##### Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



FORM 10-K

|           |  |                                                                                                 
|---------- |  | ------------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                                 
|          
|ü          |  | ANNUAL REPORT PURSUANT TO
    SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
    1934    
|           |  | FOR THE FISCAL YEAR ENDED
    DECEMBER 31, 2005                                                 
|           |  | 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.                                      




ü


ü


ü


S-K 10-K 10-K.


12b-2


ü


12b-2  ü






DOCUMENTS INCORPORATED BY REFERENCE






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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                                                                     |                         |                            
|Issued by BellSouth
    Telecommunications, Inc.       |                                                                                               |                        
|                                                       | Fifteen Year
    57/8%
    Debentures, due January 15, 2009                                   |                         |                            
|                                                       | 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                                      |                         |                            
|                                                       | Principal Amount of One Hundred
    Year 6.65% Zero-To-Full Debentures, due December 15, 2095 |                         |                            
|                                                       | Thirty Year
    63/8%
    Debentures, due June 1, 2028                                        |                         |                            





1




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##### 

TABLE OF CONTENTS

|                                                                  |  |                                                                                                                                                              |                                                                                                        |                                    |    |    |    | 
|----------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------ | ---------------------------------- | -- | -- | -- | 
|Item                                                              |  |                                                                                                                                                              |                                                                                                        | Page                               |   
|                                                                  | 
|PART
    I                                                        |  |                                                                                                                                                              |                                                                                                        |                                   
|Cautionary
    Language Concerning
    Forward-Looking Statements |  |                                                                                                                                                              | 3                                                                                                      |                                   
|1.                                                                |  | Business                                                                                                                                                     |                                                                                                        |                                    | 3  |   
|                                                                  |  |                                                                                                                                                              | Communications
    Group                                                                               |                                    |    | 4  |   
|                                                                  |  |                                                                                                                                                              | Wireless                                                                                               |                                    |    | 7  |   
|                                                                  |  |                                                                                                                                                              | Advertising
    & Publishing Group                                                                     |                                    |    | 11 |   
|                                                                  |  |                                                                                                                                                              | Latin American
    Group                                                                               |                                    |    | 12 |   
|                                                                  |  |                                                                                                                                                              | Intellectual
    Property                                                                              |                                    |    | 12 |   
|                                                                  |  |                                                                                                                                                              | Research and
    Development                                                                           |                                    |    | 12 |   
|                                                                  |  |                                                                                                                                                              | Employees                                                                                              |                                    |    | 12 |   
|1A.                                                               |  | Risk
    Factors                                                                                                                                             |                                                                                                        |                                    | 12 |   
|1B.                                                               |  | Unresolved SEC
    Staff Comments                                                                                                                            |                                                                                                        |                                    | 16 |   
|2.                                                                |  | Properties                                                                                                                                                   |                                                                                                        |                                    | 16 |   
|3.                                                                |  | Legal
    Proceedings                                                                                                                                        |                                                                                                        |                                    | 16 |   
|4.                                                                |  | Submission of
    Matters to
    a         Vote
    of Shareholders                                                                                          |                                                                                                        |                                    | 18 |   
|Executive
    Officers                                            |  |                                                                                                                                                              | 18                                                                                                     |                                   
|Website
    Access                                                |  |                                                                                                                                                              | 18                                                                                                     |                                   
|PART
    II                                                       |  |                                                                                                                                                              |                                                                                                        |                                   
|5.                                                                |  | Market for
    Registrants Common
    Equity,         Related
    Shareholder Matters
    and         Issuer
    Purchases of
    Equity         Securities |                                                                                                        |                                    | 18 |   
|6.                                                                |  | Selected
    Financial and
    Operating         Data                                                                                                        |                                                                                                        |                                    | 20 |   
|7.                                                                |  | Managements
    Discussion
    and         Analysis
    of Financial
    Condition         and
    Results of Operations                                    |                                                                                                        |                                    | 21 |   
|                                                                  |  |                                                                                                                                                              | Overview                                                                                               |                                    |    | 21 |   
|                                                                  |  |                                                                                                                                                              | Consolidated
    Results of Operations                                                                 |                                    |    | 23 |   
|                                                                  |  |                                                                                                                                                              | Results by
    Segment                                                                                 |                                    |    | 27 |   
|                                                                  |  |                                                                                                                                                              |                                                                                                        | Communications
    Group           |    |    | 27 | 
|                                                                  |  |                                                                                                                                                              |                                                                                                        | Wireless                           |    |    | 32 | 
|                                                                  |  |                                                                                                                                                              |                                                                                                        | Advertising
    & Publishing Group |    |    | 36 | 
|                                                                  |  |                                                                                                                                                              | Liquidity and
    Financial Condition                                                                  |                                    |    | 38 |   
|                                                                  |  |                                                                                                                                                              | Off-Balance
    Sheet Arrangements
    and            Aggregate
    Contractual            Obligations |                                    |    | 40 |   
|7A.                                                               |  | Quantitative
    and
    Qualitative            Disclosure
    About Market Risk                                                                             |                                                                                                        |                                    | 41 |   
|                                                                  |  | Operating
    Environment                                                                                                                                    |                                                                                                        |                                    | 42 |   
|                                                                  |  | Critical
    Accounting Policies                                                                                                                             |                                                                                                        |                                    | 49 |   
|8.                                                                |  | Consolidated Financial Statements
    of         BellSouth
    Corporation                                                                                   |                                                                                                        |                                    |    |   
|                                                                  |  | Consolidated
    Statements of Income                                                                                                                        |                                                                                                        |                                    | 51 |   
|                                                                  |  | Consolidated
    Balance Sheets                                                                                                                              |                                                                                                        |                                    | 52 |   
|                                                                  |  | Consolidated
    Statements of Cash Flows                                                                                                                    |                                                                                                        |                                    | 53 |   
|                                                                  |  | Consolidated
    Statements of
    Shareholders         Equity
    and
    Comprehensive         Income                                                     |                                                                                                        |                                    | 54 |   
|                                                                  |  | Notes to
    Consolidated
    Financial         Statements                                                                                                   |                                                                                                        |                                    | 55 |   
|                                                                  |  | Reports of
    Independent Registered
    Public         Accounting
    Firm                                                                                 |                                                                                                        |                                    | 83 |   
|                                                                  |  | Report of
    Management on Internal
    Control         Over
    Financial Reporting                                                                        |                                                                                                        |                                    | 84 |   
|9.                                                                |  | Changes in and
    Disagreements
    with         Accountants
    on Accounting
    and         Financial
    Disclosure                                     |                                                                                                        |                                    | 85 |   
|9A.                                                               |  | Controls and
    Procedures                                                                                                                                  |                                                                                                        |                                    | 85 |   
|9B.                                                               |  | Other
    Information                                                                                                                                        |                                                                                                        |                                    | 85 |   
|PART
    III                                                      |  |                                                                                                                                                              |                                                                                                        |                                   
|*10.                                                              |  | Directors and
    Executive Officers of
    the         Registrant                                                                                           |                                                                                                        |                                    | 85 |   
|*11.                                                              |  | Executive
    Compensation                                                                                                                                   |                                                                                                        |                                    | 85 |   
|*12.                                                              |  | Security
    Ownership of Certain
    Beneficial         Owners
    and Management
    and         Related
    Shareholder Matters                           |                                                                                                        |                                    | 85 |   
|*13.                                                              |  | Certain
    Relationships and
    Related         Transactions                                                                                               |                                                                                                        |                                    | 86 |   
|*14.                                                              |  | Principal
    Accountant Fees and Services                                                                                                                   |                                                                                                        |                                    | 86 |   
|PART
    IV                                                       |  |                                                                                                                                                              |                                                                                                        |                                   
|15.                                                               |  | Exhibits and
    Financial
    Statement         Schedules                                                                                                   |                                                                                                        |                                    | 87 |   
|                                                                  |  | Signatures                                                                                                                                                   |                                                                                                        |                                    | 95 |   
|EX-10.L.2 AMENDMENT TO SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN    
|EX-10.X.17 AMENDMENT TO THE RETIREMENT ACCOUNT PENSION PLAN      
|EX-10.GG.6 BELLSOUTH RETIREMENT SAVINGS PLAN                     
|EX-10.QQ FORM OF STOCK AND INCENTIVE COMPENSATION PLAN           
|EX-10.ZZ FORM OF STOCK AND INCENTIVE COMPENSATION PLAN           
|EX-10.AAA FORM OF STOCK AND INCENTIVE COMPENSATION               
|EX-10.BBB FORM OF STOCK AND INCENTIVE COMPENSATION PLAN          
|EX-11 COMPUTATION OF EARNINGS PER SHARE                          
|EX-12 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES          
|EX-21 SUBSIDIARIES OF BELLSOUTH                                  
|EX-23.A CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 
|EX-23.B CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 
|EX-23.C CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 
|EX-24 POWERS OF ATTORNEY                                         
|EX-31.A SECTION 302, CERTIFICATION OF DUANE ACKERMAN             
|EX-31.B SECTION 302, CERTIFICATION OF W. PATRICK SHANNON         
|EX-32 SECTION 906, CERTIFICATIONS                                
|EX-99.A RISK FACTORS SECTION OF 10-K FOR CINGULAR                
|EX-99.B CONSOLIDATED FINANCIAL STATEMENTS OF CINGULAR            





|  |                                                                                                                                                                                                                                                                                                        
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | All or a portion of the referenced sections have been included
    in BellSouth Corporations definitive proxy statement
    issued in connection with the 2006 annual meeting of
    shareholders filed with the SEC within 120 days after
    December 31, 2005 and incorporated herein by reference.



2




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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 business prospects,
financial trends and accounting policies that may affect our
future operating results, financial position and cash flows.
From time to time, we also may provide oral or written
forward-looking statements in other materials we release to the
public. Forward-looking statements give our current expectations
or forecasts of future events. You can identify these statements
by the fact that they do not relate strictly to historic or
current facts. They use words such as will,
anticipate, estimate,
expect, project, intend,
plan, believe, target,
forecast and other words and terms of similar
meaning in connection with any discussion of future operating or
financial performance. In particular, they include statements
relating to future actions, prospective products and services,
future performance or results of current and anticipated
products and services, sales efforts, capital expenditures,
expenses, interest rates, the outcome of contingencies, such as
legal proceedings, and financial results.

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:




    the impact and the success of Cingular Wireless, our wireless
    joint venture with AT&T Inc. (AT&T) (formerly SBC
    Communications, Inc.), including marketing and product
    development efforts, technological changes and financial
    capacity;
    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
    acquisition of AT&T Wireless as a result of technical,
    logistical, regulatory and other factors;
    changes in 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 retail and wholesale services;
    the impact on our business of consolidation in the wireline and
    wireless industries in which we operate;
    the impact on our network and our business of adverse weather
    conditions;
    the issuance by the Financial Accounting Standards Board or
    other accounting bodies of new accounting standards or changes
    to existing standards;
    changes in available technology that increase the likelihood of
    our customers choosing alternate technology to our products
    (technology substitution);
    higher than anticipated start-up costs or significant up-front
    investments associated with new business initiatives;
    the outcome of pending litigation; and
    unanticipated higher capital spending from, or delays in, the
    deployment of new technologies.





Item 1.
    BusinessOVERVIEW

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

We are a Fortune 100 company with annual revenues of over
$20 billion. Our core business is wireline communications
and our largest customer segment is the retail consumer. We have
interests in wireless communications through our ownership of
40% of Cingular Wireless, the nations largest wireless
company based on number of customers and revenue. We also
operate one of the largest directory advertising businesses in
the United States. We have assets of approximately
$57 billion and employ approximately 63,000 individuals.
Our principal executive offices are located at
1155 Peachtree Street, N.E., Atlanta, Georgia
30309-3610 (telephone
number 404-249-2000).
We were incorporated under the laws of the State of Georgia and
became a publicly traded company in December 1983 as a result of
the breakup of the Bell System.

Over the past 18 months, we realigned our asset portfolio
towards wireless and broadband. We increased our investment in
the domestic wireless business through Cingular Wireless
acquisition of AT&T Wireless in October 2004. With the
AT&T Wireless acquisition, over 40% of BellSouths
revenue on a proportional basis is derived from wireless. We
completed the sale of our Latin American operations to
Telefónica Móviles in early 2005.

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


    Communications Group;
    Wireless; and
    Advertising & Publishing Group.

BELLSOUTH 2005      3



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##### Table of Contents

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





Communications Group

OVERVIEW

We are the leading communications service provider in the
southeastern United States (US), serving substantial portions of
the population within Alabama, Florida, Georgia, Kentucky,
Louisiana, Mississippi, North Carolina, South Carolina and
Tennessee. BellSouth Telecommunications, Inc. (BST), our
wholly-owned subsidiary, provides wireline communications
services, including local exchange, network access, intraLATA
long distance services and Internet services. BellSouth Long
Distance, Inc. (BSLD), our long distance subsidiary, provides
long distance services to residential and small business
customers in our nine southeastern states, long distance
services to enterprise customers with locations throughout the
country, and wholesale long distance primarily to Cingular
Wireless. Communications Group operations generated 90% of our
total operating revenues in 2003, 2004 and 2005.

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 wireless
carriers, cable television operators, voice over Internet
protocol (VoIP) providers and other telecommunications carriers.
Effective January 1, 2006, we reorganized our operations to
parallel our major customer bases: retail markets and business
markets.

Retail Markets. In addition to providing traditional
local and long distance voice services, this unit focuses on
providing advanced voice, data, Internet and networking
solutions to residential customers and small and medium-sized
businesses. It offers a full selection of standard and
customized communications services to this market. While
traditional local and long distance telephone services,
including convenience features such as caller ID, call
forwarding, voice mail, and
dial-up access to the
Internet, remain the core of this market, customer demands are
rapidly broadening to include an expanded range of services,
from high-speed DSL Internet services to home networking to
video services. During 2005, the consumer unit represented 44%
of Communications Group revenues while the small business unit
represented 13% of Communications Group revenues.

Business Markets. This unit provides (1) a wide
range of standard and highly specialized services and products
to large and complex business customers and
(2) interconnection (referring to the link between our
telecommunications network and the telecommunications networks
of other service providers) to our network and other related
wholesale services to telecommunications carriers for use in
providing services to their customers, as well as services such
as voice and data transport. In addition to providing
traditional local and long distance voice services, we offer our
large business customers Internet access, private networks,
high-speed data equipment and transmission, conferencing and
industry-specific communications arrangements for industries
such as banking, healthcare and manufacturing. We also offer a
variety of data services to our wholesale customers. During
2005, the large business unit represented 17% of Communications
Group revenues, and interconnection services represented 23% of
Communications Group revenues and 42% of our reported data
revenues.

WIRELINE 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 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 other new service 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.WIRELINE 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 end-user charges and cost recoveries
related to the federal universal service fund.

We also offer our voice services on a wholesale basis to other
competitive local exchange carriers for provision to their
customers. Competitors primarily utilize our local network under
various methods, including resale, the use of our loop
transmission paths (unbundled network element loops, or
UNE-L) and, to a
greater extent, the use of commercial agreements that provide
the combined elements of our network necessary for the offering
of voice service. The commercial agreements are successor
arrangements to the unbundled network element platform (UNE-P)
previously mandated by the Federal Communications Commission
(FCC). In February 2005, the FCC re-




4BELLSOUTH 2005



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##### Table of Contents

leased an order that effectively relieved us of the obligation
to accept new UNE-P service orders and that provided a
12-month transition to
phase out existing UNE-P service. That transition ends
March 11, 2006.

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 Wireless. Similarly, we provide
access and interconnection services to competitive local
exchange carriers so their subscribers can reach ours and vice
versa.

We offer a wide array of long distance calling plans to both our
residential and business customers. Many of these long distance
offers have been packaged with our local, data and wireless
offerings so as to present a bundle of services to
our customers. These bundles generally 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, 2005, BellSouth has
achieved a long distance penetration of 58% of its mass market
customer base.

Wireline voice services provided approximately 62% of
BellSouths total operating revenues for 2003 and 2004 and
61% for 2005.

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), VoIP and
other IP-enabled
service technologies.

We offer a wide range of data services serving the retail as
well as the wholesale markets. Revenues from retail offerings
such as
BellSouth®
FastAccess®
DSL, ISDN, Frame Relay,
LightGate®
and
SMARTRing®
accounted for 58% of total data revenues in 2005 while wholesale
offerings accounted for the remaining 42%.

DSL service is an important broadband service for BellSouth.
Almost 85% of the households in our region are qualified to
receive DSL from BellSouth, and we ended 2005 with almost
2.9 million DSL subscribers. BellSouth participates in the
DSL market in two significant ways. First, we offer retail
DSL-based high speed Internet service that we market under the
name
BellSouth®
FastAccess®
DSL. Second, we offer certain 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 have differentiated our Internet access products by providing
a range of tiered speeds and associated pricing that appeal to a
larger market. We currently offer four levels of service:
downstream speeds of up to 256 kps, up to 1.5 megabits, up
to 3.0 megabits and (introduced in late 2005) up to
6.0 megabits. We have announced plans to continue to
upgrade our capabilities and expand our DSL footprint in 2006.
In addition, at December 31, 2005 we had over 830,000
dial-up customers. This
is an important market as it provides a pool of potential
customers for our higher speed products.

Through arrangements with Qwest Communications Corporation and
Sprint Nextel 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 US. We intend to pursue additional
relationships as we look to expand our enterprise business.

In 2004, BellSouth began offering a variety of new network based
VoIP services that may be accessed by customers over
BellSouths existing broadband service facilities.
BellSouth currently offers:




    a suite of VoIP network based IP products, including Internet
    Protocol Telephone Gateway (IPTG) service and VoIP
    Conversion service for Interconnection Service customers;
    a VoIP service specifically designed for Large Business
    customers and known as BellSouth Converged Solutions (limited
    trial basis); and
    a number of PBX equipment-based IP voice and data services; and
    VoIP services for certain of our retail market customers.We expect to develop and introduce additional VoIP services to
all of our customer market segments as this new technology
continues to evolve in the marketplace.

Broadband and data services generated approximately 21% of
BellSouths total operating revenues for 2003, 22% for 2004
and 23% for 2005.

Video

In August 2004, we began acting as a selling agent for
DirecTV®
service. This relationship enables us to offer a bundle of
wireline and wireless voice along with data and video. We
recently signed a five-year exclusive marketing alliance with
DIRECTV, Inc. As part of this new agreement, DIRECTVs
residential customers across our nine-state service area can now
order
BellSouth®
FastAccess®
DSL services directly from DIRECTV.

As technology evolves, we are continuing to look at future
options for providing video services. For example, in 2005 we
commenced a trial of
Microsoft®IP-TV technology that,
if commercially deployed, would enable BellSouth to deliver an
integrated suite of new voice, data and interactive video
capabilities and services to our customers over an upgraded
DSL-based broadband transmission platform.

Other Communications Group revenues

Other Communications Group revenues are comprised primarily of
charges for billing and collection services for carriers,
enhanced white pages listings, customer late




BELLSOUTH 2005      5



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##### Table of Contents

payment fees, 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. 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. Other Communications Group services provided
approximately 7% of BellSouths total operating revenues
for 2003 and 6% for 2004 and 2005.

WIRELINE TECHNOLOGY

The wireline portion of the telecommunications industry is
rapidly transforming from a circuit switched voice environment
to broadband services network. This transformation has fiber
optic cable, Internet Protocol (IP), Ethernet and evolving
Digital Subscriber Line (DSL) technologies at its core.

