain
competition by agreeing not to compete with one another
and otherwise allocating customers and markets to one
another. The plaintiffs are seeking an unspecified amount
of treble damages and injunctive relief, as well as
attorneys fees and expenses. In October 2003, the district
court dismissed the complaint for failure to state a claim and
the case is now on appeal.


OTHER CLAIMS

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.

Note R  Related Party
Transactions

In addition to the advances to affiliates
discussed in Note D and activity related to Cingular
discussed in Note K, other significant transactions with
related parties are summarized in the succeeding paragraphs. We
generated revenues of approximately $304 in 2001, $386 in 2002,
and $426 in 2003 from the provision of local interconnect and
long distance services to Cingular and agent commissions from
Cingular.

In October 2000, we entered into a transition
services agreement with Cingular, pursuant to which we provide
transition services and products for a limited period of time.
The services we provided included government and regulatory
affairs, finance, compensation and benefit accounting, human
resources, internal audit, risk management, legal, security and
tax. Provided services terminated prior to December 31,
2002. The fees were determined based




84 BELLSOUTH
2003




---



##### Table of Contents







on the cost of providing the level of service
expected to be provided at the time we entered into the
agreements.

Also in October 2000, we transferred our wireless
employees and all related obligations and liabilities to two
subsidiary leasing companies. We entered into a leasing
agreement with Cingular, whereby our leasing companies agreed to
lease all of their current employees to Cingular through
December 2001. Between October 2000 and December 2001, the
wireless employees were solely employed by our leasing
subsidiaries and participated in BellSouth benefit plans. During
this period, Cingular reimbursed us monthly for all payroll
related obligations for these wireless employees. These billings
to Cingular were recorded as contra expenses, and the net
earnings of the leasing subsidiaries were zero during this
period. In December 2001 we transferred our leasing companies
and substantially all related liabilities to Cingular. The net
liabilities transferred to Cingular approximated $36.




|         |                                     
|-------- | ------------------------------------
|Note S  | Subsidiary Financial
    Information

We have fully and unconditionally guaranteed all
of the outstanding debt securities of BellSouth
Telecommunications, Inc. (BST), which 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. We revised the condensed
consolidating financial information as of December 31, 2002
and December 31, 2001 and for the years then ended to
reflect the application by BST and BellSouth (Parent) of the
equity method of accounting for investments in their
subsidiaries. The Other column represents all other wholly owned
subsidiaries excluding BST and BST subsidiaries. The Adjustments
column includes the necessary amounts to eliminate the
intercompany balances and transactions between BST, Other and
Parent and to consolidate wholly owned subsidiaries to reconcile
to our consolidated financial information.

The revisions described above had no effect on
the consolidated financial statements. Further, the revisions
had no effect on the revenues or net income in the BST column.
The primary impact of these revisions on the December 31,
2002 consolidating information was an approximate
$19 billion increase in Parent Shareholders Equity
(of which $17 billion was an increase in Investments in
Subsidiaries) and a reclassification of approximately
$3 billion between Accounts Receivable and Investments in
the BST column. Additionally, there were reclassifications
between Operating Expenses, Equity in Earnings and Income Taxes.
These changes resulted in increases in Operating Expenses, Cash
Flows, and Equity in Earnings, and decreases in Income Taxes in
the BST column, which were offset by changes within the
Adjustments column. We do not believe any of these revisions are
material.


CONDENSED CONSOLIDATING
STATEMENTS OF INCOME

|                                                                                        |  |                                      |        |         |  |        |       |       |  |       |        |   |  |   |        |   |  |   |        |   |  | 
|--------------------------------------------------------------------------------------- |  | ------------------------------------ | ------ | ------- |  | ------ | ----- | ----- |  | ----- | ------ | - |  | - | ------ | - |  | - | ------ | - |  | 
|                                                                                        |  |                                     
|                                                                                        |  | For the Year Ended December 31, 2001
|                                                                                        |  |                                     
|                                                                                        |  |                                     
|                                                                                        |  |                                     
|                                                                                        |  |                                      |        | Adjust- |  |       
|                                                                                        |  | BST                                  |        | Other   |  | Parent |       | ments |  | Total |        |  
|                                                                                       
|                                                                                       
|                                                                                       
|Total operating revenues                                                                |  | $                                    | 18,267 |         |  | $      | 8,659 |       |  | $     |       |   |  | $ | (2,796 | ) |  | $ | 24,130 |   |  | 
|Total operating expenses                                                                |  |                                      | 15,307 |         |  |        | 6,912 |       |  |       | 125    |   |  |   | (4,352 | ) |  |   | 17,992 |   |  | 
|                                                                                       
|Operating income                                                                        |  |                                      | 2,960  |         |  |        | 1,747 |       |  |       | (125   | ) |  |   | 1,556  |   |  |   | 6,138  |   |  | 
|Interest expense                                                                        |  |                                      | 853    |         |  |        | 434   |       |  |       | 632    |   |  |   | (604   | ) |  |   | 1,315  |   |  | 
|Net earnings (losses) of equity affiliates                                              |  |                                      | 1,160  |         |  |        | 478   |       |  |       | 3,680  |   |  |   | (4,853 | ) |  |   | 465    |   |  | 
|Other income (expense), net                                                             |  |                                      | 15     |         |  |        | (5    | )     |  |       | (1,173 | ) |  |   | (311   | ) |  |   | (1,474 | ) |  | 
|                                                                                       
|Income before income taxes and cumulative effect
    of changes in accounting principle |  |                                      | 3,282  |         |  |        | 1,786 |       |  |       | 1,750  |   |  |   | (3,004 | ) |  |   | 3,814  |   |  | 
|Provision (benefit) for income taxes                                                    |  |                                      | 749    |         |  |        | 647   |       |  |       | (697   | ) |  |   | 668    |   |  |   | 1,367  |   |  | 
|                                                                                       
|Income before cumulative effect of changes in
    accounting principle                  |  |                                      | 2,533  |         |  |        | 1,139 |       |  |       | 2,447  |   |  |   | (3,672 | ) |  |   | 2,447  |   |  | 
|Cumulative effect of changes in accounting
    principle                                |  |                                      |       |         |  |        |      |       |  |       |       |   |  |   |       |   |  |   |       |   |  | 
|                                                                                       
|Net income (losses)                                                                     |  | $                                    | 2,533  |         |  | $      | 1,139 |       |  | $     | 2,447  |   |  | $ | (3,672 | ) |  | $ | 2,447  |   |  | 
|                                                                                       