BellSouth is well positioned for this transformation due to the
high level of fiber in its network and the advanced nature of
its IP network. Approximately half the homes in the BellSouth
region are expected to be within 5,000 feet of fiber and to
be served by Gigabit Ethernet-fed IP aware DSL technology by
December 31, 2007. This can be achieved at a reasonable
economic cost due to the Companys history of fiber
investment and deployment. At these short distances, data speeds
of 12Mbps+ (single lines) and 24Mbps+ (two bonded
lines) are possible with ADSL2+ technology, which is an
evolution of DSL technology. With the completion of even more
advanced standards in 2005, referred to as VDSL2, even higher
speeds are expected to be possible at shorter distances in 2007.

The transformation, when complete, will allow a single converged
IP network to provide voice, data, and video services. As an
example of potential new services, voice over IP (VoIP) may
enable cost savings and differentiated feature capabilities.
VoIP can also provide the basis for converged wireless/wireline
services in conjunction with Cingular. This capability would
combine the best of the wireless and wireline networks in a
handset that operates as a cell phone while away from the home
and as a VoIP cordless while in the home, for both
voice and data services. In the business markets BellSouth has
been successful with IP, Ethernet and Virtual Private Network
data services. The same Regional Internet Backbone that was
built to support these services will potentially be used to
transport VoIP and video services, again demonstrating the power
of converged IP networking.

WIRELINE COMPETITION

Our voice services face significant competition from wireless,
cable and other telecommunication service providers. In
addition, we are facing fierce competition from cable companies
and other entities for our mass market broadband Internet access
service.

Wireless providers

Our wireline services face strong competition from wireless
service providers. The major wireless carriers have created
lower price point service offerings that include large buckets
of anytime minutes with long distance, causing many customers to
choose wireless for their primary voice communications option.
As wireless companies expand their offerings to include high
speed data services, we expect this migration trend to continue.

Broadband service providers

Technological developments have made it feasible for cable
television networks to carry data and voice communications. Our
cable competitors, such as Time Warner, Inc., Comcast
Corporation, and Cox Communications, Inc., are increasingly
targeting our mass market broadband Internet access service. In
addition, we are seeing competitive threats in some areas from
community Wi-Fi programs as well as broadband over power lines.
New competition for our voice services is also resulting from
the development of commercial applications using Internet
Protocol technology, such as VoIP. This medium could attract
substantial traffic because of its lower cost structure due in
part to the fact that Federal and State authorities are not
currently imposing charges and taxes on most communications
carried over this technology.

Telecommunication service providers

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 have resulted in an increase in advertising and
promotional spending. Competitors are able to resell our local
services, or lease separate unbundled network elements (UNE). In
addition, 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.

UNE prices are determined using an FCC-prescribed
forward-looking cost model and the premise of a hypothetical,
most efficient, lowest 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
determinations. For the past several years, our
competitors use of UNEs and the UNE platform have resulted
in lower revenue per access line and had a detrimental impact on
our margins as we were not allowed to charge UNE competitors for
the actual cost we incurred to maintain and service the access
lines. The impact could be increased by competitors
offering of service bundles that target high value customers. In
addition, competitors offerings could sometimes cause us
to lose revenues from non-UNE sources, including access to our
switches and calling features, inside wire maintenance, operator
services and directory assistance. As a result of regulated
artificially low wholesale prices and highly competitive retail
pricing, our competitors have been effective in gaining market




6BELLSOUTH 2005



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##### Table of Contents

share, primarily in metropolitan areas. At December 31,
2005, we had provisioned approximately 2.2 million resale
and UNE lines to competing carriers, a decrease of
25 percent since December 31, 2004. The FCC issued new
rules in February 2005, which are effective in March 2006, that
effectively ended the UNE platform and somewhat reduced the
availability of certain high capacity loops and transport. We
have subsequently negotiated contracts with many competitors
that provide them with a commercial successor to the UNE
platform. These commercial arrangements reduce our exposure to
the former artificially low wholesale prices and terms mandated
by regulation for the UNE platform. For competitors that have
not chosen a commercial arrangement, we are litigating changes
to the UNE platform terms of their contracts before state
commissions, and the conduct of that litigation may cause some
delay in our implementation of the FCC rules. The new FCC rules
retain other UNEs that we expect competitors will continue to
use. When used, the UNEs have the detrimental effects described
above.

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.

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, 2005 our most significant local
service competitors were AT&T Corp. and MCI Inc. (currently
known as Verizon Communications, Inc.) and our most significant
long distance competitors included AT&T, Verizon and Sprint
Nextel Corporation.

WIRELINE REGULATORY ENVIRONMENT

The FCC regulates rates and other aspects of our provision of
interstate telecommunications services, including international
rates and interstate access charges. The FCC also defines
network elements and establishes other telecommunications
policies, including policies related to broadband services.
State regulatory commissions have jurisdiction over our
provision of intrastate telecommunications services (including
traditional local voice service, and intrastate long distance
and intrastate access services) to the extent defined by state
law. Access charges are designed to compensate our wireline
subsidiary for the use of its networks by other carriers. 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.

Additional information relating to federal and state regulation
of our wireline subsidiary is contained under the heading
Managements Discussion and Analysis of Financial
Condition and Results of Operations  Operating
Environment  Wireline Regulatory Environment
and is incorporated herein by reference.

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.





Wireless

OVERVIEW

Our wireless business consists of a 40 percent interest in
Cingular Wireless. Cingular Wireless is a joint venture that was
formed by combining the former domestic wireless operations of
BellSouth and AT&T (formerly SBC). Cingular Wireless is
operated independently from both parents, currently with a six
member Board of Directors comprised of three directors from each
parent. BellSouth and AT&T share control of Cingular
Wireless. Cingular Wireless is a SEC registrant by virtue of its
publicly traded debt securities. Accordingly, it files separate
reports with the SEC.

Cingular Wireless provides a wide array of wireless services for
individual, business and governmental users. At
December 31, 2005:




    Cingular Wireless reported US wireless cellular service and
    personal communication services (PCS) customers totaling
    54.1 million;
    86 percent of Cingular Wireless subscriber base was
    GSM-equipped and 95 percent of its total minutes were
    carried on its GSM network; and
    Cingular Wireless had over 24 million active users of its
    data services.Cingular Wireless has access to licenses, either through owned
or leased licenses or licenses owned by joint ventures and
affiliates, to provide cellular or PCS wireless communications
services covering an aggregate of 294 million in population
(POPs) or approximately 99 percent of the
US population, including all of the 100 largest
US metropolitan areas. Cingular Wireless supplements its
own networks with roaming agreements that allow its subscribers
to use other providers wireless services in regions where
it does not have network coverage. Cingular Wireless refers to
the area covered by its network footprint and
roaming agreements as its coverage area. Through roaming
agreements with foreign carriers, Cingular Wireless provides its
customers equipped with multi-band devices the largest global
coverage of any US wireless carrier, with service available
in over 180 countries. Cingular Wireless also offers multi-band
devices, and accessories,




BELLSOUTH 2005      7



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that allow its customers to access networks using both the
cellular and PCS frequencies across the US as well as
international networks around the world.

Cingular Wireless plans to continue to expand its service and
coverage area and increase the capacity and quality of its
digital network through new network construction, acquisitions,
joint ventures, and roaming arrangements with other wireless
providers.

Along with completing the integration of AT&T Wireless,
Cingular Wireless primary business initiatives for 2006
include the development of the Business Markets Group, expansion
of its voice and data networks and the continuing deployment of
high-speed Universal Mobile Telephone System
(UMTS) third-generation (3G) service throughout the
majority of the largest US metropolitan markets where it has not
yet been deployed.

As a result of the AT&T Wireless acquisition, which was
completed in October 2004, Cingular Wireless dissolved its joint
venture with T-Mobile and, in January 2005, sold its ownership
of its California/Nevada Major Trading Area (MTA) network assets
to T-Mobile for
approximately $2.5 billion in cash. The ownership of the
New York network assets returned to
T-Mobile. Cingular
Wireless retained the right to utilize the California/Nevada and
New York networks during a four-year transition period and has
guaranteed the purchase of a minimum number of minutes over the
term with a minimum purchase price of $1.2 billion.
Cingular Wireless and
T-Mobile retained all
of their respective customers in each market.

WIRELESS STRATEGY

Cingular Wireless intends to be the pre-eminent wireless
communications company in the US. Its business strategies to
achieve that goal are to:




    build the best network by completing the integration of the
    Cingular Wireless and AT&T Wireless networks, accelerating
    the build out of the network to improve coverage in suburban and
    neighborhood areas and strengthen the in-building penetration in
    urban areas, deploying UMTS/HSDPA in major markets across the
    country and working with its rural roaming partners to improve
    and expand coverage outside of its footprint and assist them in
    providing consistent products and services to its customers that
    roam onto their networks;
    deliver exceptional customer service by implementing policies
    and procedures at every point of contact with its customers to
    improve the customer experience;
    rationalize its direct and indirect distribution points and
    expand sales locations opportunistically to create an unmatched
    distribution network;
    continue to offer compelling products and services including
    devices, features and pricing plans, that differentiate Cingular
    Wireless from its competitors; and
    drive financial results by quickly and efficiently completing
    the integration of AT&T Wireless business and
    operations.

WIRELESS OPERATIONS

Voice services

Cingular Wireless offers a comprehensive range of high-quality
wireless voice communications services in a variety of pricing
plans, including national and regional rate plans as well as
prepaid service plans. Its voice offerings are tailored to meet
the communications needs of targeted customer segments,
including youth, family, active professionals, local and
regional businesses and major national corporate accounts. The
marketing and distribution plans for its voice services are
further targeted to the specific geographic and demographic
characteristics of each of Cingular Wireless markets.
Voice services revenue contributed 89%, 85% and 81% to operating
revenue in 2003, 2004 and 2005, respectively.

POSTPAID VOICE SERVICE

Consumer postpaid voice service is generally offered on a
contract basis for one or two year periods. Under the terms of
these contracts, service is billed and provided on a monthly
basis according to the applicable rate plan chosen. Wireless
services include basic local wireless communications service,
long distance service and roaming services. Roaming services
enable its customers to utilize other carriers networks
when they are roaming outside Cingular
Wireless network footprint. Cingular Wireless also charges
fees to other carriers for providing roaming services to their
customers when their customers utilize its network. Cingular
Wireless had approximately 46.3 million postpaid
subscribers (excluding reseller subscribers) at
December 31, 2005. In addition to basic wireless voice
telephony services, Cingular Wireless offers enhanced features
with many of its pricing plans. These features include caller
ID, call waiting, call forwarding, three-way calling, no
answer/busy transfer and voice mail. In addition, many of
Cingular Wireless postpaid plans include unlimited
mobile-to-mobile and
unlimited off peak hour calling. In most markets, Cingular
Wireless also makes available additional services for a monthly
fee, such as Push-to-Talk voice service, discounted
international roaming and international long distance, expanded
off peak hours, roadside assistance and handset insurance.
Special handsets are required for Push-to-Talk and international
roaming services.

Cingular Wireless primary marketing emphasis is on
enrolling customers in postpaid service calling plans. Despite
the relatively higher cost of enrollment due to handset
subsidies and sales commission structure, such customers
generate higher revenue and have a lower churn rate than prepaid
service customers. Accordingly, a significant component of its
strategy consists of developing value-added plan features,
ancillary services, unique devices and promotions to attract and
retain postpaid customers. In 2005, Cingular Wireless continued
to focus on simplifying and enhancing its national and
international calling plans. Cingular Wireless emphasizes
national calling plans without roaming or long distance charges
due to the simplicity and value of the plans and expanded
mobile-to-mobile
coverage areas to include non-Cingular network areas in the
calling plan area to take advantage of its large calling
community. Thus, as its coverage and that of




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its GSM roaming partners expands, so does the calling area of
Cingular Wireless customers, which further enhances its
brand messages. Cingular Wireless
FAMILYTALK®
plans, which add lines at substantial discounts to high-priced
accounts, continue to be popular and to contribute a significant
portion of its postpaid customer growth. The
ROLLOVER®
rate plans, which allow Cingulars customers to carry over
any unused anytime minutes from month-to- month for
up to one year, continue to be offered exclusively by Cingular
Wireless. Cingular Wireless enhanced its international GSM voice
roaming coverage to over 180 countries for subscribers with
compatible devices. Additionally, in 2005 Cingular Wireless
introduced a new international services feature package
providing discounted voice roaming to Western Europe and
discounted international long distance dialing from the US.

Cingular Wireless business customers can take advantage of
consumer postpaid voice plans, as well as a number of
business-specific devices and features, and pooled and flat rate
plans. Cingular Wireless pooled rate plans allow
enterprises to share minutes and megabytes across their employee
base.

PREPAID VOICE SERVICE

Cingular Wireless offers prepaid service to meet the demands of
distinct consumer segments, such as the youth market, families
and small business customers, who prefer to control usage or pay
in advance. Cingular Wireless prepaid services are
marketed as
GoPhone®
branded services with payment options including Pay As You
Go and Pick Your Plan.
GoPhone®
Pick Your Plan allows predefined monthly minute replenishment to
occur automatically with pre-authorized charges against a
customers credit card, debit card or checking account.
GoPhone®
Pay As You Go is more of the traditional prepaid service where
minutes can be purchased online, through the customers
wireless device or through the purchase of prepaid cards. As of
December 31, 2005, retail prepaid users represented
approximately 6 percent of Cingular Wireless total
customers. Cingular Wireless believes its prepaid service
offering benefits from being part of a national brand,
particularly with regard to distribution. Cingular
Wireless prepaid strategy focuses on increasing the
profitability of these prepaid customers through offering a
wider array of services and features to increase revenue and
retention of these customers. Its prepaid services offer
customers many features available on Cingular Wireless
postpaid plans, including unlimited nights and weekends, long
distance, caller ID, call waiting, voicemail and roaming, as
well as enhanced features like text messaging, downloadable
graphics and ringtones, games and information alerts. At the
same time, the customer retains the benefits of no credit check
and enhanced ability to control spending, and
GoPhone®
customers also have no contract or monthly billing. In addition,
Cingular Wireless continues to focus on increasing the
distribution of its prepaid offering to include the Internet,
automated replenishment services and strategic retail partners
that allow its prepaid service to be truly a product of
convenience.

Consistent with the industry, Cingular Wireless experiences
higher subscriber churn rates and lower revenue per customer
with prepaid customers than its postpaid customers; however,
these impacts are somewhat offset by the higher revenue per
minute earned, the absence of significant payment defaults and a
lower cost of acquiring new prepaid customers, including lower
handset subsidies.

Data services

Cingular Wireless offers a wide array of consumer data services,
such as wireless Internet browsing, wireless
e-mail, text messaging,
instant messaging, multi-media messaging and the ability to
download content and applications. Cingular Wireless continues
to focus on improving the customer experience through deploying
advanced data capable devices, enhancing the user interface on
these devices, and making the provisioning of data services on
these devices as seamless as possible. To foster the continued
growth in the consumer data business, Cingular Wireless
continues to upgrade the tools and applications that facilitate
greater usage. Revenue from data services contributed 3% to
Cingular Wireless total operating revenue in 2003, 5% in
2004 and 8% in 2005.

Cingular Wireless provides wireless data access to corporate
business applications for its customers who have mobile field
personnel. Its wireless solutions allow sales managers to access
corporate e-mail when
away from the office and technicians to solve problems and
access corporate databases from the field. To deliver these
services, Cingular Wireless offers a wide range of wireless data
devices for business needs. Cingular Wireless supports all major
operating system platforms 
BlackBerry®,
Windows
Mobile®,
Palm®
and
Symbian®
and a wide range of devices  data-enabled handsets,
integrated personal digital assistants (PDAs) (such as
BlackBerry handhelds), personal computer data cards and special
purpose devices. In 2005, Cingular Wireless transitioned its
business devices portfolio to Enhanced Data Rates for Global
Evolution (EDGE) and introduced BroadbandConnect enabled PC
cards, taking advantage of its new 3G network. In addition, in
spring 2005 Sony began offering its
Vaio®
T Series notebook PCs with Cingular Wireless EDGE
high-speed wireless data technology built in, and Dell and
Lenoyo recently announced that beginning in 2006, they would
begin offering notebook computers with Cingular Wireless
BroadbandConnect service built in.

Reseller service

Cingular Wireless offers wholesale services to resellers, who
purchase wireless services from Cingular Wireless for resale to
their customers. As of December 31, 2005, the number of
customers served through resellers represented approximately 8%
of Cingulars total customers. Revenues from its reseller
customers, who most often buy a prepaid service, are lower than
those generated by postpaid contract customers; however,
customer acquisition and servicing costs are significantly
lower, resulting in favorable economics from the reseller
arrangements.

Equipment sales

Cingular Wireless sells a wide variety of handsets and personal
computer wireless data cards manufactured by various suppliers
for use with its services. Cingular Wireless




BELLSOUTH 2005      9



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##### Table of Contents

also provides its customers and resellers with subscriber
identity modules (SIM) cards that store unique customer
account information such as the customers phone number and
codes needed to grant customers access to the network. Equipment
sales contributed 8% to total operating revenue during 2003, 10%
in 2004 and 11% in 2005.

NETWORK

Licenses

Cingular Wireless has access to licenses to provide voice or
data services over cellular/ PCS networks in all of the 100
largest US metropolitan areas, covering an aggregate of
294 million in population (POPs) or approximately
99 percent of the US population. Cingular Wireless has
signed numerous roaming agreements to ensure its customers can
receive wireless service in many areas in the US where Cingular
does not have a network footprint.

Technology

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  the
850 MHz band and the 1900 MHz band. The services
provided over these two frequency bands are commonly referred to
as cellular and PCS, respectively. PCS infrastructure is
characterized by shorter transmission distances and the need for
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 user from digital cellular service. Handsets contain
receivers and transmitters that allow the user to seamlessly
access both 850 and 1900 MHz networks utilizing the same
technology as that of the network infrastructure.

Cingular Wireless primary network technology is Global
System for Mobile Communication (GSM) with 95 percent of
minutes being carried on its GSM network as of December 31,
2005. Hardware and software enhancements, referred to as General
Packet Radio Service (GPRS), and EDGE, allow higher speed packet
data communications. EDGE, which delivers two to three times
higher data rates than GPRS technology, provides Cingular
Wireless customers with greater connectivity and
communications capabilities, including faster speeds for
accessing the wireless Internet.

Although many advances are still underway for enhanced capacity,
performance and features in GSM/ GPRS/ EDGE deployed
technologies, Cingular Wireless is building a network offering
3G technology using the UMTS standard to support significantly
higher data speeds and capacity. UMTS also supports voice, so
building this 3G network will obviate the need to augment voice
radio capacity and spectrum separate from Cingular
Wireless packet data radio capacity and spectrum as both
networks grow. Cingular Wireless deployed 3G UMTS systems
currently allow user average data download speeds between
220-320 Kbps, providing the capability for a variety of services
such as streaming audio, video and simultaneous voice and data
applications. Much like Cingular Wireless EDGE technology,
UMTS allows for packet data, enabling always on
connectivity, which is useful for receiving email when it
arrives, versus the need to set aside time for an email
download, and allowing billing based on the amount of data
transferred, rather than the amount of time a given device is
connected.