BELLSOUTH
2003      85




---



##### Table of Contents



NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS CONTINUED


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


BELLSOUTH CORPORATION

|                                                                                        |  |                                      |        |         |  |        |        |       |  |       |        |   |  |   |        |   |  |   |        |   |  | 
|--------------------------------------------------------------------------------------- |  | ------------------------------------ | ------ | ------- |  | ------ | ------ | ----- |  | ----- | ------ | - |  | - | ------ | - |  | - | ------ | - |  | 
|                                                                                        |  |                                     
|                                                                                        |  | For the Year Ended December 31, 2002
|                                                                                        |  |                                     
|                                                                                        |  |                                     
|                                                                                        |  |                                     
|                                                                                        |  |                                      |        | Adjust- |  |       
|                                                                                        |  | BST                                  |        | Other   |  | Parent |        | ments |  | Total |        |  
|                                                                                       
|                                                                                       
|                                                                                       
|Total operating revenues                                                                |  | $                                    | 17,515 |         |  | $      | 7,423  |       |  | $     |       |   |  | $ | (2,498 | ) |  | $ | 22,440 |   |  | 
|Total operating expenses                                                                |  |                                      | 15,292 |         |  |        | 6,263  |       |  |       | 114    |   |  |   | (3,975 | ) |  |   | 17,694 |   |  | 
|                                                                                       
|Operating income                                                                        |  |                                      | 2,223  |         |  |        | 1,160  |       |  |       | (114   | ) |  |   | 1,477  |   |  |   | 4,746  |   |  | 
|Interest expense                                                                        |  |                                      | 617    |         |  |        | 343    |       |  |       | 610    |   |  |   | (382   | ) |  |   | 1,188  |   |  | 
|Net earnings (losses) of equity affiliates                                              |  |                                      | 1,015  |         |  |        | 86     |       |  |       | 2,899  |   |  |   | (3,920 | ) |  |   | 80     |   |  | 
|Other income (expense), net                                                             |  |                                      | (46    | )       |  |        | 881    |       |  |       | 184    |   |  |   | (241   | ) |  |   | 778    |   |  | 
|                                                                                       
|Income before income taxes and cumulative effect
    of changes in accounting principle |  |                                      | 2,575  |         |  |        | 1,784  |       |  |       | 2,359  |   |  |   | (2,302 | ) |  |   | 4,416  |   |  | 
|Provision (benefit) for income taxes                                                    |  |                                      | 582    |         |  |        | 882    |       |  |       | (249   | ) |  |   | 593    |   |  |   | 1,808  |   |  | 
|                                                                                       
|Income before cumulative effect of changes in
    accounting principle                  |  |                                      | 1,993  |         |  |        | 902    |       |  |       | 2,608  |   |  |   | (2,895 | ) |  |   | 2,608  |   |  | 
|Cumulative effect of changes in accounting
    principle                                |  |                                      |       |         |  |        | (1,285 | )     |  |       | (1,285 | ) |  |   | 1,285  |   |  |   | (1,285 | ) |  | 
|                                                                                       
|Net income (losses)                                                                     |  | $                                    | 1,993  |         |  | $      | (383   | )     |  | $     | 1,323  |   |  | $ | (1,610 | ) |  | $ | 1,323  |   |  | 
|                                                                                       

|                                                                                        |  |                                      |        |         |  |        |       |       |  |       |       |   |  |   |        |   |  |   |        |  |  | 
|--------------------------------------------------------------------------------------- |  | ------------------------------------ | ------ | ------- |  | ------ | ----- | ----- |  | ----- | ----- | - |  | - | ------ | - |  | - | ------ |  |  | 
|                                                                                        |  |                                     
|                                                                                        |  | For the Year Ended December 31, 2003
|                                                                                        |  |                                     
|                                                                                        |  |                                     
|                                                                                        |  |                                     
|                                                                                        |  |                                      |        | Adjust- |  |       
|                                                                                        |  | BST                                  |        | Other   |  | Parent |       | ments |  | Total |       |  
|                                                                                       
|                                                                                       
|                                                                                       
|Total operating revenues                                                                |  | $                                    | 17,400 |         |  | $      | 7,989 |       |  | $     |      |   |  | $ | (2,754 | ) |  | $ | 22,635 |  |  | 
|Total operating expenses                                                                |  |                                      | 14,838 |         |  |        | 6,114 |       |  |       | 25    |   |  |   | (4,248 | ) |  |   | 16,729 |  |  | 
|                                                                                       
|Operating income                                                                        |  |                                      | 2,562  |         |  |        | 1,875 |       |  |       | (25   | ) |  |   | 1,494  |   |  |   | 5,906  |  |  | 
|Interest expense                                                                        |  |                                      | 537    |         |  |        | 174   |       |  |       | 580   |   |  |   | (243   | ) |  |   | 1,048  |  |  | 
|Net earnings (losses) of equity affiliates                                              |  |                                      | 1,067  |         |  |        | 511   |       |  |       | 3,900 |   |  |   | (5,013 | ) |  |   | 465    |  |  | 
|Other income (expense), net                                                             |  |                                      | (10    | )       |  |        | 190   |       |  |       | 111   |   |  |   | (14    | ) |  |   | 277    |  |  | 
|                                                                                       
|Income before income taxes and cumulative effect
    of changes in accounting principle |  |                                      | 3,082  |         |  |        | 2,402 |       |  |       | 3,406 |   |  |   | (3,290 | ) |  |   | 5,600  |  |  | 
|Provision (benefit) for income taxes                                                    |  |                                      | 730    |         |  |        | 845   |       |  |       | (183  | ) |  |   | 619    |   |  |   | 2,011  |  |  | 
|                                                                                       
|Income before cumulative effect of changes in
    accounting principle                  |  |                                      | 2,352  |         |  |        | 1,557 |       |  |       | 3,589 |   |  |   | (3,909 | ) |  |   | 3,589  |  |  | 
|Cumulative effect of changes in accounting
    principle                                |  |                                      | 816    |         |  |        | (501  | )     |  |       | 315   |   |  |   | (315   | ) |  |   | 315    |  |  | 
|                                                                                       
|Net income (losses)                                                                     |  | $                                    | 3,168  |         |  | $      | 1,056 |       |  | $     | 3,904 |   |  | $ | (4,224 | ) |  | $ | 3,904  |  |  | 
|                                                                                       

CONDENSED CONSOLIDATING
BALANCE SHEETS

|                                           |  |                   |        |                   |  |        |        |       |  |         |        |     |  |       |         |        |  |       |        |       |  |   |        |  |  |   |        |  |  |   |        |   |  |   |         |   |  |   |        |  |  | 
|------------------------------------------ |  | ----------------- | ------ | ----------------- |  | ------ | ------ | ----- |  | ------- | ------ | --- |  | ----- | ------- | ------ |  | ----- | ------ | ----- |  | - | ------ |  |  | - | ------ |  |  | - | ------ | - |  | - | ------- | - |  | - | ------ |  |  | 
|                                           |  |                   |        |                  
|                                           |  | December 31, 2002 |        | December 31, 2003
|                                           |  |                   |        |                  
|                                           |  |                   |        |                  
|                                           |  |                   |        |                  
|                                           |  |                   |        | Adjust-           |  |        |        |       |  | Adjust- |        |    
|                                           |  | BST               |        | Other             |  | Parent |        | ments |  | Total   |        | BST |  | Other |         | Parent |  | ments |        | Total |  |  
|                                          
|                                          
|                                          
|ASSETS                                     |  |                   |        |                   |  |        |        |       |  |         |        |     |  |       |         |        |  |       |        |       |  |   |        |  |  |   |        |  |  |   |        |   |  |   |         |   |  |   |        |  |  | 
|Current assets:                            |  |                   |        |                   |  |        |        |       |  |         |        |     |  |       |         |        |  |       |        |       |  |   |        |  |  |   |        |  |  |   |        |   |  |   |         |   |  |   |        |  |  | 
|Cash and cash equivalents                  |  | $                 |       |                   |  | $      | 752    |       |  | $       | 1,643  |     |  | $     | 87      |        |  | $     | 2,482  |       |  | $ | 5      |  |  | $ | 1,190  |  |  | $ | 3,227  |   |  | $ | 134     |   |  | $ | 4,556  |  |  | 
|Accounts receivable, net                   |  |                   | 53     |                   |  |        | 1,901  |       |  |         | 2,807  |     |  |       | (632    | )      |  |       | 4,129  |       |  |   | 68     |  |  |   | 1,201  |  |  |   | 3,204  |   |  |   | (1,545  | ) |  |   | 2,928  |  |  | 
|Other current assets                       |  |                   | 367    |                   |  |        | 695    |       |  |         | 81     |     |  |       | 108     |        |  |       | 1,251  |       |  |   | 393    |  |  |   | 773    |  |  |   | 81     |   |  |   | 118     |   |  |   | 1,365  |  |  | 
|                                           |  |                  
|Total current assets                       |  |                   | 420    |                   |  |        | 3,348  |       |  |         | 4,531  |     |  |       | (437    | )      |  |       | 7,862  |       |  |   | 466    |  |  |   | 3,164  |  |  |   | 6,512  |   |  |   | (1,293  | ) |  |   | 8,849  |  |  | 
|                                           |  |                  
|Investments and advances                   |  |                   | 3,331  |                   |  |        | 6,924  |       |  |         | 23,340 |     |  |       | (23,854 | )      |  |       | 9,741  |       |  |   | 3,464  |  |  |   | 7,913  |  |  |   | 22,609 |   |  |   | (25,434 | ) |  |   | 8,552  |  |  | 
|Property, plant and equipment, net         |  |                   | 21,352 |                   |  |        | 2,037  |       |  |         | 5      |     |  |       | 51      |        |  |       | 23,445 |       |  |   | 21,818 |  |  |   | 1,947  |  |  |   | 4      |   |  |   | 38      |   |  |   | 23,807 |  |  | 
|Deferred charges and other assets          |  |                   | 4,892  |                   |  |        | 329    |       |  |         | 124    |     |  |       | 381     |        |  |       | 5,726  |       |  |   | 5,029  |  |  |   | 287    |  |  |   | 72     |   |  |   | 467     |   |  |   | 5,855  |  |  | 
|Intangible assets, net                     |  |                   | 1,071  |                   |  |        | 1,477  |       |  |         | 3      |     |  |       | 154     |        |  |       | 2,705  |       |  |   | 1,036  |  |  |   | 1,460  |  |  |   | 5      |   |  |   | 138     |   |  |   | 2,639  |  |  | 
|                                           |  |                  
|Total assets                               |  | $                 | 31,066 |                   |  | $      | 14,115 |       |  | $       | 28,003 |     |  | $     | (23,705 | )      |  | $     | 49,479 |       |  | $ | 31,813 |  |  | $ | 14,771 |  |  | $ | 29,202 |   |  | $ | (26,084 | ) |  | $ | 49,702 |  |  | 
|                                           |  |                  
|LIABILITIES AND
    SHAREHOLDERS EQUITY   |  |                   |        |                   |  |        |        |       |  |         |        |     |  |       |         |        |  |       |        |       |  |   |        |  |  |   |        |  |  |   |        |   |  |   |         |   |  |   |        |  |  | 
|Current liabilities:                       |  |                   |        |                   |  |        |        |       |  |         |        |     |  |       |         |        |  |       |        |       |  |   |        |  |  |   |        |  |  |   |        |   |  |   |         |   |  |   |        |  |  | 
|Debt maturing within one year              |  | $                 | 2,844  |                   |  | $      | 1,120  |       |  | $       | 2,991  |     |  | $     | (1,841  | )      |  | $     | 5,114  |       |  | $ | 2,454  |  |  | $ | 920    |  |  | $ | 2,470  |   |  | $ | (2,353  | ) |  | $ | 3,491  |  |  | 
|Other current liabilities                  |  |                   | 3,415  |                   |  |        | 1,563  |       |  |         | 743    |     |  |       | (1,252  | )      |  |       | 4,469  |       |  |   | 3,942  |  |  |   | 1,724  |  |  |   | 916    |   |  |   | (1,615  | ) |  |   | 4,967  |  |  | 
|                                           |  |                  
|Total current liabilities                  |  |                   | 6,259  |                   |  |        | 2,683  |       |  |         | 3,734  |     |  |       | (3,093  | )      |  |       | 9,583  |       |  |   | 6,396  |  |  |   | 2,644  |  |  |   | 3,386  |   |  |   | (3,968  | ) |  |   | 8,458  |  |  | 
|                                           |  |                  
|Long-term debt                             |  |                   | 5,371  |                   |  |        | 3,344  |       |  |         | 6,294  |     |  |       | (2,726  | )      |  |       | 12,283 |       |  |   | 4,970  |  |  |   | 845    |  |  |   | 6,301  |   |  |   | (627    | ) |  |   | 11,489 |  |  | 
|                                           |  |                  
|Noncurrent liabilities:                    |  |                   |        |                   |  |        |        |       |  |         |        |     |  |       |         |        |  |       |        |       |  |   |        |  |  |   |        |  |  |   |        |   |  |   |         |   |  |   |        |  |  | 
|Deferred income taxes                      |  |                   | 3,507  |                   |  |        | 1,508  |       |  |         | (733   | )   |  |       | 170     |        |  |       | 4,452  |       |  |   | 4,408  |  |  |   | 1,519  |  |  |   | (751   | ) |  |   | 173     |   |  |   | 5,349  |  |  | 
|Other noncurrent liabilities               |  |                   | 3,258  |                   |  |        | 1,147  |       |  |         | 802    |     |  |       | 48      |        |  |       | 5,255  |       |  |   | 2,991  |  |  |   | 1,074  |  |  |   | 554    |   |  |   | 75      |   |  |   | 4,694  |  |  | 
|                                           |  |                  
|Total noncurrent liabilities               |  |                   | 6,765  |                   |  |        | 2,655  |       |  |         | 69     |     |  |       | 218     |        |  |       | 9,707  |       |  |   | 7,399  |  |  |   | 2,593  |  |  |   | (197   | ) |  |   | 248     |   |  |   | 10,043 |  |  | 
|                                           |  |                  
|Shareholders equity                       |  |                   | 12,671 |                   |  |        | 5,433  |       |  |         | 17,906 |     |  |       | (18,104 | )      |  |       | 17,906 |       |  |   | 13,048 |  |  |   | 8,689  |  |  |   | 19,712 |   |  |   | (21,737 | ) |  |   | 19,712 |  |  | 
|                                           |  |                  
|Total liabilities and shareholders equity |  | $                 | 31,066 |                   |  | $      | 14,115 |       |  | $       | 28,003 |     |  | $     | (23,705 | )      |  | $     | 49,479 |       |  | $ | 31,813 |  |  | $ | 14,771 |  |  | $ | 29,202 |   |  | $ | (26,084 | ) |  | $ | 49,702 |  |  | 
|                                           |  |                  



86 BELLSOUTH
2003




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##### Table of Contents







CONDENSED CONSOLIDATING CASH
FLOW STATEMENTS

|                                     |  |                                      |        |       |  |        |        |             |  |       |        |   |  |   |        |   |  |   |        |   |  | 
|------------------------------------ |  | ------------------------------------ | ------ | ----- |  | ------ | ------ | ----------- |  | ----- | ------ | - |  | - | ------ | - |  | - | ------ | - |  | 
|                                     |  |                                     
|                                     |  | For the Year Ended December 31, 2001
|                                     |  |                                     
|                                     |  |                                     
|                                     |  |                                     
|                                     |  | BST                                  |        | Other |  | Parent |        | Adjustments |  | Total |        |  
|                                    
|                                    
|                                    
|Cash flows from operating activities |  | $                                    | 6,308  |       |  | $      | 1,896  |             |  | $     | 3,559  |   |  | $ | (3,765 | ) |  | $ | 7,998  |   |  | 
|Cash flows from investing activities |  |                                      | (4,962 | )     |  |        | (1,183 | )           |  |       | (3,320 | ) |  |   | 2,426  |   |  |   | (7,039 | ) |  | 
|Cash flows from financing activities |  |                                      | (1,347 | )     |  |        | (1,156 | )           |  |       | (239   | ) |  |   | 1,314  |   |  |   | (1,428 | ) |  | 
|                                    
|Net (decrease) increase in cash      |  | $                                    | (1     | )     |  | $      | (443   | )           |  | $     |       |   |  | $ | (25    | ) |  | $ | (469   | ) |  | 
|                                    