In January 2005, Cingular Wireless field tested a higher speed
downlink component of UMTS called High Speed Downlink
Packet Access (HSDPA). HSDPA has average mobile data
throughput speed in the 400-700 Kbps range and theoretical
data speeds of 14 Mbps. Development and deployment of UMTS
with HSDPA continued throughout 2005 and, in December 2005,
Cingular Wireless commercially launched 3G networks in the
following markets: Austin, Baltimore, Boston, Chicago, Dallas,
Houston, Las Vegas, Phoenix, Portland, Salt Lake City,
San Diego, San Francisco, San Jose, Seattle,
Tacoma and Washington DC. Cingular Wireless currently expects to
deploy UMTS/ HSDPA in most major metropolitan areas by the end
of 2006.

Spectrum capacity and coverage

Cingular Wireless owns licenses for spectrum in the 850 MHz
and 1900 MHz bands. Cingular Wireless has a significant
spectrum depth but expects the demand for its wireless services
to grow over the next several years as the demand for both
traditional wireless voice services and wireless data services,
including Internet connectivity, increases. Cingular Wireless
anticipates needing access to additional spectrum in selected
densely populated markets to meet demand for existing services
and to provide UMTS/ HSDPA.

In order to gain access to additional spectrum, Cingular
Wireless may participate in future FCC auctions and exchange
spectrum with, and lease or purchase spectrum licenses from,
other wireless carriers. Cingular Wireless may also obtain
additional spectrum capacity through mergers and acquisitions,
joint ventures and alliances.

Network integration

The acquisition of AT&T Wireless provided Cingular Wireless
with an additional complete network of cell sites and
significant spectrum. To reduce costs and improve customer
experience, Cingular Wireless is in the process of fully
integrating the two networks of former Cingular Wireless and
AT&T Wireless where they had overlapping coverage. In these
locations, Cingular Wireless is retaining the best cell sites,
de-commissioning the other cell sites and incorporating the
combined spectrum position. Cingular Wireless expects that this
combined network will have higher average signal strength and
greater network depth thus improving network quality by reducing
dropped and blocked calls and enhancing the transmission
quality. In this integration process Cingular Wireless also
expects to reduce costs by eliminating approximately 7,600 cell
sites. Cingular Wireless had integrated nearly a third of its
cell sites in overlap areas by the end of 2005 and expects to
finalize network integration by the end of 2006.

COMPETITION

There is substantial and increasing competition in all aspects
of the wireless communications industry. Cingular




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##### Table of Contents

Wireless expects this to continue as consolidation in the
industry continues. Cingular Wireless competes for customers
based principally on its reputation, network quality, customer
service, price and service offerings.

Cingular Wireless competitors are principally the other
national providers of cellular, PCS and other wireless
communications services  Verizon Wireless, Sprint
Nextel and T-Mobile,
which together with Cingular Wireless serve over 90 percent
of the US wireless customers. Cingular Wireless
competitors also include regional carriers, such as Alltel and
US Cellular, niche carriers, such as MetroPCS and Cricket
Communications Inc., and resellers. Some of the indirect
retailers who sell Cingular Wireless services also sell
its competitors services. Cingular Wireless ranks first
among the four national carriers in terms of both customers
served and revenue for 2005.

Regulatory policies favor robust competition in wireless
markets. Wireless Local Number Portability (WLNP), which was
implemented by the FCC late in 2003, has also increased the
level of competition in the industry. WLNP allows subscribers to
switch carriers without having to change their telephone numbers.

Consolidation, alliances and business ventures increase
competition. Consolidation and the formation of alliances and
business ventures within the wireless communications industry
have occurred, and Cingular Wireless expects that this trend
will continue. Consolidation may create larger,
better-capitalized competitors with substantial financial,
technical, marketing, distribution and other resources to
compete with Cingular Wireless product and service
offerings. In addition, global combinations of wireless
carriers  such as the joint venture between Sprint
Nextel and Virgin Group Ltd., Verizon Wireless, which is a joint
venture between Verizon Communications and Vodafone Group Plc,
T-Mobile USA, which is the US arm of a global portfolio of
T-Mobile companies, and mergers and acquisitions, such as
mergers of Sprint Corporation and Nextel, and Alltel and Western
Wireless Corporation  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.

The traditional wireless industry continues to evolve. Mobile
Virtual Network Operators, or MVNOs, which historically offered
low cost prepaid services, are currently launching postpaid
offerings, which will introduce additional competition in this
area. Cingular Wireless also anticipates increased competitive
pressures from the landline companies, cable television
operators and Internet service providers.

Cingular Wireless ability to compete successfully will
depend, in part, on the quality of its network, customer service
and sales and distribution channels, as well as its marketing
efforts and 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 Cingular
Wireless ability to take advantage of its relationship
with BellSouth and AT&T. As a result of competition,
Cingular Wireless has in the past and may in the future be
required to:


    increase its spending to retain customers;
    restructure its service packages to include more compelling
    products and services;
    further upgrade its network infrastructure and the handsets
    offered; and
    increase its advertising, promotional spending, commissions and
    other customer acquisition costs.WIRELESS REGULATORY ENVIRONMENT

The FCC regulates the licensing, construction, operation,
acquisition and transfer of wireless systems in the
US pursuant to the Communications Act of 1934 and its
associated rules, regulations and policies. Additional
information relating to federal and state regulation of Cingular
Wireless wireless operations is contained under the
heading Managements Discussion and Analysis of
Financial Condition and Results of Operations 
Operating Environment  Wireless Regulatory
Environment, and is incorporated herein by reference.





Advertising & Publishing Group

OVERVIEW

We are one of the leading publishers of telephone directories in
the United States. Our Advertising & Publishing Group
publishes more than 500 directories and distributes
approximately 65 million copies to residences, businesses
and government agencies in the Southeast. Revenues from this
group represented approximately 10% of our total operating
revenues in 2003, 2004 and 2005.

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 RealYellow
Pages®
trademark in the same markets. The published advertising is also
made available through our own
YELLOWPAGES.COMtm
from BellSouth site and through partnerships with multiple
search engines.

We continually seek to expand our Advertising &
Publishing business by increasing advertising sales in our
traditional directory and electronic products. 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
also market to customers with unique directory and advertising
needs.

While print yellow pages remain a significant source of
information for many customers searching for local contact
information, a growing number of customers are going online for
their local searches, and advertisers are increasingly including
online advertising with their print media buys. In November
2004, the directory businesses of BellSouth and AT&T
(formerly SBC) created an Internet yellow pages joint venture by
acquiring the highly recognized YellowPages.com brand, with the
goal of becoming the market leader in Internet yellow pages and
local Internet search.




BELLSOUTH 2005      11



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##### Table of Contents

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 2005, we contracted with 95 nonaffiliated telephone
companies to sell advertising in 540 classified directories in
39 states. We also act as an agent for national yellow page
ad placements in 50 states on behalf of over
450 companies.

STRATEGY

We are committed to remaining the preferred comprehensive source
linking buyers and sellers in the local, regional and national
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 product suites
    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;
    continue to improve operational efficiency; and
    leverage the new Internet national brand and URL
    (WWW.YELLOWPAGES.COM) to attract new businesses and
    generate incremental revenue growth from existing customers.COMPETITION

Competition in the yellow pages industry continues to intensify.
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, R.H. Donnelly, and Verizon. Electronic
competitors include Google, YahooLocal, SuperPages.com and other
Internet search engines that have a small but growing percentage
of yellow page-like searches. 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, local promotions, customer value plans,
increased advertising, and sales execution.





Latin American Group

In late 2004 and early 2005, we sold all our interests in our
Latin American operations to Telefónica Móviles, S.A.,
the wireless affiliate of Telefónica, S.A.





Intellectual Property

BellSouths intellectual property portfolio is a 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.





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 various external
vendors.





Employees

At December 31, 2005, we employed approximately 63,000
individuals. About 65% of BellSouths employees at
December 31, 2005 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 2004. These five-year contracts, which
expire August 8, 2009, cover approximately 41,000
employees. The contracts include basic wage increases of 1% in
year one, 2% in year two and annual increases of 2.5% in years
three through five totaling 10.5% over the contract term. In
addition, the agreements provide for a standard incentive award
of 2% in the first three years of the contract increasing to 3%
in years four and five. Other terms of the agreements include
pension band increases and pension plan cash balance
improvements for active employees. The contracts provided for a
4% lump-sum payment upon ratification by the membership. We
expect the agreements to continue to give us the workforce
planning flexibility needed to respond to changing marketplace
conditions.

In December 2005, we announced a management reduction of
approximately 1,500 employees. We expect the reduction to be
substantially complete by April 30, 2006.







Item 1A.
    Risk FactorsWe will continue to face significant competition, which
may reduce our market share and lower our profits.

Rapid development in telecommunications technologies, such as
wireless, cable and VoIP, has increased competition in the
telecommunications industry. As a result, we compete with not
only traditional communications service providers, but also new
competitors such as cable companies, satellite companies,
wireless providers and VoIP providers. These competitors are
typically subject to less regulation and therefore are able to
offer services at lower cost. In addition, these competitors may
have lower cost structures than we do because they do not have a




12BELLSOUTH 2005



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unionized workforce, they offer lower benefits to employees and
they have fewer retirees (as most of the competitors are
relatively new companies). The increased competition could put
further pressure on the price of the services provided by us and
may result in reduced revenues and profits. In addition, our
print and online yellow pages products face significant
competition, with many different media competing for advertising
revenue. Further, competition for directory sales agency
contracts for the sale of advertising in publications of
nonaffiliated companies also continues to be strong.

Our ability to maintain leading technological capabilities
is uncertain.

Our operating results will depend to a significant extent upon
our and Cingular Wireless ability to continue to expand
our service offerings and to reduce the costs of providing our
existing services. We cannot assure you that we or Cingular
Wireless will successfully develop and market new service
opportunities in a timely or cost-effective manner. The success
of new service development depends on many factors, including
proper identification of customer needs, cost, timely completion
and introduction of new products, product differentiation from
offerings of competitors and market acceptance.

Technology in the telecommunications industry changes rapidly,
which could cause our or Cingular Wireless services and
products to become obsolete. We cannot assure you that we and
our suppliers will be able to keep pace with technological
developments. If the new technologies on which we and Cingular
Wireless intend to focus our investments fail to achieve
acceptance in the marketplace, we and Cingular Wireless could
suffer a material adverse effect on our future competitive
position that could cause a reduction in our revenues and net
income. For example, our competitors could be the first to
obtain proprietary technologies that are perceived by the
marketplace as being superior. Furthermore, one or more of the
technologies under development for our use could become obsolete
prior to its introduction. In addition, delays in the delivery
of components or other unforeseen problems in our or Cingular
Wireless communication systems may occur that could
materially adversely affect our or Cingular Wireless
ability to generate revenue, offer new services and remain
competitive.

Maintaining our networks requires significant capital
expenditures and our inability or failure to maintain our
networks would have a material impact on our market share and
ability to generate revenue.

During the year ended December 31, 2005, wireline capital
expenditures totaled $3.2 billion (excluding
$211 million associated with Hurricane Katrina) and
Cingular Wireless capital expenditures totaled
$7.5 billion. Our and Cingular Wireless capital
expenditures are expected to continue at similar levels in 2006,
excluding any significant expenditures associated with Hurricane
Katrina. Either of us could incur significant additional capital
expenditures as a result of unanticipated developments,
regulatory changes and other events that impact our business. If
we or Cingular Wireless are unable or fail to adequately
maintain or expand our networks to meet customer needs, there
could be a material adverse impact on our market share and
ability to generate revenue.

We provide services to our customers over access lines,
and if we lose access lines, our business and results of
operations may be adversely affected.

Our wireline business generates revenue by delivering voice and
data services over access lines. We have experienced access line
loss of 18.4 percent for the period from December 31,
2000 through December 31, 2005 due to challenging economic
conditions, increased competition and technology substitution.
We are seeking to improve our competitive position through
product bundling and other sales and marketing initiatives.
However, we may continue to experience net access line loss in
our markets. An inability to retain access lines could adversely
affect our business and results of operations.

The regulatory regime under which we operate could change
to our detriment.

We are subject to various US federal regulations, including
substantial regulation by the FCC. FCC rules and regulations are
subject to change in response to industry developments, changes
in law, new technologies and political considerations. In
addition, we are subject to the regulatory authority of state
commissions, which generally have the power to regulate
intrastate rates and services, including local, long-distance
and network access services.

Our business could be materially adversely affected by the
adoption of new laws, policies and regulations or changes to
existing regulations. The development of new technologies, such
as Internet Protocol-based services including VoIP and super
high-speed broadband and video, for example, have created or
potentially could create conflicting regulation between the FCC
and various state and local authorities, which may involve
lengthy litigation to resolve and may result in outcomes
unfavorable to us.

Unfavorable regulations imposed at the federal or state level
could cause us to experience additional declines in access line
revenues and could reduce our invested capital and employment
levels related to those services. It is difficult to predict
either the outcome of proceedings before the FCC, state PSCs and
the courts or the FCCs and the state PSCs future
rule-making activities. Any adverse decision by the courts, the
FCC or the state PSCs could have a materially adverse effect on
our operations.

We may not be successful in our efforts to maintain a
reduced cost structure, and the actions that we take in order to
reduce our costs could have long-term adverse effects on our
business.

We have taken, and continue to take, various actions to
transition our company to a reduced cost structure. In response
to declining revenues, beginning in 2001 we reduced our
expenses, decreased our workforce by approximately 19,000
(including a management reduction of 1,500 announced in December
2005 that is not yet complete), froze hiring and reduced
discretionary spending. There are several risks inherent in our
efforts to maintain a reduced cost structure. These include the
risk that we will not be able to reduce expenditures quickly




BELLSOUTH 2005      13



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##### Table of Contents

enough and hold them at a level necessary to sustain or increase
profitability, and that we may have to undertake further
restructuring initiatives that would entail additional charges
and cause us to take additional actions. There is also the risk
that cost-cutting initiatives will impair our ability to
effectively develop new products, to remain competitive and to
operate effectively. Each of the above measures could have
long-term effects on our business by reducing our pool of
technical talent, decreasing or slowing product development,
making it more difficult for us to respond to customers, and
limiting our ability to hire and retain key personnel. These
circumstances could adversely affect our operating results,
which could adversely affect our stock price.

Third parties may claim that we are infringing their
intellectual property, and we could suffer significant
litigation or licensing expenses or be prevented from selling
products.

Although we do not believe that any of our products or services
infringe the valid intellectual property rights of third
parties, we may be unaware of intellectual property rights of
others that may cover some of our technology, products or
services. Any litigation growing out of third party patents or
other intellectual property claims could be costly and
time-consuming and could divert our management and key personnel
from our business operations. The complexity of the technology
involved and the uncertainty of intellectual property litigation
increase these risks. Resolution of claims of intellectual
property infringement might also require us to enter into costly
license agreements. Likewise, we may not be able to obtain
license agreements on terms acceptable to us, or at all. We also
may be subject to significant damages or injunctions against
development and sale of certain of our products. Further, we
often rely on licenses of third party intellectual property
useful for our businesses. We cannot ensure that these licenses
will be available in the future on favorable terms or at all.

Third parties may infringe our intellectual property, and
we may expend significant resources enforcing our rights or
suffer competitive injury.

Our success depends in significant part on the competitive
advantage we gain from our proprietary technology and other
valuable intellectual property assets. We rely on a combination
of patents, copyrights, trademarks and trade secrets
protections, confidentiality provisions and licensing
arrangements to establish and protect our intellectual property
rights. If we fail to successfully enforce our intellectual
property rights, our competitive position could suffer, which
could harm our operating results.

Our pending patent and trademark registration applications may
not be allowed, or competitors may challenge the validity or
scope of our patents, copyrights or trademarks. Further, we may
be required to spend significant resources to monitor and police
our intellectual property rights. We may not be able to detect
third party infringements and our competitive position may be
harmed before we do so. In addition, competitors may design
around our technology or develop competing technologies.
Furthermore, some intellectual property rights are licensed to
other companies, allowing them to compete with us using that
intellectual property.

We could incur significant costs as a result of a number
of pending putative class action lawsuits, and additional
significant litigation may be filed against us in the
future.

We have been named in several putative class action lawsuits
that allege that we violated the federal securities and ERISA
laws. In addition, we have been named in a putative class action
lawsuit that alleges that we engaged in employment
discrimination and a putative class action lawsuit that alleges
that we violated the antitrust laws. We are vigorously
contesting these matters, but such litigation could result in
substantial costs and have a material impact on our financial
condition, results of operation and cash flow. An adverse
decision or settlement in any of these cases could require us to
pay substantial damages or subject us to injunctive relief,
either of which could have a material adverse affect on our
business and operations. Further, additional significant
litigation may be filed against us in the future.

Our business will suffer if we are not able to retain and
hire key personnel.

Our future success depends partly on the continued service of
our key technical, sales, marketing, executive and
administrative personnel. If we fail to retain and hire a
sufficient number of these personnel, we may not be able to
maintain or expand our business. Since 2002, we have experienced
workforce reductions and limited pay increases, which may harm
our long-term ability to hire and retain key personnel. As the
economy continues its recovery, there is intense competition for
certain highly technical specialties in geographic areas where
we recruit, and it may become more difficult to retain our key
employees.

Our wireline business operates primarily in the Southeast,
which is likely to continue to experience severe hurricanes and
tropical storms.

We operate an electronics-based network with extensive outside
plant in a geographic region that is susceptible to inclement
weather, including hurricanes. Water (flooding in particular)
and wind damage can severely damage our outside plant causing
service outages, line noise or other trouble associated with
damage to our plant requiring field technicians to conduct
premise visits. In 2004, we experienced an unprecedented four
major hurricanes within a 45 day period. Further, the
damage inflicted on our network by Hurricane Katrina in August
2005 was extensive. Current predictions suggest that the
Atlantic basin could experience significant hurricanes for the
foreseeable future. The occurrence of severe storms could impact
our revenue in affected areas and could cause us to experience
higher than normal levels of expense and capital expenditures.




14BELLSOUTH 2005



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Uncertainty in the US securities markets and adverse
medical cost trends could cause our pension and postretirement
costs to increase.

Our pension and postretirement cost have increased in recent
years, primarily due to a continued increase in medical and
prescription drug costs. Investment returns of our pension funds
depend largely on trends in the US securities markets and the
US economy in general. In particular, uncertainty in the
US securities markets and US economy could result in
investment returns less than those previously assumed and a
decline in the value of plan assets used in pension and
postretirement calculations, which we would be required to
recognize over the next several years under generally accepted
accounting principles. Should the securities markets decline and
medical and prescription drug costs continue to increase
significantly, we would expect to face increasing annual
combined net pension and postretirement costs.

A downgrade of our debt rating could increase our
borrowing costs.

At December 31, 2005, our long-term debt rating was A2 from
Moodys Investor Service and A from Standard and
Poors. Our short-term debt rating at December 31,
2005 was P-1 from
Moodys and A-1
from Standard and Poors. Moodys maintains a negative
outlook on both our short-and long-term debt ratings, and
Standard & Poors recently placed our short- and
long-term credit ratings on CreditWatch with negative
implications. A downgrade of our debt rating could increase our
borrowing costs.

If we fail to extend or renegotiate our collective
bargaining agreements with our labor unions when they expire, or
if our unionized employees were to engage in a strike or other
work stoppage, our business and operating results could be
materially harmed.