|                                     |  |                                      |        |       |  |        |       |             |  |       |        |   |  |   |        |   |  |   |        |  
|------------------------------------ |  | ------------------------------------ | ------ | ----- |  | ------ | ----- | ----------- |  | ----- | ------ | - |  | - | ------ | - |  | - | ------ | -
|                                     |  |                                     
|                                     |  | For the Year Ended December 31, 2002
|                                     |  |                                     
|                                     |  |                                     
|                                     |  |                                     
|                                     |  | BST                                  |        | Other |  | Parent |       | Adjustments |  | Total
|                                    
|                                    
|                                    
|Cash flows from operating activities |  | $                                    | 6,174  |       |  | $      | 1,362 |             |  | $     | 3,434  |   |  | $ | (2,724 | ) |  | $ | 8,246  |  
|Cash flows from investing activities |  |                                      | (3,166 | )     |  |        | (479  | )           |  |       | 1,480  |   |  |   | 458    |   |  |   | (1,707 | )
|Cash flows from financing activities |  |                                      | (3,008 | )     |  |        | (731  | )           |  |       | (3,271 | ) |  |   | 2,361  |   |  |   | (4,649 | )
|                                    
|Net (decrease) increase in cash      |  | $                                    |       |       |  | $      | 152   |             |  | $     | 1,643  |   |  | $ | 95     |   |  | $ | 1,890  |  
|                                    

|                                     |  |                                      |        |       |  |        |        |             |  |       |        |   |  |   |        |   |  |   |        |  
|------------------------------------ |  | ------------------------------------ | ------ | ----- |  | ------ | ------ | ----------- |  | ----- | ------ | - |  | - | ------ | - |  | - | ------ | -
|                                     |  |                                     
|                                     |  | For the Year Ended December 31, 2003
|                                     |  |                                     
|                                     |  |                                     
|                                     |  |                                     
|                                     |  | BST                                  |        | Other |  | Parent |        | Adjustments |  | Total
|                                    
|                                    
|                                    
|                                    
|Cash flows from operating activities |  | $                                    | 7,654  |       |  | $      | 2,283  |             |  | $     | 4,038  |   |  | $ | (5,446 | ) |  | $ | 8,529  |  
|Cash flows from investing activities |  |                                      | (2,918 | )     |  |        | (685   | )           |  |       | 371    |   |  |   | 1,534  |   |  |   | (1,698 | )
|Cash flows from financing activities |  |                                      | (4,731 | )     |  |        | (1,160 | )           |  |       | (2,825 | ) |  |   | 3,959  |   |  |   | (4,757 | )
|                                    
|Net (decrease) increase in cash      |  | $                                    | 5      |       |  | $      | 438    |             |  | $     | 1,584  |   |  | $ | 47     |   |  | $ | 2,074  |  
|                                    



BELLSOUTH
2003      87




---



##### Table of Contents



NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS CONTINUED


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


BELLSOUTH CORPORATION



|         |                                                
|-------- | -----------------------------------------------
|Note T  | Quarterly Financial Information
    (Unaudited)

In the following summary of quarterly financial
information, all adjustments necessary for a fair presentation
of each period were included.

|                                                           |  |         |       |         |  |         |       |         |  |   |       |  |  |   |       |  |  | 
|---------------------------------------------------------- |  | ------- | ----- | ------- |  | ------- | ----- | ------- |  | - | ----- |  |  | - | ----- |  |  | 
|                                                           |  | First   |       | Second  |  | Third   |       | Fourth  |  |  
|                                                           |  | Quarter |       | Quarter |  | Quarter |       | Quarter |  |  
|                                                          
|                                                          
|                                                          
|2002                                                       |  |         |       |         |  |         |       |         |  |   |       |  |  |   |       |  |  | 
|Operating Revenues                                         |  | $       | 5,534 |         |  | $       | 5,780 |         |  | $ | 5,434 |  |  | $ | 5,692 |  |  | 
|Operating Income                                           |  |         | 1,369 |         |  |         | 1,199 |         |  |   | 1,042 |  |  |   | 1,136 |  |  | 
|Income Before Effect of Change in Accounting
    Principle |  |         | 1,131 |         |  |         | 263   |         |  |   | 640   |  |  |   | 574   |  |  | 
|Net Income (Loss)                                          |  |         | (154  | )       |  |         | 263   |         |  |   | 640   |  |  |   | 574   |  |  | 
|Basic Earnings Per Share(a):                               |  |         |       |         |  |         |       |         |  |   |       |  |  |   |       |  |  | 
|Income Before Effect of Change in Accounting
    Principle |  | $       | .60   |         |  | $       | .14   |         |  | $ | .34   |  |  | $ | .31   |  |  | 
|Net Income (Loss)                                          |  | $       | (.08  | )       |  | $       | .14   |         |  | $ | .34   |  |  | $ | .31   |  |  | 
|Diluted Earnings Per Share(a):                             |  |         |       |         |  |         |       |         |  |   |       |  |  |   |       |  |  | 
|Income Before Effect of Change in Accounting
    Principle |  | $       | .60   |         |  | $       | .14   |         |  | $ | .34   |  |  | $ | .31   |  |  | 
|Net Income (Loss)                                          |  | $       | (.08  | )       |  | $       | .14   |         |  | $ | .34   |  |  | $ | .31   |  |  | 
|                                                          
|2003                                                       |  |         |       |         |  |         |       |         |  |   |       |  |  |   |       |  |  | 
|Operating Revenues                                         |  | $       | 5,523 |         |  | $       | 5,642 |         |  | $ | 5,728 |  |  | $ | 5,742 |  |  | 
|Operating Income                                           |  |         | 1,379 |         |  |         | 1,435 |         |  |   | 1,554 |  |  |   | 1,538 |  |  | 
|Income Before Effect of Change in Accounting
    Principle |  |         | 915   |         |  |         | 951   |         |  |   | 936   |  |  |   | 787   |  |  | 
|Net Income (Loss)                                          |  |         | 1,230 |         |  |         | 951   |         |  |   | 936   |  |  |   | 787   |  |  | 
|Basic Earnings Per Share(a):                               |  |         |       |         |  |         |       |         |  |   |       |  |  |   |       |  |  | 
|Income Before Effect of Change in Accounting
    Principle |  | $       | .49   |         |  | $       | .51   |         |  | $ | .51   |  |  | $ | .43   |  |  | 
|Net Income (Loss)                                          |  | $       | .66   |         |  | $       | .51   |         |  | $ | .51   |  |  | $ | .43   |  |  | 
|Diluted Earnings Per Share(a):                             |  |         |       |         |  |         |       |         |  |   |       |  |  |   |       |  |  | 
|Income Before Effect of Change in Accounting
    Principle |  | $       | .49   |         |  | $       | .51   |         |  | $ | .51   |  |  | $ | .43   |  |  | 
|Net Income (Loss)                                          |  | $       | .66   |         |  | $       | .51   |         |  | $ | .51   |  |  | $ | .43   |  |  | 



|    |  |                                                                                                 
|--- |  | ------------------------------------------------------------------------------------------------
|(a) |  | Due to rounding, the sum of quarterly EPS
    amounts may not agree to year-to-date EPS amounts.