We are a party to collective bargaining agreements with our
labor unions, which represent a significant number of our
employees. Although we believe that our relations with our
employees are satisfactory, no assurance can be given that we
will be able to successfully extend or renegotiate our
collective bargaining agreements when they expire from time to
time. If we fail to extend or renegotiate our collective
bargaining agreements, if disputes with our unions arise, or if
our unionized workers engage in a strike or a work stoppage, we
could experience a significant disruption of operations or incur
higher ongoing labor costs, either of which could have a
material adverse effect on our business.

Terrorist attacks and other acts of violence or war may
affect the financial markets and our business, financial
condition, results of operations and cash flows.

Terrorist attacks may negatively affect our operations and
financial condition. There can be no assurance that there will
not be future terrorist attacks against the United States of
America or US businesses, or armed conflict involving the
United States of America. Terrorist attacks or other acts of
violence or war may directly impact our physical facilities or
those of our customers and vendors. Further, these events could
cause consumer confidence and spending to decrease or result in
increased volatility in the United States and world financial
markets and economy. They could result in an economic recession
in the United States or abroad. Any of these occurrences could
have a material adverse impact on our business, financial
condition, results of operations and cash flows.

Cingular Wireless could fail to achieve, in the amounts
and within the timeframe expected, the capital and expense
synergies and other benefits expected from its acquisition of
AT&T Wireless.

In October 2004, Cingular Wireless, BellSouths wireless
joint venture with AT&T, acquired AT&T Wireless for
approximately $41 billion in cash. Achieving the
anticipated benefits of the Cingular
Wireless/AT&T Wireless merger will depend in part upon
meeting certain challenges such as delivering a single,
consistent and effective customer experience across all
functions, integrating and rationalizing systems and
administrative infrastructures, and reducing redundant
facilities and resources. There can be no assurance that such
challenges will be met. Failure to meet such challenges would
affect BellSouths ability to realize the anticipated
synergies, cost savings and other benefits expected from the
merger, which could adversely affect the value of BellSouth
common stock. In addition, if the Cingular
Wireless/AT&T Wireless merger fails to achieve, in the
amount and within the timeframe expected, the capital and
expense synergies and other benefits expected, there may be an
adverse impact on Cingular Wireless operating results,
which may adversely affect the financial results of BellSouth.

Cingular Wireless faces substantial competition in all
aspects of its business as competition continues to increase in
the wireless communications industry.

On average, Cingular Wireless has four to five other wireless
competitors in each of its service areas and competes for
customers based principally on reputation, network quality,
customer service, price and service offerings. Cingular
Wireless competitors are principally three national
providers and a larger number of regional providers of cellular,
PCS and other wireless communications services. Cingular
Wireless also competes with resellers and wireline service
providers. Moreover, Cingular Wireless may experience
significant competition from companies that provide similar
services using other communications technologies and services.
While some of these technologies and services are now
operational, others are being developed or may be developed in
the future.

Competition is expected to continue to put pressure on pricing,
margins and customer turnover. BellSouth and AT&T may have
differences of opinion with respect to the strategic direction
and oversight of Cingular Wireless, which could adversely affect
our ability to cooperate as the owners of Cingular Wireless and
impair Cingular Wireless ability to respond effectively to
the competitive environment. These competitive issues could
result in a material adverse effect on its ability to achieve
revenue and profit growth, and this in turn could hurt
BellSouths bottom line




BELLSOUTH 2005      15



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##### Table of Contents

based on its 40 percent share in Cingular Wireless
net income.

For a more detailed discussion of risks related to our
wireless business, see the Risk Factors section of
Cingular Wireless
Form 10-K for the
year ended December 31, 2005, which is incorporated by
reference into this
Form 10-K and is
attached hereto as Exhibit 99a.







Item 1B.
    Unresolved SEC Staff CommentsNone.







Item 2.
    PropertiesOur properties do not lend themselves to description by
character or location of principal units. Our investment in
property, plant and equipment in our consolidated operations
consisted of the following at December 31:

|                              |  |      |       |   |      |  |       |  
|----------------------------- |  | ---- | ----- | - | ---- |  | ----- | -
|                              |  | 2004 |       |   | 2005 | 
|                              | 
|Outside plant                 |  |      | 43.0  | % |      |  | 43.0  | %
|Central office equipment      |  |      | 41.7  |   |      |  | 41.9  |  
|Operating and other equipment |  |      | 3.5   |   |      |  | 3.4   |  
|Land and buildings            |  |      | 7.7   |   |      |  | 7.6   |  
|Furniture and fixtures        |  |      | 3.8   |   |      |  | 3.7   |  
|Plant under construction      |  |      | 0.3   |   |      |  | 0.4   |  
|                             
|                              |  |      | 100.0 | % |      |  | 100.0 | %
|                             










Item 3.      Legal
Proceedings


EMPLOYMENT CLAIM


Gladys Jenkins
et al. v. BellSouth Corporation


SECURITIES AND ERISA CLAIMS


In re BellSouth
Securities Litigation






16




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##### Table of Contents

can goodwill, the allegations relating to unbilled receivables
of the Companys Advertising & Publishing
subsidiary, the implementation of SAB 101 regarding
recognition of Advertising & Publishing revenues and
alleged improper billing of CLECs. 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. In July
2003, the federal court issued a ruling that the case should be
remanded to Fulton County Superior Court. The Fulton County
Superior Court has stayed the case pending resolution of the
federal case. 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 U.S. 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 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 BellSouths 401(k)
plans (the Plans) participants and beneficiaries;
(2) failing to ensure that the Plans assets were
invested properly; (3) failing to monitor the Plans
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. In October
2005, plaintiffs motion for class certification was
denied. The plaintiffs are seeking an unspecified amount of
damages, injunctive relief, attorneys fees and costs.
Certain underlying factual allegations regarding
BellSouths Advertising & Publishing subsidiary
and its former 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.

ANTITRUST CLAIMS

In December 2002, a consumer class action alleging antitrust
violations of Section 1 of the Sherman Antitrust Act was
filed against BellSouth, Verizon, AT&T (formerly known as
SBC) and Qwest, captioned William Twombly, et al
v. Bell Atlantic Corp., et al, in
U.S. District Court for the Southern District of New York.
The complaint alleged that defendants conspired to restrain
competition by agreeing not to compete with one another and to
impede competition with others. 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. In October 2005, the Second Circuit Court of Appeals
reversed the District Courts decision and remanded the
case to the District Court for further proceedings. At this
time, the likely outcome of the case cannot be predicted, nor
can a reasonable estimate of loss, if any, be made.

In June 2004, the U.S. Court of Appeals for the
11th Circuit affirmed the District Courts dismissal
of most of the antitrust and state law claims brought by a
plaintiff CLEC in a case captioned Covad Communications
Company, et al v. BellSouth Corporation,
et al. The appellate court, however, permitted a price
squeeze claim and certain state tort claims to proceed. In
November 2005, Covad dismissed with prejudice the civil action
and then contemporaneously filed complaints with the public
service commissions of Florida and Georgia and filed an informal
complaint with the FCC. The commission complaints allege
breaches of our interconnection contracts approved by the state
commissions, including failure to provide collocation,
mishandling of orders, ineffective support systems, and failure
to provide unbundled loops. The complaints also allege improper
solicitation of Covad customers. These claims are similar to the
claims raised in the civil action dismissed by Covad. The
complaints seek credits and equitable relief. Covad has asked
the state commissions to stay proceedings on its complaints
pending resolutions of its FCC complaint. At this time, the
likely outcome of the case cannot be predicted, nor can a
reasonable estimate of loss, if any, be made.

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, 2005, our
recorded liability related to these matters was approximately
$9 million. We continue to believe that expenditures in
connection with additional remedial actions under the current
environmental protection laws or related matters will not be
material to our results of operations, financial position or
cash flows.

OTHER MATTERS

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, including
environmental liabilities, rates and contracts. Certain
contingent liabilities for pre-divestiture events are shared
with AT&T. Although complete assurance cannot be given as to
the outcome of any legal claims, we believe that any financial
impact should not be material to our results of operations,
financial position or cash flows. See Note Q to our
consolidated financial statements.




BELLSOUTH 2005      17



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##### Table of Contents

Item 4.
    Submission of Matters to a Vote of ShareholdersNo matter was submitted to a vote of shareholders in the fourth
quarter of the year ended December 31, 2005.





Executive Officers

The executive officers of BellSouth Corporation are listed below:

|                       |  |     |    |  |        |                                                          |       |      |        |       |  |  |      |  |  | 
|---------------------- |  | --- | -- |  | ------ | -------------------------------------------------------- | ----- | ---- | ------ | ----- |  |  | ---- |  |  | 
|                       |  |     |    |  |        |                                                          |       | This |        |       | 
|                       |  |     |    |  |        | Officer                                                  |       |      | Office |       |  | 
|Name                   |  | Age |    |  | Office |                                                          | Since |      |        | Since |  |  |     
|                      
|F. Duane Ackerman      |  |     | 63 |  |        | Chairman of the Board and Chief
    Executive Officer    |       |      | 1983   |       |  |  | 1997 |  |  | 
|Richard A. Anderson    |  |     | 47 |  |        | Vice Chairman and
    President  Business Markets       |       |      | 1993   |       |  |  | 2006 |  |  | 
|Barry L. Boniface      |  |     | 43 |  |        | Vice
    President  Planning and Development            |       |      | 2001   |       |  |  | 2001 |  |  | 
|Francis A. Dramis, Jr. |  |     | 57 |  |        | Chief Information, E-Commerce and
    Security Officer   |       |      | 1998   |       |  |  | 2000 |  |  | 
|Mark L. Feidler        |  |     | 49 |  |        | President and Chief Operating
    Officer                |       |      | 2004   |       |  |  | 2005 |  |  | 
|Marc Gary              |  |     | 53 |  |        | General Counsel                                          |       |      | 2004   |       |  |  | 2004 |  |  | 
|Isaiah Harris, Jr.     |  |     | 53 |  |        | President  BellSouth
    Advertising & Publishing Group |       |      | 1997   |       |  |  | 2005 |  |  | 
|W. Patrick Shannon     |  |     | 43 |  |        | Chief Financial Officer                                  |       |      | 1997   |       |  |  | 2006 |  |  | 
|                      








Website Access


www.bellsouth.com 10-K, 10-Q, 8-K, www.bellsouth.com/investor/


www.bellsouth.com/corporate governance/


30309-3610.





PART II







|        |                                                                                                                 
|------- | ----------------------------------------------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity, Related
    Shareholder Matters and Issuer Purchases of Equity Securities





18




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##### Table of Contents



|               |  |               |       |           |           |   |       |          |  |   |     | 
|-------------- |  | ------------- | ----- | --------- | --------- | - | ----- | -------- |  | - | --- | 
|               |  |               |       | Per Share |          
|               |  | Market Prices |       |           | Dividends |  
|               |  | High          |       |           | Low       |   |       | Declared | 
|               |  |               |      
|2004           |  |               |       |           |           |   |       |          |  |   |     | 
|First Quarter  |  | $             | 31.00 |           |           | $ | 26.13 |          |  | $ | .25 | 
|Second Quarter |  |               | 27.86 |           |           |   | 24.46 |          |  |   | .27 | 
|Third Quarter  |  |               | 27.94 |           |           |   | 25.08 |          |  |   | .27 | 
|Fourth Quarter |  |               | 28.96 |           |           |   | 25.65 |          |  |   | .27 | 
|2005           |  |               |       |           |           |   |       |          |  |   |     | 
|First Quarter  |  | $             | 28.12 |           |           | $ | 24.85 |          |  | $ | .27 | 
|Second Quarter |  |               | 27.36 |           |           |   | 25.38 |          |  |   | .29 | 
|Third Quarter  |  |               | 27.90 |           |           |   | 25.51 |          |  |   | .29 | 
|Fourth Quarter |  |               | 28.03 |           |           |   | 24.32 |          |  |   | .29 | 



Issuer Purchases of Equity Securities


|                        |  |                     |            |  |                |                        |       |                            |                       |  |                     |  |  |   |               | 
|----------------------- |  | ------------------- | ---------- |  | -------------- | ---------------------- | ----- | -------------------------- | --------------------- |  | ------------------- |  |  | - | ------------- | 
|                        |  |                     |            |  |                |                        |       | Approximate Dollar         |                      
|                        |  |                     |            |  |                | Total Number of Shares |       |                            | Value that May Yet Be | 
|                        |  | Total Number of     |            |  | Average Price  |                        |       | Purchased as Part of a     |                       |  | Purchased Under the | 
|Period                  |  | Shares Purchased(1) |            |  | Paid per Share |                        |       | Publicly Announced Plan(2) |                       |  | Plan(2)             | 
|                        | 
|October 1-31,
    2005  |  |                     | 2,478,029  |  |                | $                      | 25.92 |                            |                       |  | 2,400,000           |  |  | $ | 1,937,850,000 | 
|November 1-30,
    2005 |  |                     | 16,795,540 |  |                | $                      | 26.38 |                            |                       |  | 16,625,000          |  |  | $ | 1,499,500,000 | 
|December 1-31,
    2005 |  |                     | 16,272,221 |  |                | $                      | 27.71 |                            |                       |  | 16,043,500          |  |  | $ | 1,054,840,000 | 
|                       
|Total                   |  |                     | 35,545,790 |  |                |                        |       |                            |                       |  | 35,068,500          |  |  |   |               | 
|                       

|    |                                                                                                                                                                                                                                                                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Consists of 477,290 shares purchased from employees to
    pay taxes related to the vesting of restricted shares, at an
    average price of $27.14, and 35,068,500 shares purchased
    from the external markets, at an average price of $26.95.
    Excludes shares purchased from employees to pay taxes related to
    the exercise of stock options.
|(2) | On October 25, 2005, we announced that the Board of
    Directors authorized the repurchase of up to $2 billion of
    common stock through the end of 2007.                                                                                                                                                                                              

Stock Transfer Agent and Registrar






19




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##### Table of Contents

Item 6.





SELECTED FINANCIAL AND OPERATING DATA

DOLLARS ARE 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 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                                           |                                                                                                        | 2001 |        |      | 2002 |   |        | 2003 |  |   | 2004   |      |  | 2005 |        |      | 
|                                                                               |                                                                                                       
|                                                                              
|Income Statement Data:                                                         |                                                                                                        |      |        |      |      |   |        |      |  |   |        |      |  |      |        |      |  |   |        |      |  | 
|Operating revenues                                                             |                                                                                                        | $    | 21,211 |      |      | $ | 20,207 |      |  | $ | 20,341 |      |  | $    | 20,300 |      |  | $ | 20,547 |      |  | 
|                                                                              
|Operating expenses                                                             |                                                                                                        |      | 15,339 |      |      |   | 15,753 |      |  |   | 14,784 |      |  |      | 15,011 |      |  |   | 15,877 |      |  | 
|                                                                              
|Operating income                                                               |                                                                                                        |      | 5,872  |      |      |   | 4,454  |      |  |   | 5,557  |      |  |      | 5,289  |      |  |   | 4,670  |      |  | 
|                                                                              
|Income from continuing operations                                              |                                                                                                        |      | 2,786  |      |      |   | 3,475  |      |  |   | 3,488  |      |  |      | 3,394  |      |  |   | 2,913  |      |  | 
|                                                                              
|Income (loss) from discontinued
    operations, net of tax                     |                                                                                                        |      | (339   | )    |      |   | (867   | )    |  |   | 101    |      |  |      | 1,364  |      |  |   | 381    |      |  | 
|                                                                              
|Income before cumulative effect of
    changes in accounting principle         |                                                                                                        |      | 2,447  |      |      |   | 2,608  |      |  |   | 3,589  |      |  |      | 4,758  |      |  |   | 3,294  |      |  | 
|                                                                              
|Cumulative effect of changes in
    accounting principle, net of tax           |                                                                                                        |      |       |      |      |   | (1,285 | )    |  |   | 315    |      |  |      |       |      |  |   |       |      |  | 
|                                                                              
|Net income                                                                     |                                                                                                        | $    | 2,447  |      |      | $ | 1,323  |      |  | $ | 3,904  |      |  | $    | 4,758  |      |  | $ | 3,294  |      |  | 
|                                                                              
|Operating income margin                                                        |                                                                                                        |      | 27.7%  |      |      |   | 22.0%  |      |  |   | 27.3%  |      |  |      | 26.1%  |      |  |   | 22.7%  |      |  | 
|                                                                              
|Diluted earnings per share of
    common stock:                                |                                                                                                        |      |        |      |      |   |        |      |  |   |        |      |  |      |        |      |  |   |        |      |  | 
|                                                                              
|                                                                               | Income before discontinued
    operations and cumulative effect of changes in accounting
    principle |      | $      | 1.48 |      |   | $      | 1.85 |  |   | $      | 1.88 |  |      | $      | 1.85 |  |   | $      | 1.59 |  |  | 
|                                                                              
|                                                                               | Income before cumulative effect of
    changes in accounting principle                                 |      | $      | 1.30 |      |   | $      | 1.39 |  |   | $      | 1.94 |  |      | $      | 2.59 |  |   | $      | 1.80 |  |  | 
|                                                                              
|                                                                               | Net income                                                                                             |      | $      | 1.30 |      |   | $      | 0.71 |  |   | $      | 2.11 |  |      | $      | 2.59 |  |   | $      | 1.80 |  |  | 
|                                                                              
|                                                                              
|Other Financial Data:                                                          |                                                                                                        |      |        |      |      |   |        |      |  |   |        |      |  |      |        |      |  |   |        |      |  | 
|                                                                              
|Diluted weighted-average shares of
    common stock
    outstanding (millions) |                                                                                                        |      | 1,888  |      |      |   | 1,876  |      |  |   | 1,852  |      |  |      | 1,836  |      |  |   | 1,829  |      |  | 
|                                                                              
|Dividends declared per share of
    common stock                               |                                                                                                        | $    | 0.76   |      |      | $ | 0.79   |      |  | $ | 0.92   |      |  | $    | 1.06   |      |  | $ | 1.14   |      |  | 
|                                                                              
|Total assets                                                                   |                                                                                                        | $    | 51,912 |      |      | $ | 49,368 |      |  | $ | 49,622 |      |  | $    | 59,339 |      |  | $ | 56,553 |      |  | 
|                                                                              
|Total debt                                                                     |                                                                                                        | $    | 20,125 |      |      | $ | 17,397 |      |  | $ | 14,980 |      |  | $    | 20,583 |      |  | $ | 17,188 |      |  | 
|                                                                              
|Shareholders equity                                                           |                                                                                                        | $    | 18,758 |      |      | $ | 17,906 |      |  | $ | 19,712 |      |  | $    | 23,066 |      |  | $ | 23,534 |      |  | 
|                                                                              
|Construction and capital
    expenditures                                      |                                                                                                        | $    | 5,495  |      |      | $ | 3,536  |      |  | $ | 2,926  |      |  | $    | 3,193  |      |  | $ | 3,457  |      |  | 
|                                                                              
|Book value per common share                                                    |                                                                                                        | $    | 9.99   |      |      | $ | 9.63   |      |  | $ | 10.77  |      |  | $    | 12.60  |      |  | $ | 13.09  |      |  | 
|                                                                              
|Ratio of earnings to fixed charges                                             |                                                                                                        |      | 3.98   |      |      |   | 5.03   |      |  |   | 5.68   |      |  |      | 6.00   |      |  |   | 4.33   |      |  | 
|                                                                              
|Debt to total capitalization ratio                                             |                                                                                                        |      | 51.8   |      |      |   | 49.3   |      |  |   | 43.2   |      |  |      | 47.2   |      |  |   | 42.2   |      |  | 
|                                                                              
|                                                                              
|Operating Data:                                                                |                                                                                                        |      |        |      |      |   |        |      |  |   |        |      |  |      |        |      |  |   |        |      |  | 
|                                                                              
|Access lines in service (in
    thousands)                                     |                                                                                                        |      | 23,824 |      |      |   | 23,005 |      |  |   | 22,263 |      |  |      | 21,356 |      |  |   | 20,037 |      |  | 
|                                                                              
|Retail long distance customers (in
    thousands)                              |                                                                                                        |      |       |      |      |   | 1,002  |      |  |   | 3,960  |      |  |      | 6,015  |      |  |   | 7,179  |      |  | 
|                                                                              
|DSL customers (in thousands)                                                   |                                                                                                        |      | 621    |      |      |   | 1,021  |      |  |   | 1,462  |      |  |      | 2,096  |      |  |   | 2,882  |      |  | 
|                                                                              
|Cingular Wireless customers (in
    thousands)                                 |                                                                                                        |      | 21,596 |      |      |   | 21,925 |      |  |   | 24,027 |      |  |      | 49,132 |      |  |   | 54,144 |      |  | 
|                                                                              
|Number of employees                                                            |                                                                                                        |      | 87,875 |      |      |   | 77,020 |      |  |   | 75,743 |      |  |      | 62,564 |      |  |   | 63,066 |      |  | 
|                                                                              





20




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##### Table of Contents

Item 7.





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

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

BELLSOUTH CORPORATION





Overview

We are a Fortune 100 company with annual revenues of over
$20 billion. Our core businesses are wireline and wireless
communications and our largest customer segment is the retail
consumer. We have interests in wireless communications through
our ownership of 40 percent of Cingular Wireless, the
nations largest wireless company based on number of
customers and revenue. 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 wireline 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. The
Southeast is a positive net migration region, with net migration
averaging almost 500,000 annually. The regions real income
growth is expected to exceed the national average over the next
five years.

INDUSTRY DYNAMICS

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, and technological advances such as broadband.
After a period of significant growth in the 1990s, access lines,
a key driver of our business, have declined steadily since 2001.

While the last mile connectivity to the customer remains
essential, the communications industry is beginning a transition
from a network-centric circuit-based infrastructure to an
applications-centric IP infrastructure, which could create
uncertainty around traditional business models. Further,
industry consolidation, such as the recent combinations of SBC
and AT&T, Verizon and MCI, and Sprint and Nextel, are
creating large competitors with global reach and economies of
scale.

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 four
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

Our wireless and wireline businesses are subject to vigorous
competition, and both are subject to regulation.

Changes to federal law in the early 1990s generally preempted
states from regulating the market entry or rates of a wireless
carrier, while allowing states to regulate other terms and
conditions of wireless service. Wireless carriers are also
subject to regulation by the Federal Communications Commission
(FCC), which allocates and enforces the spectrum used by
wireless carriers, and adopts and enforces other policies
relating to wireless services.

Our wireline business is subject to dual state and federal
regulation. The FCC has historically engaged in heavy regulation
of our interstate services. In recent years, it has granted
increasing pricing flexibility for our interstate
telecommunications services because of the additional
competition to which those services are subject, though nearly
all of the services remain subject to tariffing requirements.
Separately, in response to the Telecommunications Act of 1996,
the FCC initially required us to share our network extensively
with local service competitors, and prescribed a pricing policy
(TELRIC) that has not permitted fair cost recovery. These
sharing (unbundling) rules were invalidated by the courts
on three separate occasions, but not before the invalid policies
had been generally implemented in our contracts with
competitors. In February 2005, the FCC issued rules that cut
back significantly on some of the anticompetitive sharing
requirements. The new rules essentially eliminated the unbundled
network platform, or
UNE-P, a combination of
unbundled elements that replicate local service at unfairly low
prices.

During 2005, we transitioned many former
UNE-P customers to a
similar platform service provided at commercially negotiated
terms and prices. The FCC-ordered transition phase out of
UNE-P is scheduled to
be complete on March 11, 2006, though the conduct of state
commission litigation concerning the
UNE-P terms of earlier
contracts may cause some delay in our implementation of the
phase-out.

The FCC provided additional relief when it released new
broadband rules effective in November 2005 that responded to a
recent US Supreme Court decision. The new rules are designed to
provide our high speed Internet access services with regulation
equivalent to that of our competition, particularly cable modem
providers. The new rules are scheduled to be fully phased in by
the third quarter of 2006, although the FCC reserved the right
to extend the transition.

The states in our region continue to exert economic regulation
over much of the revenue generated by our traditional narrowband
wireline telecommunications services, though that regulation has
been lessening. During the past two years, state legislatures
and state regulatory commissions have taken action that moved
regulation toward equivalence with our telecommunications
competi-




BELLSOUTH 2005      21



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##### Table of Contents

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

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

BELLSOUTH CORPORATION

tors by prohibiting state regulation of broadband services,
rebalancing rates, and reducing regulation of service bundles.

Despite these successes, our wireline business remains more
regulated than competing businesses that use cable, wireless or
non-facilities based technologies. While we welcome the reforms,
the transition of our wireline business regulation from the
comprehensive, utility-like regulation of previous years to
standard business regulation is not complete, and adjusting to
each individual change requires significant management
attention. We will accordingly continue to encourage regulatory
reform in every appropriate forum.

ACQUISITIONS AND DISPOSITIONS

Over the last 18 to 24 months, we completed the exit of our
international operations and increased our investment in the
domestic wireless market through Cingular Wireless
acquisition of AT&T Wireless. The addition of AT&T
Wireless filled in Cingular Wireless national coverage
footprint, added depth to its licensed spectrum position, and
added size and scale to compete more effectively. Cingular
Wireless new advertising campaigns combined with
improvements in customer service and network coverage are
driving customer loyalty and growth. Customer churn has reduced
appreciably, integration efforts are well underway and cost
synergies are contributing to margin expansion. This acquisition
substantially increases BellSouths participation in the
domestic wireless industry, bringing wireless to over
40 percent of our proportional revenues including Cingular
Wireless. As Cingular completes its integration of AT&T
Wireless and executes its strategy, we expect its contribution
to BellSouths earnings to increase over the next two years.

HIGHLIGHTS AND OUTLOOK

On August 29, 2005, Hurricane Katrina caused catastrophic
damage in areas of Louisiana, Mississippi and Alabama, causing
significant incremental expense for network restoration and
customer dislocation. Despite the challenges of Hurricane
Katrina, BellSouth maintained focus on the key growth areas of
its business, delivering continued customer growth from
broadband and long distance services. Consolidated revenues,
which do not include our share of Cingular Wireless, increased
slightly in 2005 as growth in long distance, DSL and small
business services effectively offset revenue declines from
residential access line loss and large business services. We
added more than 1.1 million mass market long distance
customers in 2005 to total nearly 7.2 million at
December 31, 2005, while DSL net subscriber additions of
786,000 brought our total to nearly 2.9 million at
December 31, 2005.

Wireless substitution continued to drive access line losses in
2005. Retail access lines were down 579,000, which included
positive retail business line growth of 64,000. Wholesale access
lines were down 740,000 compared to year-end 2004 influenced by
the change in regulatory position towards UNE-P.

Our cost structure is heavily weighted towards labor and fixed
asset related costs. In order to sustain margins, we have to
adjust our workforce as market share of access lines shifts.
Since the beginning of 2001, we have reduced our domestic
workforce by slightly more than 17,000 employees, or 22 percent.
Further, in December 2005, we announced a reduction of 1,500
management employees. Maintaining current operating margin
levels going forward will be challenging as competition
intensifies, pressuring revenue. We must achieve continued
increases in productivity to manage our costs. While there have
been some encouraging developments on the regulatory front,
there will be other events such as increasing healthcare costs,
continued loss of lines to wireless substitution and the
roll-out of VoIP telephony by cable providers that are likely to
continue to put pressure on margins. Further, operating cash
flow was relatively flat in 2005 but is expected to decline over
the next two years due primarily to higher income tax payments.

Cingular Wireless

Cingular Wireless added more than 5 million customers in
2005, bringing its nationwide customer base to 54.1 million
customers. Customer churn of 2.2 percent in 2005 decreased
50 basis points compared to the prior year. Year over year,
revenue growth exceeded 6 percent on a pro forma basis
driven by customer growth partially offset by a decline in
average revenue per user (ARPU). Operating margin has been
improving due to revenue growth and operating efficiencies from
an improved customer acquisition cost structure, headcount
reductions and systems rationalization.




22BELLSOUTH 2005



---



##### Table of Contents

Consolidated Results of Operations

Key financial and operating data for the three years ended
December 31, 2003, 2004 and 2005 are set forth below. 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 directly following this
section.

Following generally accepted accounting principles (GAAP), we
use the equity method of accounting for our investment in
Cingular Wireless. We record and present our proportionate share
of Cingular Wireless earnings as net earnings of equity
affiliates in our consolidated income statements. Additionally,
our financial statements reflect results for the Latin American
operations as Discontinued Operations. The operational results
and other activity associated with the Latin American segment
have been presented on one line item in the income statement
separate from Continuing Operations.

|                                                                       |                                                       |                          |        |       |                |   |        |          |        |   |        |       |        |      |       |      |     |  |       |     |     | 
|---------------------------------------------------------------------- | ----------------------------------------------------- | ------------------------ | ------ | ----- | -------------- | - | ------ | -------- | ------ | - | ------ | ----- | ------ | ---- | ----- | ---- | --- |  | ----- | --- | --- | 
|                                                                       |                                                       | For the Year Ended       |        |       | Percent Change |  
|                                                                       |                                                       | December 31,             |        |       |                |  
|                                                                       |                                                       |                          |        |       | 2004 vs.       |   |        | 2005 vs. |       
|                                                                       |                                                       | 2003                     |        |       | 2004           |   |        | 2005     |        |   | 2003   |       |        | 2004 |      
|                                                                       |                                                      
|Results of operations:                                                 |                                                      
|                                                                       |                                                      
|Operating revenues                                                     |                                                       | $                        | 20,341 |       |                | $ | 20,300 |          |        | $ | 20,547 |       |        |      | (0.2  | )    |     |  | 1.2   |    
|Operating expenses                                                     |                                                       |                          |        |       |                |   |        |          |        |   |        |       |        |      |       |      |     |  |       |    
|                                                                       | Cost of services and products                         |                          |        | 6,991 |                |   |        | 7,520    |        |   |        | 8,067 |        |      |       | 7.6  |     |  |       | 7.3 |    
|                                                                       | Selling, general, and
    administrative expenses     |                          |        | 3,777 |                |   |        | 3,816    |        |   |        | 3,873 |        |      |       | 1.0  |     |  |       | 1.5 |    
|                                                                       | Depreciation and amortization                         |                          |        | 3,811 |                |   |        | 3,636    |        |   |        | 3,661 |        |      |       | (4.6 | )   |  |       | 0.7 |    
|                                                                       | Provision for restructuring and
    asset impairments |                          |        | 205   |                |   |        | 39       |        |   |        | 276   |        |      |       | *    |     |  |       | *   |    
|                                                                       |                                                       |                          |        |       |                |   |        |          |        |   |        |       |        |      |      
|                                                                       |                                                       | Total operating expenses |        |       | 14,784         |   |        |          | 15,011 |   |        |       | 15,877 |      |       |      | 1.5 |  |       |     | 5.8 | 
|Operating income                                                       |                                                       |                          | 5,557  |       |                |   | 5,289  |          |        |   | 4,670  |       |        |      | (4.8  | )    |     |  | (11.7 | )  
|Interest expense                                                       |                                                       |                          | 947    |       |                |   | 916    |          |        |   | 1,124  |       |        |      | (3.3  | )    |     |  | 22.7  |    
|Net earnings of equity affiliates                                      |                                                       |                          | 452    |       |                |   | 68     |          |        |   | 165    |       |        |      | *     |      |     |  | 142.6 |    
|Gain on sale of operations                                             |                                                       |                          |       |       |                |   | 462    |          |        |   | 351    |       |        |      | *     |      |     |  | (24.0 | )  
|Other income (expense), net                                            |                                                       |                          | 362    |       |                |   | 283    |          |        |   | 240    |       |        |      | (21.8 | )    |     |  | (15.2 | )  
|                                                                       |                                                       |                          |        |       |                |   |        |          |        |   |        |       |        |      |      
|Income from continuing operations
    before income taxes              |                                                       |                          | 5,424  |       |                |   | 5,186  |          |        |   | 4,302  |       |        |      | (4.4  | )    |     |  | (17.0 | )  
|Provision for income taxes                                             |                                                       |                          | 1,936  |       |                |   | 1,792  |          |        |   | 1,389  |       |        |      | (7.4  | )    |     |  | (22.5 | )  
|                                                                       |                                                       |                          |        |       |                |   |        |          |        |   |        |       |        |      |      
|Income from continuing operations                                      |                                                       |                          | 3,488  |       |                |   | 3,394  |          |        |   | 2,913  |       |        |      | (2.7  | )    |     |  | (14.2 | )  
|Income from discontinued
    operations, net of tax                    |                                                       |                          | 101    |       |                |   | 1,364  |          |        |   | 381    |       |        |      | *     |      |     |  | *     |    
|                                                                       |                                                       |                          |        |       |                |   |        |          |        |   |        |       |        |      |      
|Income before cumulative effect of
    changes in accounting principle |                                                       |                          | 3,589  |       |                |   | 4,758  |          |        |   | 3,294  |       |        |      | 32.6  |      |     |  | *     |    
|Cumulative effect of changes in
    accounting principle, net of tax   |                                                       |                          | 315    |       |                |   |       |          |        |   |       |       |        |      | *     |      |     |  |      |    
|                                                                       |                                                       |                          |        |       |                |   |        |          |        |   |        |       |        |      |      
|                                                                       | Net income                                            |                          | $      | 3,904 |                |   | $      | 4,758    |        |   | $      | 3,294 |        |      |       | 21.9 |     |  |       | *   |    

|                                               |  |   |       |  |  |   |       |  |  |   |     |   |  |  |      |  |  |  |   | 
|---------------------------------------------- |  | - | ----- |  |  | - | ----- |  |  | - | --- | - |  |  | ---- |  |  |  | - | 
|                                               | 
|Summary results of discontinued operations:    | 
|                                               | 
|Operating revenues                             |  | $ | 2,294 |  |  | $ | 2,459 |  |  | $ | 66  |   |  |  | 7.2  |  |  |  | * | 
|Operating income (loss)                        |  | $ | 349   |  |  | $ | 647   |  |  | $ | (5  | ) |  |  | 85.4 |  |  |  | * | 
|Income (loss) from discontinued
    operations |  | $ | 101   |  |  | $ | 1,364 |  |  | $ | 381 |   |  |  | *    |  |  |  | * | 
|                                              



2005 compared to 2004










23




---



##### Table of Contents

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

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

BELLSOUTH CORPORATION

for network restoration, including capital and expense, to be
$700 to $900. We expect a portion of the cost associated with
the Hurricane Katrina recovery effort to be covered by
insurance. While the exact amount has not been determined, our
current estimate of the amount of covered losses, net of our
deductible, is approximately $250. The actual recovery will vary
depending on the outcome of the insurance loss adjustment effort.

OPERATING REVENUES

Consolidated operating revenues increased $247 in 2005 as
compared to 2004 reflecting growth in DSL and long distance
products. Combined revenues from DSL and long distance increased
$673 in 2005 compared to 2004. These increases were
substantially offset by the impact of revenue declines
associated with competitive access line losses in the retail and
wholesale sectors along with related pricing pressures.
Additionally, $97 of the year-over-year increase is attributable
to one-time revenue adjustments in the Communications
Group  a $50 reduction in 2004 related to a
regulatory settlement and a $47 increase in 2005 related to the
current recognition of previously deferred revenue.
Advertising & Publishing revenues continued to grow in
2005 driven by higher core print revenues, growing sales of
electronic media products and higher sales agency commissions.

Revenue trends are discussed in more detail in the
Communications Group and Advertising & Publishing Group
segment results sections.

OPERATING EXPENSES

Total operating expenses increased $866 in 2005 as compared to
2004. A major driver was $447 of incremental increase in
hurricane-related expense as Hurricanes Katrina, Wilma and Rita
eclipsed the expense associated with the four major hurricanes
of the 2004 season. Another primary driver was a $260 increase
in labor driven by overtime associated with higher DSL volumes
and network maintenance, severance-related costs, expansion and
growth in the advertising and publishing business and higher
expenses associated with pension and postretirement benefit
plans.

Specifically, retiree medical expense increased by $150
primarily as a result of the full year impact of calculating the
obligation for non-management retiree medical costs as if there
were no caps, partially offset by reductions in other retiree
benefits. The change in accounting for non-management caps was
effective with ratification of our contract with the CWA in the
third quarter of 2004. Partially offsetting this increase was
$48 higher pension income primarily due to lower interest rates.

Other factors driving the 2005 increase include volume-driven
increases of $112 primarily for the provision of long distance
services associated with the growth of subscribers and $109 of
incremental expense for Universal Service Fund contributions due
to increases in fund contribution rates and a higher assessment
base driven by growth in DSL and long distance. These increases
were partially offset by a $72 decline in uncollectible expense
associated with improved economic conditions.

Trends in operating expenses are discussed in more detail in the
Communications Group and Advertising & Publishing Group
segment results sections.

INTEREST EXPENSE

|                             |                |                    |        |     |      |   |        |        |  |   |       |     |  |  | 
|---------------------------- | -------------- | ------------------ | ------ | --- | ---- | - | ------ | ------ |  | - | ----- | --- |  |  | 
|                             |                | For the Year Ended |        |     |      |   |       
|                             |                | December 31,       |        |     |      |   |       
|                             |               
|                             |                | 2004               |        |     | 2005 |   |        | Change |  |   |      
|                             |               
|Interest expense  debt      |                | $                  | 864    |     |      | $ | 1,021  |        |  | $ | 157   |     |  | 
|Interest expense  other     |                |                    | 52     |     |      |   | 103    |        |  |   | 51    |     |  | 
|                            
|                             | Total interest |                    | $      | 916 |      |   | $      | 1,124  |  |   | $     | 208 |  |  | 
|                            
|Average debt
    balances(1) |                | $                  | 15,523 |     |      | $ | 18,163 |        |  | $ | 2,640 |     |  | 
|                            
|Effective rate               |                |                    | 5.6    | %   |      |   | 5.6    | %      |  |   | 0     | bps |  | 
|                            



|    |  |                                                                              
|--- |  | -----------------------------------------------------------------------------
|(1) |  | Average debt balances exclude amounts related to discontinued
    operations.





|                       |  |                    |    |  |      |   |     |        |  |   |     |   |  | 
|---------------------- |  | ------------------ | -- |  | ---- | - | --- | ------ |  | - | --- | - |  | 
|                       |  | For the Year Ended |    |  |      |   |    
|                       |  | December 31,       |    |  |      |   |    
|                       | 
|                       |  | 2004               |    |  | 2005 |   |     | Change |  |   |    
|                       | 
|Cingular Wireless      |  | $                  | 24 |  |      | $ | 135 |        |  | $ | 111 |   |  | 
|Other equity investees |  |                    | 44 |  |      |   | 30  |        |  |   | (14 | ) |  | 
|                      
|Total                  |  | $                  | 68 |  |      | $ | 165 |        |  | $ | 97  |   |  | 
|                      





24




---



##### Table of Contents

execute plans to fully integrate the acquired operations, exit
certain activities, and dispose of certain assets of AT&T
Wireless, including redundant facilities and interests in
certain foreign operations. These plans affect many areas of the
combined company, including sales and marketing, network,
information technology, customer care, supply chain and general
and administrative functions.