The quarters shown were affected by the following:


2002



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | During 2002, we recorded foreign currency losses,
    net of tax, of $204, or $0.11 per share, in first quarter, $355,
    or $0.19 per share, in second quarter, $13, or $0.01 per share,
    in third quarter and $26, or $0.01 per share, in fourth quarter.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | We recorded losses as a result of selling shares
    of Qwest common stock, which reduced net income by $60, or $0.03
    per share, during first quarter and $23, or $0.01 per share,
    during second quarter.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | We recorded losses related to the write-down of
    our investments in equity securities, which reduced net income
    by $101, or $0.05 per share, in first quarter and $33, or $0.02
    per share, in second quarter.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | We recorded losses related to our workforce
    reduction of approximately 5,000 positions, which reduced net
    income by $225, or $0.12 per share, in second quarter and $202,
    or $0.11 per share, in third quarter, and $262, or $0.14 per
    share in fourth quarter.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | First quarter also includes a gain related to the
    conversion of our ownership interest in E-Plus into KPN stock, a
    loss on the subsequent sale of the KPN stock, and a gain from
    the settlement of forward contracts associated with advances to
    E-Plus, all of which increased net income by $857, or $0.45 per
    share. In addition, first quarter includes recognition of an
    impairment on shareholder loans to our Brazilian equity
    investments, as well as the recognition of a guarantee on a
    portion of those operations debt, which resulted in a
    decrease to net income of $263, or $0.14 per share. Also during
    first quarter, we recorded a reduction to our advertising and
    publishing revenues, which reduced net income by $101, or $0.05
    per share.
| |  | Third quarter also includes a charge for the
    refund of certain late payment fees to customers in Florida,
    which reduced net income by $70, or $0.04 per share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | Fourth quarter also includes a loss related to
    the sale of our remaining Brazilian yellow pages operation,
    which reduced net income by $51, or $0.03 per share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

2003



| |   |                                                                                                                                                                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | During 2003, we recorded foreign currency gains
    and (losses), net of tax, of $48, or $0.03 per share, in first
    quarter, $65, or $0.04 per share, in second quarter, $(12), or
    $(0.01) per share, in third quarter and $9, or $0.00 per share,
    in fourth quarter.                   
| |  | We recorded losses related to our workforce
    reduction of approximately 3,400 positions, which reduced net
    income by $74, or $0.04 per share, in first quarter and $12, or
    $0.01 per share, in second quarter, and $10, or $0.01 per share
    in fourth quarter.                       
| |  | Second quarter also includes a charge for the
    sale of one of our Brazilian equity-method investments, which
    reduced net income by $73, or $0.04 per share.                                                                                                                                 
| |  | Third quarter also includes a charge for an asset
    impairment, which reduced net income by $32, or $0.02 per share.                                                                                                                                                                             
| |  | Fourth quarter also includes a charge for the
    sale of one of our Brazilian equity-method investments, which
    reduced net income by $161, or $0.09 per share, and a gain
    related to the sale of Tele Cento Oeste common stock, which
    increased net income by $27, or $0.01 per share.

Note U  Subsequent
Events

SONOFON

On February 12, 2004, we closed on a
previously announced agreement to sell our interest in Danish
wireless provider, Sonofon, for 3.68 billion Danish Kroner
(currently equaling approximately US$600) to Telenor ASA. We
received 3.05 billion Danish Kroner for our 46.5% equity
stake and 630 Danish Kroner for our shareholder loan and accrued
interest. Telenor, the incumbent local exchange carrier in
Norway, currently owns 53.5 percent of Sonofon and shares
joint control of the company with BellSouth.



88 BELLSOUTH
2003




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##### Table of Contents







We will record an after-tax gain of approximately
$300 in the first quarter of 2004.

AT&T WIRELESS

On February 17, 2004, Cingular announced an
agreement to acquire AT&T Wireless Services, Inc. in an all
cash transaction. Under the terms of the agreement, which were
approved by our board of directors and the boards of directors
of SBC and Cingular as well as AT&T Wireless, shareholders
of AT&T Wireless will receive $15 cash per common share or
approximately $41 billion. The acquisition, which is
subject to the approvals of AT&T Wireless shareholders and
federal regulatory authorities, and to other customary closing
conditions, is expected to be completed in the fourth quarter of
2004.

We have committed to funding our proportionate
share of the all cash transaction. We expect our funding
requirement will be approximately $16 billion. Funding will
be achieved through a combination of existing cash on hand, cash
generated from our operations prior to closing and potential
asset sales. We plan to access the public debt markets for the
remainder. At the time of closing, we currently anticipate our
likely external funding needs to be in the $9.5 to
$10.5 billion range.


Cingular expects to achieve significant operating
and capital synergies through this acquisition by consolidating
networks, distribution, billing, procurement, marketing,
advertising and other functions. Due to the impacts of purchase
accounting at Cingular, integration costs and additional
financing costs of indebtedness we expect to incur to satisfy
our funding commitment to the transaction, we expect some
dilution to GAAP earnings per share in the first few years
subsequent to the closing of the transaction.


SBCs and BellSouths proportionate
equity stake in Cingular will remain unchanged following the
transaction, with SBC holding 60 percent and BellSouth
40 percent. SBC and BellSouth will continue to have equal
management control.




BELLSOUTH
2003      89




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##### Table of Contents



EXHIBITS, FINANCIAL STATEMENT
SCHEDULES AND REPORTS ON FORM 8-K


BELLSOUTH CORPORATION






ITEM 9.    CHANGES
IN AND DISAGREEMENTS WITH AUDITORS ON ACCOUNTING AND FINANCIAL
DISCLOSURE

No change in auditors or disagreements on the
adoption of appropriate accounting standards or financial
disclosure has occurred during the periods included in this
report.




ITEM 9a.    Controls
and Procedures

We maintain disclosure controls and procedures
that are designed to ensure that information required to be
disclosed in our Exchange Act reports is recorded, processed,
summarized and reported within the time periods specified in the
SECs rules and forms, and that such information is
accumulated and communicated to the management, including the
Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required
disclosure. Management necessarily applied its judgment in
assessing the costs and benefits of such controls and
procedures, which, by their nature, can provide only reasonable
assurance regarding managements control objectives. We
also have investments in certain unconsolidated entities. As we
do not control or manage these entities, our disclosure controls
and procedures with respect to such entities are necessarily
more limited than those we maintain with respect to our
consolidated subsidiaries.

The Companys management, including the
Chief Executive Officer and Chief Financial Officer, does not
expect that our disclosure controls can prevent all errors and
all fraud. A control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met. There are
inherent limitations in all control systems, including the
realities that judgments in decision-making can be faulty, and
that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual
acts of one or more persons. The design of any system of
controls also is based in part upon certain assumptions about
the likelihood of future events, and, while our disclosure
controls and procedures are designed to be effective under
circumstances where they should reasonably be expected to
operate effectively, there can be no assurance that any design
will succeed in achieving its stated goals under all potential
future conditions. Because of the inherent limitations in any
control system, misstatements due to error or fraud may occur
and not be detected.


As of the end of the period covered by this
report, we carried out an evaluation, under the supervision and
with the participation of management, including the Chief
Executive Officer along with the Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure
controls and procedures pursuant to Exchange Act
Rules 13a-15(b) and 15d-15(b). Based upon the foregoing,
the Chief Executive Officer along with the Chief Financial
Officer concluded that our disclosure controls and procedures
are effective at providing reasonable assurance that all
material information relating to BellSouth (including
consolidated subsidiaries) required to be included in our
Exchange Act reports is reported in a timely manner. In
addition, based on such evaluation we have identified no change
in our internal control over financial reporting that occurred
during our last fiscal quarter that has materially affected, or
is reasonably likely to materially affect, our internal control
over financial reporting.





PART III






ITEMS 10 THROUGH 13.


Information regarding executive officers required
by Item 401 of Regulation S-K is furnished in a
separate disclosure on page 20 in Part I of this report since
the registrant did not furnish such information in its
definitive proxy statement prepared in accordance with
Schedule 14A. Information regarding our Code of Ethics, as
required by Item 10 below, is included under the caption
Website Access on page 20 of this
Form 10-K.