The decline in other earnings from equity investees relates to
the sale of our interest in Cellcom.

GAIN ON SALE OF OPERATIONS

The gain on sale of operations in 2005 related to the sale of
our 34.75 percent interest in Cellcom, a cellular
communications operator in Israel, for $625 in gross proceeds.
As a result of the sale, we recorded a gain of $351, or $228 net
of tax, which included the recognition of cumulative foreign
currency translation losses of $10.

OTHER INCOME (EXPENSE), NET

|                                              |  |                    |     |   |      |   |     |        |  |   |     |   |  | 
|--------------------------------------------- |  | ------------------ | --- | - | ---- | - | --- | ------ |  | - | --- | - |  | 
|                                              |  | For the Year Ended |     |   |      |   |    
|                                              |  | December 31,       |     |   |      |   |    
|                                              | 
|                                              |  | 2004               |     |   | 2005 |   |     | Change |  |   |    
|                                              | 
|Interest income                               |  | $                  | 70  |   |      | $ | 34  |        |  | $ | (36 | ) |  | 
|Interest on advances to Cingular
    Wireless |  |                    | 230 |   |      |   | 204 |        |  |   | (26 | ) |  | 
|Loss on early extinguishment of debt          |  |                    | (14 | ) |      |   | (42 | )      |  |   | (28 | ) |  | 
|Gain (loss) on sale of assets                 |  |                    | (5  | ) |      |   | 32  |        |  |   | 37  |   |  | 
|Other, net                                    |  |                    | 2   |   |      |   | 12  |        |  |   | 10  |   |  | 
|                                             
|Total other income (expense), net             |  | $                  | 283 |   |      | $ | 240 |        |  | $ | (43 | ) |  | 
|                                             





|                           |  |                    |       |   |      |   |       |        |  |   |      |       |  | 
|-------------------------- |  | ------------------ | ----- | - | ---- | - | ----- | ------ |  | - | ---- | ----- |  | 
|                           |  | For the Year Ended |       |   |      |   |      
|                           |  | December 31,       |       |   |      |   |      
|                           | 
|                           |  | 2004               |       |   | 2005 |   |       | Change |  |   |     
|                           | 
|Provision for income taxes |  | $                  | 1,792 |   |      | $ | 1,389 |        |  | $ | (403 | )     |  | 
|Effective tax rate         |  |                    | 34.6  | % |      |   | 32.3  | %      |  |   | (230 | ) bps |  | 
|                          







2004 compared to 2003












25




---



##### Table of Contents

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

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

BELLSOUTH CORPORATION

ated with the growth in subscribers, information technology
expenses and contract services increased $51 in connection with
more project-related spending and materials and supplies
increased $55 attributable to increased utilities usage and
weather-related restorations.

These increases were partially offset by lower depreciation and
amortization expense of $175 attributable to lower depreciation
rates, lower uncollectible expense of $139 driven by improved
economic conditions and improved collection processes and lower
access fees of $96 driven by CLEC interconnect volume declines.
The $166 decline in restructuring charges and asset impairments
is attributable to incrementally smaller workforce reductions
and a $52 asset impairment charge related to an abandoned
software project in 2003.

INTEREST EXPENSE

|                             |                |                    |        |     |      |   |        |        |  |   |       |       |   |  | 
|---------------------------- | -------------- | ------------------ | ------ | --- | ---- | - | ------ | ------ |  | - | ----- | ----- | - |  | 
|                             |                | For the Year Ended |        |     |      |   |       
|                             |                | December 31,       |        |     |      |   |       
|                             |               
|                             |                | 2003               |        |     | 2004 |   |        | Change |  |   |      
|                             |               
|Interest expense  debt      |                | $                  | 836    |     |      | $ | 864    |        |  | $ | 28    |       |   | 
|Interest expense  other     |                |                    | 111    |     |      |   | 52     |        |  |   | (59   | )     |   | 
|                            
|                             | Total interest |                    | $      | 947 |      |   | $      | 916    |  |   | $     | (31   | ) |  | 
|                            
|Average debt
    balances(1) |                | $                  | 14,193 |     |      | $ | 15,523 |        |  | $ | 1,330 |       |   | 
|                            
|Effective rate               |                |                    | 5.9    | %   |      |   | 5.6    | %      |  |   | (30   | ) bps |   | 
|                            



|    |  |                                                                              
|--- |  | -----------------------------------------------------------------------------
|(1) |  | Average debt balances exclude amounts related to discontinued
    operations.





|                       |  |                    |     |  |      |   |    |        |  |   |      |   |  | 
|---------------------- |  | ------------------ | --- |  | ---- | - | -- | ------ |  | - | ---- | - |  | 
|                       |  | For the Year Ended |     |  |      |   |   
|                       |  | December 31,       |     |  |      |   |   
|                       | 
|                       |  | 2003               |     |  | 2004 |   |    | Change |  |   |     
|                       | 
|Cingular Wireless      |  | $                  | 408 |  |      | $ | 24 |        |  | $ | (384 | ) |  | 
|Other equity investees |  |                    | 44  |  |      |   | 44 |        |  |   |     |   |  | 
|                      
|Total                  |  | $                  | 452 |  |      | $ | 68 |        |  | $ | (384 | ) |  | 
|                      









|                                                |  |                    |     |   |      |   |     |        |  |   |     |   |  | 
|----------------------------------------------- |  | ------------------ | --- | - | ---- | - | --- | ------ |  | - | --- | - |  | 
|                                                |  | For the Year Ended |     |   |      |   |    
|                                                |  | December 31,       |     |   |      |   |    
|                                                | 
|                                                |  | 2003               |     |   | 2004 |   |     | Change |  |   |    
|                                                | 
|Interest income                                 |  | $                  | 60  |   |      | $ | 70  |        |  | $ | 10  |   |  | 
|Interest on advances to Cingular
    Wireless   |  |                    | 256 |   |      |   | 230 |        |  |   | (26 | ) |  | 
|Foreign currency transaction gains
    (losses) |  |                    | 39  |   |      |   | (1  | )      |  |   | (40 | ) |  | 
|Loss on early extinguishment of debt            |  |                    | (18 | ) |      |   | (14 | )      |  |   | 4   |   |  | 
|Other, net                                      |  |                    | 25  |   |      |   | (2  | )      |  |   | (27 | ) |  | 
|                                               
|Total other income (expense), net               |  | $                  | 362 |   |      | $ | 283 |        |  | $ | (79 | ) |  | 
|                                               







|                           |  |                    |       |   |      |   |       |        |  |   |      |       |  | 
|-------------------------- |  | ------------------ | ----- | - | ---- | - | ----- | ------ |  | - | ---- | ----- |  | 
|                           |  | For the Year Ended |       |   |      |   |      
|                           |  | December 31,       |       |   |      |   |      
|                           | 
|                           |  | 2003               |       |   | 2004 |   |       | Change |  |   |     
|                           | 
|Provision for income taxes |  | $                  | 1,936 |   |      | $ | 1,792 |        |  | $ | (144 | )     |  | 
|Effective tax rate         |  |                    | 35.7  | % |      |   | 34.6  | %      |  |   | (110 | ) bps |  | 
|                          









26




---



##### Table of Contents

and higher revenues. Partially offsetting the increases to net
income were the $190 charge related to the settlement of
arbitration in Venezuela, foreign exchange gain decreases of
$99, and a $33 loss in the second quarter of 2004 related to the
purchase of additional ownership share in Argentina.

From an operational perspective, the Latin America business
generated strong growth in both customers and revenue. Despite
the October 2004 sale of eight properties, which resulted in
only ten months of revenues in 2004 for these properties,
operating revenue in the Latin America operations for 2004
increased $165, or 7.2 percent, over 2003 due to growth in
customers and traffic throughout the portfolio. Excluding the
decrease in operating expenses for the cessation of depreciation
beginning in the second quarter of 2004, operating income was
$76 higher than the prior year.

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.

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.





Results by Segment

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




    Communications Group;
    Wireless; and
    Advertising & Publishing Group.The Companys chief decision makers evaluate 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. Such items are
listed in the table of summary results for each segment. 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 P 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.





COMMUNICATIONS GROUP

The Communications Group includes our core domestic businesses
including: all domestic wireline voice, data, broadband, long
distance, Internet services and advanced voice features. The
group provides these services to an array of customers,
including consumer, small business, large business and wholesale.

In the first quarter of 2005, BellSouth began to include various
corporate entities, the largest of which is BellSouth
Technologies Group, Inc., in the Communications Group segment
for financial reporting purposes. These entities previously
billed substantially all of their costs to the Communications
Group. This change aligns financial reporting with
managements current view of the business, is principally
timing in nature and does not affect the consolidated financial
statements. Prior period segment operating results were recast
to reflect the reporting change.

Our marketing strategy has been to further penetrate our
existing base of customers with new products such as interLATA
long distance and
BellSouth®
FastAccess®
DSL, encouraging customers to purchase packages containing
multiple communications 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 2006.




BELLSOUTH 2005      27



---



##### Table of Contents

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

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

BELLSOUTH CORPORATION

|                                                        |                                                   |                                  |                           |                                            |        |        |        |                |        |        |          |        |        |        |        |      |       |      |       |      |       |       |       |  
|------------------------------------------------------- | ------------------------------------------------- | -------------------------------- | ------------------------- | ------------------------------------------ | ------ | ------ | ------ | -------------- | ------ | ------ | -------- | ------ | ------ | ------ | ------ | ---- | ----- | ---- | ----- | ---- | ----- | ----- | ----- | -
|                                                        |                                                   |                                  |                           |                                            |        |        |        | Percent Change |       
|                                                        |                                                   |                                  |                           |                                            |        |        |        |                |       
|                                                        |                                                   |                                  |                           |                                            |        |        |        | 2004 vs.       |        |        | 2005 vs. |       
|At December 31 or for the Year Ended December 31        |                                                   | 2003                             |                           |                                            | 2004   |        |        | 2005           |        |        | 2003     |        |        | 2004   |       
|                                                        |                                                  
|Segment operating revenues:                             |                                                   |                                  |                           |                                            |        |        |        |                |        |        |          |        |        |        |        |      |       |      |       |     
|                                                        | Voice                                             |                                  | $                         | 12,701                                     |        |        | $      | 12,609         |        |        | $        | 12,576 |        |        |        | (0.7 | )     |      |       | (0.3 | )    
|                                                        | Data                                              |                                  |                           | 4,353                                      |        |        |        | 4,513          |        |        |          | 4,743  |        |        |        | 3.7  |       |      |       | 5.1  |      
|                                                        | Other                                             |                                  |                           | 1,353                                      |        |        |        | 1,291          |        |        |          | 1,193  |        |        |        | (4.6 | )     |      |       | (7.6 | )    
|                                                        |                                                   | Total segment operating revenues |                           |                                            | 18,407 |        |        |                | 18,413 |        |          |        | 18,512 |        |        |      | 0.0   |      |       |      | 0.5   |      
|Segment operating expenses:                             |                                                   |                                  |                           |                                            |        |        |        |                |        |        |          |        |        |        |        |      |       |      |       |     
|                                                        | Cost of services and products                     |                                  |                           | 6,744                                      |        |        |        | 7,089          |        |        |          | 7,471  |        |        |        | 5.1  |       |      |       | 5.4  |      
|                                                        | Selling, general, and
    administrative expenses |                                  |                           | 3,063                                      |        |        |        | 3,118          |        |        |          | 3,153  |        |        |        | 1.8  |       |      |       | 1.1  |      
|                                                        | Depreciation and amortization                     |                                  |                           | 3,787                                      |        |        |        | 3,609          |        |        |          | 3,633  |        |        |        | (4.7 | )     |      |       | 0.7  |      
|                                                        |                                                   | Total segment operating expenses |                           |                                            | 13,594 |        |        |                | 13,816 |        |          |        | 14,257 |        |        |      | 1.6   |      |       |      | 3.2   |      
|Segment operating income                                |                                                   |                                  | 4,813                     |                                            |        |        | 4,597  |                |        |        | 4,255    |        |        |        | (4.5   | )    |       |      | (7.4  | )   
|                                                       
|Segment net income                                      |                                                   | $                                | 2,829                     |                                            |        | $      | 2,727  |                |        | $      | 2,543    |        |        |        | (3.6   | )    |       |      | (6.7  | )   
|                                                       
|                                                       
|Unusual items excluded from segment
    net income:     |                                                   |                                  |                           |                                            |        |        |        |                |        |        |          |        |        |        |        |      |       |      |       |     
|                                                        | Accounting change (FAS143)                        |                                  |                           | 816                                        |        |        |        |               |        |        |          |       |        |        |        | *    |       |      |       | *    |      
|                                                        | Gains on grantor trust transactions               |                                  |                           |                                           |        |        |        | 5              |        |        |          | 44     |        |        |        | *    |       |      |       | *    |      
|                                                        | Loss on early extinguishment of debt              |                                  |                           | (11                                        | )      |        |        |               |        |        |          | (26    | )      |        |        | *    |       |      |       | *    |      
|                                                        | Deferred revenue adjustment                       |                                  |                           |                                           |        |        |        |               |        |        |          | 29     |        |        |        | *    |       |      |       | *    |      
|                                                        | Asset impairment and lease
    termination cost   |                                  |                           | (32                                        | )      |        |        | (7             | )      |        |          |       |        |        |        | *    |       |      |       | *    |      
|                                                        | South Carolina regulatory settlement              |                                  |                           |                                           |        |        |        | (33            | )      |        |          |       |        |        |        | *    |       |      |       | *    |      
|                                                        | Severance-related items                           |                                  |                           | (97                                        | )      |        |        | (25            | )      |        |          | (59    | )      |        |        | *    |       |      |       | *    |      
|                                                        | Hurricane-related expenses                        |                                  |                           |                                           |        |        |        | (100           | )      |        |          | (315   | )      |        |        | *    |       |      |       | *    |      
|                                                       
|Segment net income including
    unusual items          |                                                   | $                                | 3,505                     |                                            |        | $      | 2,567  |                |        | $      | 2,216    |        |        |        | (26.8  | )    |       |      | (13.7 | )   
|                                                       
|                                                       
|Key Indicators (000s except where
    noted)            |                                                   |                                  |                           |                                            |        |        |        |                |        |        |          |        |        |        |        |      |       |      |       |     
|                                                       
|Switched access
    lines(1):                           |                                                   |                                  |                           |                                            |        |        |        |                |        |        |          |        |        |        |        |      |       |      |       |     
|                                                        | Residence retail:                                 |                                  |                           |                                            |        |        |        |                |        |        |          |        |        |        |        |      |       |      |       |      |      
|                                                        |                                                   | Primary                          |                           |                                            | 12,463 |        |        |                | 11,770 |        |          |        | 11,319 |        |        |      | (5.6  | )    |       |      | (3.8  | )    
|                                                        |                                                   | Additional                       |                           |                                            | 1,601  |        |        |                | 1,346  |        |          |        | 1,163  |        |        |      | (15.9 | )    |       |      | (13.6 | )    
|                                                       
|                                                        |                                                   |                                  | Total retail residence    |                                            |        | 14,064 |        |                |        | 13,116 |          |        |        | 12,482 |        |      |       | (6.7 | )     |      |       | (4.8  | )    
|                                                       
|                                                        | Residential wholesale:                            |                                  |                           |                                            |        |        |        |                |        |        |          |        |        |        |        |      |       |      |       |      |      
|                                                        |                                                   | Resale                           |                           |                                            | 178    |        |        |                | 117    |        |          |        | 182    |        |        |      | (34.3 | )    |       |      | 55.6  |      
|                                                        |                                                   | Commercial agreements/UNE-P      |                           |                                            | 1,698  |        |        |                | 1,972  |        |          |        | 1,306  |        |        |      | 16.1  |      |       |      | (33.8 | )    
|                                                       
|                                                        |                                                   |                                  | Total wholesale residence |                                            |        | 1,876  |        |                |        | 2,089  |          |        |        | 1,488  |        |      |       | 11.4 |       |      |       | (28.8 | )    
|                                                       
|Total residence                                         |                                                   |                                  | 15,940                    |                                            |        |        | 15,205 |                |        |        | 13,970   |        |        |        | (4.6   | )    |       |      | (8.1  | )   
|                                                       
|                                                        | Business retail                                   |                                  |                           | 5,413                                      |        |        |        | 5,242          |        |        |          | 5,306  |        |        |        | (3.2 | )     |      |       | 1.2  |      
|                                                       
|                                                        | Business wholesale:                               |                                  |                           |                                            |        |        |        |                |        |        |          |        |        |        |        |      |       |      |       |      |      
|                                                        |                                                   | Resale                           |                           |                                            | 77     |        |        |                | 60     |        |          |        | 54     |        |        |      | (22.1 | )    |       |      | (10.0 | )    
|                                                        |                                                   | Commercial agreements/UNE-P      |                           |                                            | 686    |        |        |                | 751    |        |          |        | 614    |        |        |      | 9.5   |      |       |      | (18.2 | )    
|                                                       
|                                                        |                                                   |                                  |                           | Total wholesale business                   |        |        | 763    |                |        |        | 811      |        |        |        | 668    |      |       |      | 6.3   |      |       |       | (17.6 | )
|                                                       
|Total business                                          |                                                   |                                  | 6,176                     |                                            |        |        | 6,053  |                |        |        | 5,974    |        |        |        | (2.0   | )    |       |      | (1.3  | )   
|                                                       
|Other retail/wholesale (primarily
    payphones)        |                                                   |                                  | 147                       |                                            |        |        | 98     |                |        |        | 93       |        |        |        | (33.3  | )    |       |      | (5.1  | )   
|                                                       
|                                                        |                                                   |                                  |                           | Total switched access lines in
    service |        |        | 22,263 |                |        |        | 21,356   |        |        |        | 20,037 |      |       |      | (4.1  | )    |       |       | (6.2  | )
|DSL customers (retail and wholesale)                    |                                                   |                                  | 1,462                     |                                            |        |        | 2,096  |                |        |        | 2,882    |        |        |        | 43.4   |      |       |      | 37.5  |     
|Retail long distance customers                          |                                                   |                                  | 3,960                     |                                            |        |        | 6,015  |                |        |        | 7,179    |        |        |        | 51.9   |      |       |      | 19.4  |     
|Switched access and local minutes
    of use (millions) |                                                   |                                  | 82,101                    |                                            |        |        | 70,061 |                |        |        | 62,589   |        |        |        | (14.7  | )    |       |      | (10.7 | )   
|Retail long distance minutes of
    use(millions)       |                                                   |                                  | 10,039                    |                                            |        |        | 21,109 |                |        |        | 25,511   |        |        |        | 110.3  |      |       |      | 20.9  |     
|                                                       
|Total access minutes of use
    (millions)              |                                                   |                                  | 92,141                    |                                            |        |        | 91,170 |                |        |        | 88,100   |        |        |        | (1.1   | )    |       |      | (3.4  | )   
|                                                       
|                                                       
|Capital expenditures                                    |                                                   | $                                | 2,898                     |                                            |        | $      | 3,164  |                |        | $      | 3,429    |        |        |        | 9.0    |      |       |      | 8.6   |     
|                                                       

|    |  |                                                                                                                                                                                         
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*   |  | Not meaningful                                                                                                                                                                          
|(1) |  | Prior period operating data are often revised at later dates
    to reflect updated information. The above information reflects
    the latest data available for the periods indicated.



28




---



##### Table of Contents

2005 compared to 2004

SEGMENT OPERATING REVENUES

Revenue growth for 2005 in both the consumer and small business
units was driven by increased penetration of long distance and
DSL and customer reacquisition and retention programs. Revenue
for our large business unit declined 2.1 percent as growth
in complex long distance services was overshadowed by
competitive pricing pressure. Wholesale revenue declined
1.4 percent due to revenue declines in transport services
sold to inter-exchange carriers,
UNE-P and switched
access were nearly offset by growth in wireless transport
revenue. Also contributing was a decrease in revenue from
declines in dial-up
Internet service provider (ISP) traffic. Billing credits
associated with service outages during Hurricane Katrina reduced
revenue by approximately $76.

Voice

Voice revenues were relatively flat, declining $33 during 2005
compared to 2004 driven by diverging factors. Access
line-related revenues declined $417 when compared to the same
periods in 2004. Total switched access lines declined 1,319,000,
or 6.2 percent, year-over-year. The access line decline was
the result of continued share loss, driven primarily by volume
declines to wireless and broadband technology substitution and,
to a much lesser extent, access line losses to VoIP providers.
Wholesale lines were down 740,000 lines year-over-year.
Wholesale lines consist primarily of the grandfathered service
provided under invalidated FCC rules
(UNE-P) and services
provided under successor commercial contracts at negotiated
rates. Commercial contracts covered 74 percent of the
wholesale lines at December 31, 2005. The amortization of
deferred installation and activation revenues declined $81 in
2005 when compared to 2004. Revenues subject to deferral have
declined over the past two years as a result of higher
promotional activity.

In efforts to combat share loss, we continue to grow our package
services. BellSouth
Answers®
is our signature residential package offering, which combines
various wireline, wireless, Internet services and/or
DIRECTV®
digital satellite television services. The primary package
combines the Complete
Choice®
calling plan of local service and multiple convenience calling
features with BellSouth Long Distance,
BellSouth®
FastAccess®
DSL or dial-up
Internet, and Cingular Wireless services. We also offer
DIRECTV®
digital satellite television service through all sales channels
as part of our BellSouth
Answers®
portfolio. This agency relationship with
DIRECTV®
provides us with a key competitive product with insignificant
cost or capital requirements. We ended 2005 with more than
4.9 million residential packages, representing a
44 percent penetration of our retail primary line residence
base. As of December 31, 2005, 86 percent of Answers
customers have long distance in their package and almost
47 percent have either FastAccess DSL or
BellSouth®dial-up Internet.

Long distance voice revenue increased $435 in 2005 when compared
to 2004, driven primarily by growth in interLATA retail services
and includes $53 of wholesale long distance services provided to
Cingular Wireless driven by wireless customer growth. InterLATA
retail revenues increased $372
year-to-date reflecting
continued market share gains driven by marketing efforts and the
BellSouth®
Unlimited Long Distance Plans. Included in this increase is $31
related to growth in our long distance offerings in complex
business. At December 31, 2005, we had nearly
7.2 million retail long distance customers and a
mass-market penetration rate of almost 58 percent of our
retail customer base.

Switched access revenue was essentially flat in 2005 when
compared to 2004. Switched access and local minutes of use
declined 10.7 percent in 2005 due to access line losses and
alternative communications services, primarily wireless and
e-mail. This volume
decline was principally offset by increased usage.

Data

Data revenues increased $230 in 2005 when compared to 2004. Data
revenues were driven by growth from the sale of
BellSouth®FastAccess®
DSL service partially offset by decreases in revenue from other
data products. Combined wholesale and retail DSL revenues of
$1,238 in 2005 were up $253 when compared to the same periods in
2004 due primarily to a larger customer base partially offset by
lower average revenue per user (ARPU). As of December 31,
2005, we had nearly 2.9 million DSL customers, an increase
of 786,000 customers compared to December 31, 2004 driven
by simplified pricing and promotional activity. In July 2005,
BellSouth announced more straightforward consumer broadband
pricing which reduced the number of FastAccess
DSL®
price points from 21 to 3. During 2005, net subscriber additions
to BellSouths three highest-speed DSL products made up
69 percent of total DSL net customer additions.

Revenue from other retail data products increased $27 in 2005
when compared to 2004. Revenue from our long distance offerings
in complex business increased $65 year-to-date when compared to
the same periods in 2004. These increases were offset by
declines of $38 for 2005 in our large business segment due to
continued price pressures.

Revenues from the sale of wholesale data transport services,
including sales to long distance companies and CLECs, declined
2.6 percent in 2005 when compared to 2004. The decreases
were due to declines in data transport sold to interexchange
carriers as they continue to reduce their network costs in
response to declining volumes. Additional lower revenue related
to dial-up ISP traffic
partially offset by revenue growth in transport sold to wireless
carriers as wireless subscribers and volumes continue to expand.




BELLSOUTH 2005      29



---



##### Table of Contents

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

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

BELLSOUTH CORPORATION

Other

Other revenues decreased $98 in 2005 when compared to 2004
reflecting $80 wholesale long distance volume declines and
reduced revenues for billing and collections and late payments
of $10, customer premise equipment of $22 and payphone service
providers of $18, partially offset by wireless sales agency fee
growth of $13.

SEGMENT OPERATING EXPENSES

Cost of services and products

Cost of services and products increased $382 in 2005 when
compared to 2004. The increase includes: $146 related to labor
costs due primarily to increases in retiree medical costs and
overtime costs associated with restoration of service after
damage from severe weather and increased technician dispatches
for DSL volumes; the impact of annual wage increases and
workforce additions. Additionally, the increase includes $112 in
costs of goods sold principally driven by higher volumes in long
distance services; $109 in Universal Service Fund contributions
due to higher fund contribution rates and a larger assessment
base driven by growth in DSL and long distance revenues; and $45
in materials and supplies driven primarily by both DSL modem
cost associated with customer growth and increased fleet fuel
costs. These increases were partially offset by a $41 decline in
access fees due to lower volumes, and a $39 decline in penalties
associated with CLEC service parity requirements.

Selling, general, and administrative expenses

Selling, general, and administrative expenses increased $35 in
2005 when compared to 2004. The increase reflects an increase of
$73 in labor costs driven by incremental retiree medical benefit
costs, and annual wage increases, and a $70 increase in contract
services related to information technology platform development.
These increases were partially offset by $31 lower advertising
expense due to specific 2004 campaigns and a $47 decline in
uncollectible expense driven by lower write-offs associated with
improved economic conditions.

Depreciation and amortization

Depreciation and amortization expense increased $24 during 2005
when compared to 2004 reflecting increased capital spending
partially offset by reduced depreciation rates under the group
life method of depreciation.

2004 compared to 2003

SEGMENT OPERATING REVENUES

Growth in consumer long distance and DSL revenue was offset by
retail residential access line losses, resulting in flat
consumer revenue in 2004 compared to 2003. Revenue for our small
business unit increased 4.3 percent in 2004 compared to
2003 driven by increased penetration of long distance and DSL
and customer reacquisition and retention programs. Revenue for
our large business segment decreased 2.6 percent in 2004
compared to 2003 reflecting competitive pricing pressure and
weak demand for access lines. Wholesale revenue was stable in
2004 compared to 2003 as revenue as declines in switched access
revenue were offset by growth in wireless transport and UNE-P
revenue.

Voice

Voice revenues decreased $92 during 2004 compared to 2003 driven
primarily by continued access line loss offset by the growth in
interLATA long distance. Total switched access lines declined
907,000, or 4.1 percent, for the period with retail line losses
being slightly offset by increases in wholesale lines. The
access line decline was the result of continued share loss and
technology substitution, primarily wireless.

Wholesale lines, which consist primarily of unbundled network
element  platform (UNE-P) lines, totaled almost
3.0 million at December 31, 2004, up 273,000 lines
year over year. The vast majority of the UNE-P additions were
residential. 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 it. To
mitigate this loss, we have been actively seeking reform of the
pricing rules that regulators use to set UNE-P prices. As
previously discussed under the heading Overview, a
judicial decision that became effective in June 2004 invalidated
certain FCC rules that governed the provision of wholesale
access to our network by local service competitors. We believe
this change in the regulatory environment influenced the loss in
UNE-P lines that we experienced in the second half of 2004.

In efforts to combat share loss, we continued to grow our
package services. BellSouth
Answers®
is our signature residential package offering, which combines
various wireline, wireless, Internet services and/or
DIRECTV®
digital satellite television services. The primary package
combines the Complete Choice calling plan of local service and
multiple convenience calling features with BellSouth Long
Distance,
BellSouth®
FastAccess®
DSL or dial-up
Internet, and Cingular Wireless services. During 2004, we began
offering
DIRECTV®
digital satellite television service through all sales channels
as part of the BellSouth
Answers®
portfolio. This agency relationship with
DIRECTV®
provides us with a key competitive product with insignificant
cost or capital requirements. With the addition of video, the
BellSouth
Answers®
package is one of the most comprehensive and competitively
priced bundles in our markets today. We ended 2004 with almost
4.4 million residential packages, representing a 37 percent
penetration of our retail primary line residence base. Almost 84
percent of Answers customers have long distance in their package




30BELLSOUTH 2005



---



##### Table of Contents

and almost 45 percent have either FastAccess DSL or BellSouth
dial-up Internet
service.

Long distance voice revenue increased $578 in 2004 when compared
to 2003, driven primarily by growth in interLATA and wireless
long distance. InterLATA revenues increased $640 reflecting
continued large market share gains driven by marketing efforts
and the BellSouth Unlimited Long Distance Plans. At
December 31, 2004, we had 6.0 million retail long
distance customers and a mass-market penetration rate of
approximately 48 percent of our customer base. We also continued
to grow our long distance offerings in complex business. We
recorded $209 in complex long distance revenue in 2004 compared
to $71 in 2003. Through December 31, 2004, the complex long
distance backlog stood at $624. This backlog represents an
estimated value of the complex long distance business sold but
not yet booked as revenue. Revenue from wholesale long distance
services provided to Cingular Wireless increased $55 when
compared to 2003. This increase was caused by higher volumes
associated with the proliferation of wireless package plans that
include long distance partially offset by slightly lower rates.

Switched access revenues declined $62 in 2004 when compared to
2003 due to volume and rate decreases. Our entry into interLATA
long distance shifted switched access minutes from other
carriers to our service resulting in a transfer from wholesale
switched access revenues to retail long distance revenue.
Switched access and local minutes of use decreased 14.7 percent
compared to 2003. The decrease is due to the impact of our entry
into interLATA long distance, access line losses including the
shift to UNE-P lines and alternative communications services,
primarily wireless and
e-mail. Switched access
rates were slightly lower in 2004 due to the July 1, 2003
rate reduction of the CALLs program, an FCC access reform
initiative. The decline in rates, however, is substantially
offset by higher subscriber line charges that are also included
in voice revenues.

Data

Data revenues increased $160 in 2004 when compared to 2003. Data
revenues were driven by strong growth from the sale of
BellSouth®
FastAccess®
DSL service partially offset by decreases in revenue from other
data products. Combined wholesale and retail DSL revenues were
up $241 in 2004 when compared to 2003 due primarily to a larger
customer base. As of December 31, 2004, we had almost
2.1 million DSL customers, an increase of 634 thousand
customers compared to December 31, 2003.

Retail data services grew 11.5 percent in 2004 when compared to
2003 driven primarily by the growth from the sale of FastAccess
DSL service. During 2004, we added 653 thousand net retail
customers. We offer three broadband downstream connection speeds
to meet the varying needs of our mass-market customers. The
original version  BellSouth FastAccess DSL
Ultra  runs at downstream connection speeds of up to
1.5 megabits. Since mid-2003, we have offered a lower speed
version 
BellSouth®
FastAccess®
DSL Lite  running at downstream connection speeds of
up to 256 kilobits. FastAccess DSL Lite accounted for
approximately one-fourth of DSL customers as of
December 31, 2004. In April 2004, we began offering
BellSouth®
FastAccess®
DSL Xtreme, delivering downstream connection speeds of up to 3.0
megabits and upstream connection speeds of up to 384 kilobits.
We believe our broadband offers are among the most competitively
priced in our markets. In late September 2004, we launched
additional incentives and introduced new pricing for
FastAccess®
DSL Ultra service designed to increase long-term market
penetration. Retail FastAccess customer additions were offset
somewhat by wholesale DSL disconnects as we continue to see a
shift in customer mix to retail. Revenue from other retail data
products was flat for 2004 when compared to 2003.

Revenues from the sale of wholesale data transport services and
wholesale DSL to other communications providers, including long
distance companies and CLECs, declined 3.5 percent in 2004 when
compared to 2003, primarily due to the lingering impacts of soft
enterprise market segment demand and continued network grooming
and consolidation by large inter-exchange carriers.

Other

Other revenues decreased $62 in 2004 when compared to 2003. This
decrease reflects decreases in revenues from the payphone
business of $77 and billing and late payment fees of $29,
partially offset by increases in equipment revenues of $33 and
increases in wholesale long distance revenues of $12. Increases
in equipment revenues reflect increased demand due to improved
economic conditions and customer upgrades to newer technology.

SEGMENT OPERATING EXPENSES

Cost of services and products

Cost of services and products increased $345 in 2004 when
compared to 2003. The cost of services increase was impacted by:
increases of $207 in costs of goods sold principally driven by
increases in the provision of long distance service volumes;
increases of $104 in labor costs impacted by pay increases
driven by union contract raises and higher costs from retiree
and medical benefits slightly offset by lower average workforce;
increases of $49 in contract services related to network
planning projects and equipment installations; and increases in
materials and supplies of $39 associated with increased
utilities usage, partially offset by decreases of $96 in access
fees due to volume declines, settlements and significant
reductions in charges associated with access to other carriers
customer name databases.

Selling, general, and administrative expenses

Selling, general, and administrative expenses increased $55 in
2004 when compared to 2003. The selling, general, and
administrative expense reflected represents an increase of




BELLSOUTH 2005      31



---



##### Table of Contents

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

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

BELLSOUTH CORPORATION

$209 in labor costs driven by higher costs from retiree and
medical benefits, incentive awards, reduced use of contractors
and pay increases partially offset by lower headcount. Also
included in the labor increase was a $40 increase in an annual
adjustment to the workers compensation and long-term disability
accruals.

This increase was partially offset by a decrease in
uncollectibles expense of $90 driven by continued improvements
in the collection process and improved economic conditions, a
decrease in contract services of $26 and a decrease in outside
sales commissions of $16.

Depreciation and amortization

Depreciation and amortization expense decreased $178 in 2004
when compared to 2003. The primary driver of the decline in
depreciation expense relates to lower depreciation rates under
the group life method of depreciation. The lower depreciation
rates were precipitated primarily by the reductions in capital
expenditures over the past several years. Amortization expense
increased due to higher levels of capitalized software.





WIRELESS

We own a 40 percent economic interest in Cingular Wireless,
a joint venture with AT&T. Because we exercise influence
over the financial and operating policies of Cingular Wireless,
we use the equity method of accounting for this investment.
Under the equity method of accounting, we record our
proportionate share of Cingular Wireless earnings in our
consolidated statements of income. These earnings are included
in the caption Net earnings of equity affiliates.
For management purposes, we evaluate our Wireless segment based
on our proportionate share of Cingular Wireless results.
Accordingly, results for our Wireless segment reflect the
proportional consolidation of 40 percent of Cingular
Wireless financial results.

On October 26, 2004, Cingular Wireless completed the
acquisition of AT&T Wireless, creating the largest wireless
carrier in the United States based on number of customers and
revenue. Data revenue played an increasingly important role in
revenue composition and its growth is expected to accelerate in
2006 with the launch of a new high speed data network. Despite
industry consolidation, competition continues to be intense.
Cingular Wireless competitors are principally the other
national providers of wireless communications services as well
as regional carriers, niche carriers and resellers.

|                                                         |                                                           |                                  |        |       |       |   |        |                |       |   |          |        |        |      |       |      |      |  |       |      |      |  |  | 
|-------------------------------------------------------- | --------------------------------------------------------- | -------------------------------- | ------ | ----- | ----- | - | ------ | -------------- | ----- | - | -------- | ------ | ------ | ---- | ----- | ---- | ---- |  | ----- | ---- | ---- |  |  | 
|                                                         |                                                           |                                  |        |       |       |   |        | Percent Change |       |   |         
|                                                         |                                                           |                                  |        |       |       |   |        |                |      
|                                                         |                                                           |                                  |        |       |       |   |        | 2004 vs.       |       |   | 2005 vs. |        |        |     
|At December 31 or for the Year Ended December 31         |                                                           | 2003                             |        |       | 2004  |   |        | 2005           |       |   | 2003     |        |        | 2004 |       |      |     
|                                                         |                                                          
|Segment operating revenues:                              |                                                           |                                  |        |       |       |   |        |                |       |   |          |        |        |      |       |      |      |  |       |      |      | 
|                                                         | Service revenues                                          |                                  | $      | 5,727 |       |   | $      | 7,041          |       |   | $        | 12,255 |        |      |       | 22.9 |      |  |       | 74.1 |      |  | 
|                                                         | Equipment revenues                                        |                                  |        | 504   |       |   |        | 785            |       |   |          | 1,518  |        |      |       | 55.8 |      |  |       | 93.4 |      |  | 
|                                                         |                                                           | Total segment operating revenues |        |       | 6,231 |   |        |                | 7,826 |   |          |        | 13,773 |      |       |      | 25.6 |  |       |      | 76.0 |  |  | 
|Segment operating expenses:                              |                                                           |                                  |        |       |       |   |        |                |       |   |          |        |        |      |       |      |      |  |       |      |      | 
|                                                         | Cost of services and products                             |                                  |        | 2,311 |       |   |        | 3,032          |       |   |          | 5,638  |        |      |       | 31.2 |      |  |       | 85.9 |      |  | 
|                                                         | Selling, general, and
    administrative expenses         |                                  |        | 2,170 |       |   |        | 2,826          |       |   |          | 4,546  |        |      |       | 30.2 |      |  |       | 60.9 |      |  | 
|                                                         | Depreciation and amortization                             |                                  |        | 835   |       |   |        | 1,073          |       |   |          | 1,778  |        |      |       | 28.5 |      |  |       | 65.7 |      |  | 
|                                                         |                                                           | Total segment operating expenses |        |       | 5,316 |   |        |                | 6,931 |   |          |        | 11,962 |      |       |      | 30.4 |  |       |      | 72.6 |  |  | 
|Segment operating income                                 |                                                           |                                  | 915    |       |       |   | 895    |                |       |   | 1,811    |        |        |      | (2.2  | )    |      |  | 102.3 |      |      | 
|                                                        
|Segment net income                                       |                                                           | $                                | 261    |       |       | $ | 209    |                |       | $ | 701      |        |        |      | (19.9 | )    |      |  | 235.4 |      |      | 
|                                                        
|Unusual items excluded from segment
    net income:      |                                                           |                                  |        |       |       |   |        |                |       |   |          |        |        |      |       |      |      |  |       |      |      | 
|                                                         | Merger integration costs                                  |                                  |        |      |       |   |        | (59            | )     |   |          | (197   | )      |      |       | *    |      |  |       | *    |      |  | 
|                                                         | Fair value adjustment and lease
    accounting adjustment |                                  |        |      |       |   |        | (50            | )     |   |          |       |        |      |       | *    |      |  |       | *    |      |  | 
|                                                         | Wireless merger intangible
    amortization               |                                  |        |      |       |   |        | (80            | )     |   |          | (374   | )      |      |       | *    |      |  |       | *    |      |  | 
|                                                         | Hurricane-related expenses                                |                                  |        |      |       |   |        |               |       |   |          | (27    | )      |      |       | *    |      |  |       | *    |      |  | 
|                                                        
|Segment net income including
    unusual items           |                                                           | $                                | 261    |       |       | $ | 20     |                |       | $ | 103      |        |        |      | (92.3 | )    |      |  | *     |      |      | 
|                                                        
|Key Indicators (100% Cingular
    Wireless):             |                                                           |                                  |        |       |       |   |        |                |       |   |          |        |        |      |       |      |      |  |       |      |      | 
|                                                        
|Cellular/PCS customers (000s)                            |                                                           |                                  | 24,027 |       |       |   | 49,132 |                |       |   | 54,144   |        |        |      | 104.5 |      |      |  | 10.2  |      |      | 
|Average monthly cellular/PCS
    revenue per
    user(a) |                                                           | $                                | 51.67  |       |       | $ | 49.68  |                |       | $ | 49.65    |        |        |      | (3.9  | )    |      |  | (0.1  | )    |      | 
|Capital expenditures                                     |                                                           | $                                | 2,734  |       |       | $ | 3,449  |                |       | $ | 7,475    |        |        |      | 26.2  |      |      |  | 116.7 |      |      | 
|                                                        



|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | Management uses average revenue per user (ARPU) as an
    indicator of operating performance of the business. Average
    monthly cellular/PCS revenue per user is defined as cellular/PCS
    service revenues during the period divided by average
    cellular/PCS customers during the period. This metric is used to
    compare the recurring revenue amounts being generated on
    Cingular Wireless network to prior periods and internal
    targets. We believe that this metric provides useful information
    concerning the performance of Cingular Wireless
    initiatives to attract and retain high value customers and the
    use of its network.
|*   |  | Not meaningful                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          