The additional information required by these
items will be included in the registrants definitive proxy
statement dated March 10, 2004 as follows, and is herein
incorporated by reference pursuant to General Instruction G(3):


|     |  |                                                                                                    |  |                                    
|---- |  | -------------------------------------------------------------------------------------------------- |  | -----------------------------------
|     |  |                                                                                                    |  | Page(s) in Definitive Proxy        
|Item |  | Description                                                                                        |  | Statement                          
|    
|    
|    
|10.  |  | Directors and Executive Officers of the Registrant                                                 |  | 7 to 8; 40 to 41(a)                
|11.  |  | Executive Compensation                                                                             |  | 13 to 14(b); 18(c);
    33 to 39(d)
|12.  |  | Security Ownership of Certain Beneficial Owners
    and Management and Related Shareholder Matters |  | 19; 37(e)                          
|13.  |  | Certain Relationships and Related Transactions                                                     |  | 11 to 12(f); 39(g)                 
|14.  |  | Principal Auditor Fees and Services                                                                |  | 15(h)                              



|    |  |                                                                                                                              
|--- |  | -----------------------------------------------------------------------------------------------------------------------------
|(a) |  | Only the information under the caption
    Section 16(a) Beneficial Ownership Reporting
    Compliance.                    
|(b) |  | Only the information under the caption
    Director Compensation.                                                          
|(c) |  | Only the information under the caption
    Compensation Committee Interlocks and Insider
    Participation.                
|(d) |  | Excluding the information under the captions
    Equity Compensation Plan Information and
    Related Party Transactions.
|(e) |  | Only the information under the caption
    Equity Compensation Plan Information.                                           
|(f) |  | Only the information under the caption
    Independent Directors.                                                          
|(g) |  | Only the information under the caption
    Related Party Transactions.                                                     
|(h) |  | Only the information under the caption
    Independent Auditor Fees and Services.                                          



90 BELLSOUTH
2003




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##### Table of Contents






PART IV






ITEM 15.    EXHIBITS,
FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K


|    |  |                                                                                                                                                                                                                                                                                                                                                             |  |   
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --
|    |  |                                                                                                                                                                                                                                                                                                                                                            
|    |  | Page(s) in This                                                                                                                                                                                                                                                                                                                                             | 
|    |  | Form 10-K                                                                                                                                                                                                                                                                                                                                                   | 
|    |  |                                                                                                                                                                                                                                                                                                                                                            
|   
|   
|   
|a.  |  | Documents filed as a part of the report:                                                                                                                                                                                                                                                                                                                    |  |   
|(1) |  | Financial Statements:                                                                                                                                                                                                                                                                                                                                       |  |   
|    |  | Reports of Independent Auditors                                                                                                                                                                                                                                                                                                                             |  | 55
|    |  | Consolidated Statements of Income                                                                                                                                                                                                                                                                                                                           |  | 56
|    |  | Consolidated Balance Sheets                                                                                                                                                                                                                                                                                                                                 |  | 57
|    |  | Consolidated Statements of Cash Flows                                                                                                                                                                                                                                                                                                                       |  | 58
|    |  | Consolidated Statements of
    Shareholders                                                                                                                                                                                                                                                                                                                |  |   
|    |  | Equity and Comprehensive Income                                                                                                                                                                                                                                                                                                                             |  | 59
|    |  | Notes to Consolidated Financial Statements                                                                                                                                                                                                                                                                                                                  |  | 60
|(2) |  | Financial statement schedules have been omitted
    because the required information is contained in the financial
    statements and notes thereto or because such schedules are not
    required or applicable.                                                                                                                                           |  |   
|(3) |  | Exhibits: Exhibits identified in parentheses
    below, on file with the SEC, are incorporated herein by
    reference as exhibits hereto. All management contracts or
    compensatory plans or arrangements required to be filed as
    exhibits to this Form 10-K Report pursuant to
    Item 15(c) are filed as Exhibits 10 through 10ll
    inclusive. |  |   

|        |  |                                                                                                                                                                                                                                                                                                                                           
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                                                           
|Number  |  |                                                                                                                                                                                                                                                                                                                                           
|3a      |  | Amended Articles of Incorporation of BellSouth
    Corporation adopted December 5, 2000. (Exhibit 3a to
    Form 10-K for the year ended December 31, 2000, File
    No. 1-8607.)                                                                                                                                                         
|3b      |  | Amended and Restated By-laws of BellSouth
    Corporation adopted September 22, 2003 (Exhibit 3b to
    Form 10-Q for the quarter ended September 30, 2003,
    File No. 1-8607.)                                                                                                                                                         
|4       |  | BellSouth Corporation Shareholder Rights
    Agreement. (Exhibit 1 to Report on Form 8-A dated
    November 23, 1999, File No. 1-8607.)                                                                                                                                                                                                   
|4a      |  | No instrument which defines the rights of holders
    of long and intermediate term debt of BellSouth Corporation is
    filed herewith pursuant to Regulation S-K,
    Item 601(b)(4)(iii)(A). Pursuant to this regulation,
    BellSouth Corporation hereby agrees to furnish a copy of any
    such instrument to the SEC upon request.
|10a     |  | BellSouth Corporation Officer Short Term
    Incentive Award Plan. (Exhibit 10y to Form 10-Q for
    the quarter ended September 30, 1996, File No. 1-8607.)                                                                                                                                                                              
|10c     |  | BellSouth Corporation Executive Long Term
    Disability and Survivor Protection Plan as amended and restated
    effective January 1, 1994. (Exhibit 10c-1 to
    Form 10-K for the year ended December 31, 1993, File
    No. 1-8607.)                                                                                                  
|10d     |  | BellSouth Corporation Executive Transfer Plan.
    (Exhibit 10ee to Registration Statement No. 2-87846.)                                                                                                                                                                                                                                  
|10e     |  | BellSouth Corporation Death Benefit Program.
    (Exhibit 10ff to Form 10-K for the year ended
    December 31, 1989, File No. 1-8607.)                                                                                                                                                                                                   
|10f     |  | BellSouth Corporation Plan For Non-Employee
    Directors Travel Accident Insurance. (Exhibit 10ii to
    Registration Statement No. 2-87846.)                                                                                                                                                                                           
|10g     |  | BellSouth Corporation Executive Incentive Award
    Deferral Plan as amended and restated effective
    September 23, 1996. (Exhibit 10g to Form 10-K for
    the year ended December 31, 1996, File No. 1-8607.)                                                                                                                         
|10h     |  | BellSouth Corporation Nonqualified Deferred
    Compensation Plan as amended and restated effective
    November 25, 1996. (Exhibit 10h to Form 10-K for
    the year ended December 31, 1996, File No. 1-8607.)                                                                                                                          
|10i     |  | BellSouth Corporation Supplemental Executive
    Retirement Plan as amended on March 23, 1998.
    (Exhibit 10i to Form 10-Q for the quarter ended
    March 31, 1998, File No. 1-8607.)                                                                                                                                                  
|10j     |  | BellSouth Corporation Directors Retirement Plan.
    (Exhibit 10qq to Form 10-K for the year ended
    December 31, 1986, File No. 1-8607.)                                                                                                                                                                                               
|10k     |  | BellSouth Corporation Financial Counseling Plan.
    (Exhibit 10r to Form 10-K for the year ended
    December 31, 1992, File No. 1-8607.)                                                                                                                                                                                                
|10k-1   |  | Amendment dated November 3, 1995 to the
    BellSouth Corporation Financial Counseling Plan for Executives.
    (Exhibit 10l-1 to Form 10-K for the year ended
    December 31, 1995, File No. 1-8607.)                                                                                                                                   
|10l     |  | BellSouth Corporation Deferred Compensation Plan
    for Non-Employee Directors. (Exhibit 10gg to Registration
    Statement No. 2-87846.)                                                                                                                                                                                                
|10m     |  | BellSouth Corporation Executive Life Insurance
    Plan as amended and restated as the BellSouth Split-Dollar Life
    Insurance Plan, effective August 31, 1998.
    (Exhibit 10m to Form 10-K for the year ended
    December 31, 1998, File No. 1-8607.)                                                                               
|10n     |  | BellSouth Corporation Non-Employee Director Stock
    Plan. (Exhibit 10z to Form 10-Q for the quarter ended
    March 31, 1997, File No. 1-8607.)                                                                                                                                                                                         
|10p     |  | BellSouth Non-Employee Directors Charitable
    Contribution Program. (Exhibit 10z to Form 10-K for
    the year ended December 31, 1992, File No. 1-8607.)                                                                                                                                                                               



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|        |  |                                                                                                                                                                                                                         
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                         
|Number  |  |                                                                                                                                                                                                                         
|10q     |  | BellSouth Personal Retirement Account Pension
    Plan, as amended and restated effective January 1, 1998.
    (Exhibit 10q to Form 10-K for the year ended
    December 31, 1998, File No. 1-8607.)                    
|10q-1   |  | Amendment dated December 22, 1998 to the
    BellSouth Personal Retirement Account Pension Plan.
    (Exhibit 10q-1 to Form 10-K for the year ended
    December 31, 1998, File No. 1-8607.)                            
|10q-2   |  | Amendment dated March 22, 1999 to the
    BellSouth Personal Retirement Account Pension Plan.
    (Exhibit 10q-2 to Form 10-Q for the quarter ended
    March 31, 1999, File No. 1-8607.)                               
|10q-3   |  | Amendment dated April 7, 1999 to the
    BellSouth Personal Retirement Account Pension Plan.
    (Exhibit 10q-3 to Form 10-Q for the quarter ended
    March 31, 1999, File No. 1-8607.)                                
|10q-4   |  | Amendment dated May 6, 1999 to the BellSouth
    Personal Retirement Account Pension Plan. (Exhibit 10q-4 to
    Form 10-Q for the quarter ended June 30, 1999, File
    No. 1-8607.)                                   
|10q-5   |  | Amendment dated May 6, 1999 to the BellSouth
    Personal Retirement Account Pension Plan. (Exhibit 10q-5 to
    Form 10-Q for the quarter ended June 30, 1999, File
    No. 1-8607.)                                   
|10q-6   |  | Amendment dated May 7, 1999 to the BellSouth
    Personal Retirement Account Pension Plan. (Exhibit 10q-6 to
    Form 10-Q for the quarter ended June 30, 1999, File
    No. 1-8607.)                                   
|10q-7   |  | Amendment dated September 13, 1999 to the
    BellSouth Personal Retirement Account Pension Plan.
    (Exhibit 10q-7 to Form 10-Q for the quarter ended
    September 30, 1999, File No. 1-8607.)                       
|10q-8   |  | Amendment dated December 22, 1999 to the
    BellSouth Personal Retirement Account Pension Plan.
    (Exhibit 10q-8 to Form 10-K for the year ended
    December 31, 1999, File No. 1-8607.)                            
|10q-9   |  | Amendment dated December 15, 2000 to the
    BellSouth Personal Retirement Account Pension Plan.
    (Exhibit 10q-9 to Form 10-K for the year ended
    December 31, 2000, File No. 1-8607.)                            
|10q-10  |  | Amendment dated December 15, 2000 to the
    BellSouth Personal Retirement Account Pension Plan.
    (Exhibit 10q-10 to Form 10-K for the year ended
    December 31, 2000, File No. 1-8607.)                           
|10q-11  |  | Amendment dated December 15, 2000 to the
    BellSouth Personal Retirement Account Pension Plan.
    (Exhibit 10q-11 to Form 10-K for the year ended
    December 31, 2000, File No. 1-8607.)                           
|10q-12  |  | Amendment dated December 15, 2000 to the
    BellSouth Personal Retirement Account Pension Plan.
    (Exhibit 10q-12 to Form 10-Q for the quarter ended
    September 30, 2001, File No. 1-8607.)                       
|10q-13  |  | Amendment dated December 18, 2001 to the
    BellSouth Personal Retirement Account Pension Plan.
    (Exhibit 10q-13 to Form 10-K for the year ended
    December 31, 2001, File No. 1-8607.)                           
|10q-14  |  | Amendment dated December 17, 2002 to the
    BellSouth Personal Retirement Account Pension Plan.
    (Exhibit 10q-14 to Form 10-K for the year ended
    December 31, 2002, File No. 1-8607.)                           
|10q-15  |  | Amendment dated December 23, 2003 to the
    BellSouth Personal Retirement Account Pension Plan.                                                                                                                        
|10r     |  | BellSouth Corporation Trust Under Executive
    Benefit Plan(s) as amended April 28, 1995.
    (Exhibit 10u-1 to Form 10-Q for the quarter ended
    June 30, 1995, File No. 1-8607.)                                   
|10r-1   |  | Amendment dated May 23, 1996 to the
    BellSouth Corporation Trust Under Executive Benefit Plan(s).
    (Exhibit 10s-1 to Form 10-Q for the quarter ended
    June 30, 1996, File No. 1-8607.)                         
|10r-2   |  | Second Amendment dated July 8, 2002 to the
    BellSouth Corporation Trust Under Executive Benefit Plan(s).
    (Exhibit 10r-2 to Form 10-Q for the quarter ended
    September 30, 2002, File No. 1-8607.)             
|10r-3   |  | First Amendment dated November 1, 2003 to
    the BellSouth Corporation Trust Under Executive Benefit Plan(s).                                                                                                          
|10r-4   |  | Second Amendment dated December 17, 2003 to
    the BellSouth Corporation Trust Under Executive Benefit Plan(s).                                                                                                        
|10s     |  | BellSouth Telecommunications, Inc. Trust Under
    Executive Benefit Plan(s) as amended April 28, 1995.
    (Exhibit 10v-1 to Form 10-Q for the quarter ended
    June 30, 1995, File No. 1-8607.)                      
|10s-1   |  | Amendment dated May 23, 1996 to the
    BellSouth Telecommunications, Inc. Trust Under Executive Benefit
    Plan(s). (Exhibit 10t-1 to Form 10-Q for the quarter
    ended June 30, 1996, File No. 1-8607.)            
|10s-2   |  | Second Amendment dated July 8, 2002 to the
    BellSouth Telecommunications, Inc. Trust Under Executive Benefit
    Plan(s). (Exhibit 10s-2 to Form 10-Q for the quarter
    ended September 30, 2002, File No. 1-8607.)
|10s-3   |  | First Amendment dated November 1, 2003 to
    the BellSouth Telecommunications, Inc. Trust Under Executive
    Benefit Plan(s).                                                                                         
|10s-4   |  | Second Amendment dated December 17, 2003 to
    the BellSouth Telecommunications, Inc. Trust Under Executive
    Benefit Plan(s).                                                                                       
|10t     |  | BellSouth Corporation Trust Under Board of
    Directors Benefit Plan(s) as amended April 28, 1995.
    (Exhibit 10w-1 to Form 10-Q for the quarter ended
    June 30, 1995, File No. 1- 8607.)                         
|10t-1   |  | Amendment dated May 23, 1996 to the
    BellSouth Corporation Trust Under Board Directors Benefit
    Plan(s). (Exhibit 10u-1 to Form 10-Q for the quarter
    ended June 30, 1996, File No. 1-8607.)                   



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|        |  |                                                                                                                                                                                                                         
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                         
|Number  |  |                                                                                                                                                                                                                         
|10t-2   |  | First Amendment dated November 1, 2003 to
    the BellSouth Corporation Trust Under Board of Directors Benefit
    Plan(s).                                                                                             
|10t-3   |  | Second Amendment dated December 17, 2003 to
    the BellSouth Corporation Trust Under Board of Directors Benefit
    Plan(s).                                                                                           
|10u     |  | BellSouth Telecommunications, Inc. Trust Under
    Board of Directors Benefit Plan(s) as amended April 28,
    1995. (Exhibit 10x-1 to Form 10-Q for the quarter
    ended June 30, 1995, File No. 1-8607.)             
|10u-1   |  | Amendment dated May 23, 1996 to the
    BellSouth Telecommunications, Inc. Trust Under Board of
    Directors Benefit Plan(s). (Exhibit 10v-1 to Form 10-Q
    for the quarter ended June 30, 1996, File No. 1-8607.)   
|10u-2   |  | First Amendment dated November 1, 2003 to
    the BellSouth Telecommunications, Inc. Trust Under Board of
    Directors Benefit Plan(s).                                                                                
|10u-3   |  | Second Amendment dated December 17, 2003 to
    the BellSouth Telecommunications, Inc. Trust Under Board of
    Directors Benefit Plan(s).                                                                              
|10v-1   |  | The Amended and Restated BellSouth Corporation
    Stock Plan Effective April 24, 1995 As Amended
    (Exhibit 10v-1 to Form 10-K for the year ended
    December 31, 2000, File No. 1-8607.)                           
|10w     |  | BellSouth Retirement Savings Plan as amended and
    restated effective July 1, 2001. (Exhibit 10w to
    Form 10-K for the year ended December 31, 2001, File
    No. 1-8607.)                                         
|10w-1   |  | First Amendment dated December 18, 2001 to
    the BellSouth Retirement Savings Plan. (Exhibit 10w-1 to
    Form 10-K for the year ended December 31, 2001, File
    No. 1-8607.)                                       
|10w-2   |  | Second Amendment dated March 14, 2002 to the
    BellSouth Retirement Savings Plan. (Exhibit 10w-2 to
    Form 10-Q for the quarter ended September 30, 2002,
    File No. 1-8607.)                                     
|10w-3   |  | Third Amendment to the BellSouth Retirement
    Savings Plan effective as of May 1, 2002 and
    December 10, 2002. (Exhibit 10w-3 to Form 10-K
    for the year ended December 31, 2002, File No. 1-8607.)             
|10w-4   |  | Fourth Amendment dated December 23, 2003 to
    the BellSouth Retirement Savings Plan.                                                                                                                                  
|10x     |  | BellSouth Corporation Officer Estate Enhancement
    Plan and Agreement. (Exhibit 10x to Form 10-K for the
    year ended December 31, 1996, File No. 1-8607.)                                                          
|10y-1   |  | BellSouth Change in Control Executive Severance
    Agreements (Exhibit 10y-1 to Form 10-Q for the quarter
    ended September 30, 2003, File No. 1-8607.)                                                              
|10z     |  | BellSouth Compensation Deferral Plan as amended
    and restated effective September 28, 1998.
    (Exhibit 10z to Form 10-Q for the quarter ended
    September 30, 2001, File No. 1-8607.)                            
|10bb    |  | BellSouth Officer Motor Vehicle Policy.
    (Exhibit 10bb to Form 10-Q for the quarter ended
    March 31, 1998, File No. 1-8607.)                                                                                      
|10dd    |  | Agreement with Chief Executive Officer.
    (Exhibit 10dd to Form 10-K for the year ended
    December 31, 1998, File No. 1-8607.)                                                                                      
|10gg    |  | Retention Agreement dated October 18, 2000
    for Francis A. Dramis. (Exhibit 10gg to Form 10-K for
    the year ended December 31, 2000, File No. 1-8607.)                                                            
|10gg-1  |  | BellSouth Corporation Stock Plan Restricted
    Shares Award Agreement dated October 18, 2000 for Francis
    A. Dramis (Exhibit 10gg-1 to Form 10-K for the year
    ended December 31, 2000, File No. 1-8607.)        
|10gg-2  |  | BellSouth Corporation Stock Plan Restricted
    Shares Award Escrow Agreement dated October 18, 2000 for
    Francis A. Dramis. (Exhibit 10gg-2 to Form 10-K
    for the year ended December 31, 2000, File No. 1-8607.)
|10hh-2  |  | BellSouth Corporation Stock Plan Restricted
    Shares Award Agreement dated October 26, 2000 for Ronald M.
    Dykes (Exhibit 10hh-1 to Form 10-K for the year ended
    December 31, 2000, File No. 1-8607.)          
|10hh-3  |  | BellSouth Corporation Stock Plan Restricted
    Shares Award Escrow Agreement dated October 26, 2000 for
    Ronald M. Dykes. (Exhibit 10hh-2 to Form 10-K for
    the year ended December 31, 2000, File No. 1-8607.)  
|10hh-4  |  | Agreement dated May 19, 2003 with Ronald M.
    Dykes (Exhibit 10hh-4 to Form 10-Q for the quarter
    ended June 30, 2003, File No. 1-8607.)                                                                           
|10jj-2  |  | The Amended and Restated BellSouth Officer
    Compensation Deferral Plan Effective April 1, 2003 As
    Amended (Exhibit 10jj-2 to From 10-Q for the quarter ended
    June 30, 2003, File No. 1-8607.)                
|10kk    |  | Amended and Restated Agreement dated
    February 24, 2004, between BellSouth Corporation and
    Mark L. Feidler.                                                                                                      
|10ll    |  | Form of Indemnity Agreement.                                                                                                                                                                                            



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##### Table of Contents



|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|Number  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|10mm    |  | Agreement and Plan of Merger by and among
    AT&T Wireless Services, Inc., Cingular Wireless Corporation,
    Cingular Wireless LLC and Links I Corporation, and, solely
    with respect to Sections 5.3, 6.1(b), 6.5(b) and
    Article IX of the Agreement and Plan of Merger, SBC
    Communications Inc. and BellSouth Corporation dated as of
    February 17, 2004 (Incorporated by reference to
    Exhibit 99.1 from the Current Report on Form 8-K/A of
    Cingular Wireless LLC dated February 17, 2004 and filed on
    February 18, 2004, File No. 001-31673.)
|10nn    |  | Investment Agreement dated February 17, 2004
    between BellSouth Corporation and SBC Communications Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|11      |  | Computation of Earnings Per Share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|12      |  | Computation of Ratio of Earnings to Fixed Charges.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|21      |  | Subsidiaries of BellSouth.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|23a     |  | Consent of Independent Accountants.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|23b     |  | Consent of Independent Auditors.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|24      |  | Powers of Attorney.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|31-a    |  | Section 302 Certification of F. Duane
    Ackerman                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|31-b    |  | Section 302 certification of Ronald M. Dykes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|32      |  | Statement Required by 18 U.S.C.
    Section 1350, as adopted pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|99a     |  | Annual report on Form 11-K for BellSouth
    Retirement Savings Plan for the fiscal year ended
    December 31, 2003 (to be filed under Form 11-K within
    180 days of the end of the period covered by this report).                                                                                                                                                                                                                                                                                                                                                      
|99b     |  | Annual report on Form 11-K for BellSouth
    Savings and Security ESOP Plan for the fiscal year ended
    December 31, 2003 (to be filed under Form 11-K within
    180 days of the end of the period covered by this report).                                                                                                                                                                                                                                                                                                                                               
|b.      |  | Reports on Form 8-K:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|        |  | Date of Event:   October 22, 2003                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|        |  | Subject:         Press
    release announcing financial results for third quarter 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      



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##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) 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   
|
| | /s/ W. Patrick Shannon  
| | W. Patrick Shannon      
| | Vice President  Finance
| | February 24, 2004       

Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the
capacities and on the date indicated.

PRINCIPAL EXECUTIVE OFFICER:

F. Duane Ackerman*


CHAIRMAN OF THE BOARD, PRESIDENT


AND CHIEF EXECUTIVE OFFICER


PRINCIPAL FINANCIAL OFFICER:

Ronald M. Dykes*


CHIEF FINANCIAL OFFICER


PRINCIPAL ACCOUNTING OFFICER:

W. Patrick Shannon*


Vice President  Finance


DIRECTORS:

F. Duane Ackerman*


Reuben V. Anderson*


James H. Blanchard*


J. Hyatt Brown*


Armando M. Codina*


Kathleen F. Feldstein*


James P. Kelly*


Leo F. Mullin*


Eugene F. Murphy*


Robin B. Smith*


William S. Stavropoulos*




| |                                       
| | --------------------------------------
| | *By: /s/ W. Patrick Shannon           
|
| | W. Patrick Shannon                    
| | (INDIVIDUALLY AND AS ATTORNEY-IN-FACT)
| | February 24, 2004                     



BELLSOUTH
2003      95