32




---



##### Table of Contents

2005 compared to 2004

SEGMENT OPERATING REVENUES

Cingular Wireless had 54.1 million cellular/PCS customers
at December 31, 2005, representing a growth of
approximately 5.0 million in its cellular/PCS customer base
from a year ago. Additionally, Cingular Wireless
cellular/PCS customer net additions were 5.0 million in
2005, up from 3.3 million in 2004. Strong customer gross
additions during 2005 of 18.5 million, up 5.8 million
from 2004, were driven by the larger distribution network of the
combined Cingular Wireless and AT&T Wireless company,
attractive service offerings, including the popularity of
Cingular Wireless
FAMILYTALK®
plans and Cingular Wireless
ROLLOVER®
plan feature, and continued high levels of advertising of the
combined company. Offsetting these increases was a decrease in
Cingular Wireless reported reseller gross additions
primarily due to the change in methodology for calculating its
reseller churn implemented in the first quarter of 2005.

The monthly cellular/PCS churn rate was 2.2% in 2005, down from
2.7% in the prior year. The decline in Cingular Wireless
churn resulted primarily from a lower churn rate in its postpaid
customer base and the change in its methodology for calculating
churn related to its reseller customers. Offsetting these
declines was an increase in the churn rate among its legacy
prepaid customers. Postpaid churn for 2005 was 1.9%, down from
2.3% in the prior year. Cingular Wireless believes that the
decline in its postpaid churn resulted from the combined company
providing a more compelling value proposition than Cingular
Wireless was able to provide before the acquisition, including
more affordable rate plans, broader network coverage, higher
network quality, exclusive devices and
mobile-to-mobile
calling to over 54.1 million Cingular Wireless customers.
The change in methodology for the calculation of reseller churn
resulted in an improvement to its reported churn for 2005 of
32 basis points.

Total operating revenues increased $5,947 to $13,773 in 2005
compared to 2004. The primary driver behind the year-over-year
increase was Cingular Wireless acquisition of AT&T
Wireless in October 2004. Additionally, total operating revenues
continue to be favorably impacted by growth in service revenue
as a result of a higher average cellular/PCS customer base, the
continued growth of data revenues and higher regulatory fee
revenues. Equipment sales contributed $733 to the increase in
total operating revenue in 2005 compared to 2004.

Service revenues

Service revenues increased $5,214 in 2005 compared to 2004. The
local service component of total service revenues includes
recurring monthly access charges, airtime usage, including
prepaid service, and charges for optional features and services,
such as voice mail,
mobile-to-mobile
calling, roadside assistance, caller ID and handset insurance.
It also includes billings to Cingular Wireless customers
for the USF and other regulatory fees and pass-through
taxes. The primary driver of the increase of $4,088 in local
service revenues for 2005 was an increase of 75.8 percent
in the average number of cellular/PCS customers, including the
nearly 22 million customers acquired in the AT&T
Wireless transaction. The increase in local service revenues was
partially offset by a decline in Cingular Wireless monthly
access charges and airtime usage due to an increase in the
number of its customers on its
ROLLOVER®
plans, which allow customers to carry over unused minutes for up
to one year, and its free
mobile-to-mobile
minutes, which allow Cingular Wireless customers to call other
Cingular Wireless customers at no charge.

Data revenue growth also favorably impacted total service
revenues. The $714 increase in data revenues for 2005 compared
to 2004 was driven by increased data service penetration and
usage of SMS short messaging and other data services by Cingular
Wireless cellular/PCS customers, including those data
customers assumed with the AT&T Wireless acquisition.
Partially offsetting these increases was the loss of revenues
from its Mobitex data business, which Cingular Wireless sold
during the fourth quarter of 2004.

Roaming revenues, including both incollect and outcollect
revenues, increased $262 for 2005 when compared with the prior
year. These increases resulted as higher roaming revenues from
the acquired AT&T Wireless customer base more than offset
the elimination of the intracompany roaming between former
AT&T Wireless and Cingular Wireless markets and a reduction
in roaming rates.

Long distance revenues increased $100 from the prior year due to
the revenue associated with the acquired AT&T Wireless
customers and an increase in international long distance
revenues from the traditional Cingular Wireless customer base as
more customers continue to migrate to its GSM network, which
allows for more access to international calling than the TDMA
technology.

Cellular/PCS ARPU for 2005 was $49.65, relatively flat when
compared to ARPU of $49.68 in 2004. Continued increases in ARPU
related to higher customer usage, data and regulatory fee
revenue and higher ARPU from former AT&T Wireless customers
were offset by the impact of a larger embedded customer base of
postpaid customers on lower ARPU
FamilyTalk®
rate plans and on all-inclusive rate plans that include more
free minutes, thereby reducing overages and other
chargeable airtime. Also exerting downward pressure is a change
in the mix of the cellular/PCS customer base to include a higher
percentage of lower ARPU reseller customers, former AT&T
Wireless customers migrating to popular
ROLLOVER®
rate plans, and decreases in roaming ARPU, largely as a result
of the acquisition of AT&T Wireless.

Equipment revenues

Equipment sales increased $733 in 2005 compared to 2004. The
increase was driven primarily by incremental revenues from new
customers in former AT&T Wireless markets, higher volumes of
equipment sales in traditional Cingular Wireless markets, and
increased equipment sales from former AT&T Wireless
customers migrating to Cingular




BELLSOUTH 2005      33



---



##### Table of Contents

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

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

BELLSOUTH CORPORATION

Wireless common service offerings. Additionally, equipment
revenues increased due to the shift to more advanced handsets
following the GSM/GPRS/EDGE network overlay.

SEGMENT OPERATING EXPENSES

Cost of services and products

Cost of services and products increased $2,606 in 2005 when
compared with 2004 resulting primarily from the increase in
costs of a larger business attributable to the AT&T Wireless
acquisition, increased network usage and a higher cost of sales
for customer handsets.

The local network systems costs and
interconnect costs increase of $514 and $322, respectively, over
the prior period resulted primarily from the incremental network
activity due to the acquisition of AT&T Wireless.
Additionally, interconnect expenses increased year-over-year due
to slight increases in minutes of use per customer.

Third-party network systems costs, which
include reseller services, incollect roaming, long distance and
USF fees, increased by $839. Reseller services increased $348
primarily from the incremental amount from the acquisition and
from increased costs associated with the California/Nevada
network sold to T-Mobile in the first quarter of 2005. USF fees
increased $207 primarily due to the incremental activity from
the acquisition. Incollect roaming and long distance grew $149
and $135, respectively, from year-to-year. Both increases were
driven by higher volumes of minutes, including those minutes
associated with the acquired AT&T Wireless customers, which
more than offset rate decreases from both incollect minutes and
long distance minutes, and the elimination of intracompany
roaming between former AT&T Wireless customers and Cingular
Wireless.

Equipment sales expenses increased $878
from the prior year driven primarily by higher unit sales.
Higher unit sales resulted both from the 46.1 percent increase
in gross customer additions as well as increased upgrade
activity due to the migration of former AT&T Wireless
customers to Cingular Wireless common service offerings and the
shift to more advanced handsets following Cingular
Wireless GSM/GPRS/EDGE network overlay.

Selling, general and administrative

Selling, general and administrative expenses for 2005 increased
$1,720 compared with the prior year, driven primarily by the
AT&T Wireless acquisition. Selling expenses, which include
sales, marketing, advertising and commission expenses increased
when compared to the prior year due to selling expenses related
to increased sales personnel costs associated with the acquired
AT&T Wireless sales force, higher advertising and promotions
expenses and increased commissions expenses related to the 46.1
percent increase in gross customers year-over-year. Costs for
maintaining and supporting Cingular Wireless customer base
in 2005 increased due to higher customer service expenses, an
increase in upgrade commissions and an increase in billing and
bad debt expenses. Customer service expenses increased due to
increased headcount and employee-related expenses acquired from
AT&T Wireless to support Cingular Wireless larger
customer base, as well as customer retention and customer
service improvement initiatives. Increases in upgrade
commissions were primarily driven by an increase in handset
upgrade activity and higher commission incentives related to the
migration of Cingular Wireless AT&T Wireless customers
to Cingular Wireless common service offerings. Since the
acquisition of AT&T Wireless, Cingular Wireless has
successfully migrated approximately 7 million former
AT&T Wireless customers to Cingular Wireless service
offerings, including approximately 5 million during 2005.
Other maintenance cost increases include higher billing and bad
debt related expenses related to the growth in Cingular
Wireless customer base. Other administrative costs
increased as a result of incremental expenses associated with
the acquired AT&T Wireless administrative personnel.

Depreciation and amortization

Depreciation expense of $1,758 increased $738 compared to the
prior year primarily due to incremental depreciation associated
with the property, plant and equipment acquired in the AT&T
Wireless acquisition and depreciation related to Cingular
Wireless ongoing capital spending associated with its GSM
and UMTS network. Additionally, depreciation expense increased
over the prior year as a result of a reduction of the estimated
useful lives of certain legacy Cingular Wireless TDMA assets.
Amortization expense for 2005 decreased by $33, primarily due to
amortization associated with intangible assets that became fully
amortized during 2004.

2004 compared to 2003

SEGMENT OPERATING REVENUES

Cingular Wireless had 49.1 million cellular/PCS customers
at December 31, 2004, representing growth of
25.1 million in its cellular/PCS customer base from a year
ago. This growth was primarily due to a 21.7 million
cellular/PCS customer base increase, related to Cingular
Wireless acquisition of AT&T Wireless in October 2004.
Additionally, for 2004, Cingular Wireless cellular/PCS
customer net additions were 3.3 million, up from
2.1 million a year ago, with 1.7 million of the
current years cellular/PCS customer net additions
occurring in the fourth quarter of the year. This fourth quarter
increase represented the highest cellular/PCS customer net
additions total ever when compared with the combined historical
results of Cingular Wireless and AT&T Wireless. The strong
performance in cellular/PCS customer net additions during the
fourth quarter was driven by the re-launch of the Cingular
Wireless brand, the offering of new common rate plans and the
larger distribution network of the newly combined Cingular
Wireless/AT&T Wireless company subsequent to the
acquisition. Also favorably impacting customer net additions
throughout




34BELLSOUTH 2005



---



##### Table of Contents

2004 were the promotion and success of Cingular Wireless
new GSM service offerings and the continued promotion of its
FamilyTalk®
service offering and its
Rollover®
rate plans. Excluding the impact to the prepaid customer base
due to the AT&T Wireless acquisition, the prepaid customer
count was reduced from the prior year, in part due to the
successful promotion of the postpaid
FamilyTalk®
plan, which competes for customers at a similar price point but
with enhanced services. The increase in reseller customer net
additions compared with the prior year can be attributed to
continued growth by Cingular Wireless primary reseller.

The monthly cellular/PCS churn rate of 2.7% in 2004, which
included the results of AT&T Wireless since its acquisition,
was flat compared with the churn rate in the prior year as a
lower churn rate in Cingular Wireless postpaid customer
base was offset by higher churn rates in the prepaid and
reseller customer bases. During the fourth quarter of 2004,
Cingular Wireless experienced a significant improvement in its
postpaid customer base churn rate compared with prior periods,
as customers responded positively to the launch of the new
Cingular Wireless, its broad network coverage and its attractive
GSM service offerings. Also, during the fourth quarter of 2004,
conformity issues related to the calculation of churn for
Cingular Wireless and AT&T Wireless reduced churn subsequent
to the acquisition by 13 basis points. To date, Cingular
Wireless does not believe that wireless local number portability
has materially impacted the customer churn rate.

Total operating revenues, consisting of service revenue and
equipment sales, increased $1,595 in 2004. The primary driver
behind the year-over-year increases in almost every component of
total operating revenues was Cingular Wireless acquisition
of AT&T Wireless in late October 2004 and the inclusion of
67 days of AT&T Wireless operating results.
Additionally, total operating revenues continue to be favorably
impacted by growth in service revenue as a result of a higher
average cellular/PCS customer base and the continued growth in
data revenues. Equipment sales contributed $281 to the increase
in total operating revenues, driven by both strong customer
growth and handset upgrade activity.

Service revenues

Service revenue, comprised of local voice and data services,
roaming, long distance and other revenue, increased $1,314 in
2004 compared to 2003. The local service component of total
service revenue includes recurring monthly access charges,
airtime usage, including prepaid service, and charges for
optional features and services, such as voice mail,
mobile-to-mobile calling, roadside assistance, caller ID,
handset insurance and data services. It also includes billings
to customers for the Universal Service Fund (USF) and other
regulatory fees. The primary driver of the increase in local
service revenue for 2004 was the inclusion of the former
AT&T Wireless operating results as a result of Cingular
Wireless acquisition in late October 2004. Aside from this
impact, increases in local service revenue are a function of the
higher average customer base partially offset by the impact of a
lower Average Revenue Per User (ARPU). Strong growth in data
revenue, including the impact of the AT&T wireless
acquisition, continues to favorably impact local service revenue
driven primarily by increased data service penetration and usage
of text messaging and other data services by cellular/PCS
customers. Incollect and outcollect roaming revenues were
essentially flat, when compared with the corresponding prior
year. Roaming revenue continues to be unfavorably impacted by
the bundling of free roaming minutes with
all-inclusive regional and national rate plans and lower
negotiated rates with Cingular Wireless roaming partners.
Prior to the acquisition, AT&T Wireless was Cingular
Wireless largest national roaming partner. Effective with
the acquisition, Cingular Wireless consolidated outcollect
revenue reflects elimination of roaming revenue between the now
combined Cingular Wireless and former AT&T Wireless
properties along with a corresponding elimination of incollect
roaming costs. Although net income neutral, this elimination
will significantly reduce the new combined company outcollect
revenue when compared to the combination of prior historical
stand-alone results. The increase in long distance revenue
compared with 2003 was primarily related to the incremental
impact of the additional long distance revenue contributed as a
result of the AT&T Wireless acquisition. Higher
international long distance revenue in 2004 also contributed, to
a lesser extent, to the overall increase compared with the prior
year.

Cellular/PCS ARPU for 2004 was $49.68, a decrease of $1.99, or
3.9 percent, compared with $51.67 for 2003. Although the
contribution of a higher ARPU for the AT&T Wireless customer
base for the last 67 days of 2004 had a slightly positive
impact on overall 2004 ARPU when compared with 2003, the main
drivers of the changes in ARPU remained consistent with prior
periods. Continued increases in ARPU related to higher customer
usage and increased data revenue and regulatory fee revenue were
more than offset by the impact of a larger embedded customer
base of postpaid customers on lower ARPU
FamilyTalk®
rate plans and on all-inclusive rate plans that include more
free minutes, thereby reducing overages and other
chargeable airtime. Also exerting downward pressure on ARPU
compared with the prior year is a change in the mix of the
cellular/PCS customer base to include a higher percentage of
lower ARPU reseller customers and decreases in roaming revenue,
largely as a result of the acquisition of AT&T Wireless.

Equipment revenues

For 2004, equipment sales increased $281 in 2004 compared to
2003, primarily driven by overall higher handset sales including
the impact of a significant increase in customer gross additions
due to the acquisition of AT&T Wireless. Customer migrations
to new Cingular Wireless rate




BELLSOUTH 2005      35



---



##### Table of Contents

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

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

BELLSOUTH CORPORATION

plans as a result of the merger also favorably impacted handset
upgrade revenue.

SEGMENT OPERATING EXPENSES

Cost of services and products

The cost of services and products increase of $721 for 2004
compared to 2003 was due to increases in local network system
costs and in third party system costs (i.e., roaming and
long distance costs).

Over half of the increase in local network system costs can be
attributed to the incremental costs related to the acquired
AT&T Wireless network. Excluding this impact, the overall
drivers of increased local network costs are primarily related
to increased network system usage and associated network system
expansion costs. Increased local network system costs in 2004
versus the prior year attributable to historical pre-merger
Cingular Wireless activities included increased costs billed to
its customers related to payments into the USF and certain other
regulatory funds and higher costs related to its handset
insurance program due to increased claims.

For 2004, third-party network system costs were lower as
continued decreases in incollect roaming costs were partially
offset by higher long distance costs. Lower incollect roaming
costs were a result of lower negotiated roaming rates with
Cingular Wireless roaming partners, which more than offset
increased volumes of roaming minutes. Also, as a result of the
AT&T Wireless acquisition, Cingular Wireless
consolidated incollect expenses reflect elimination of
intra-company incollect roaming costs between the now combined
Cingular Wireless and former AT&T Wireless properties along
with a corresponding elimination of outcollect revenue. Although
net income neutral, this elimination will significantly reduce
the new combined company incollect roaming expenses when
compared to the combination of prior historical stand-alone
results. The increase in long distance costs was primarily
volume driven, impacted by the inclusion of free long
distance in many of Cingular Wireless regional and
national rate plan offerings. In addition, approximately
one-third of the increase in long distance costs versus 2003 was
related to the incremental long distance expenses incurred as a
result of the AT&T Wireless acquisition.

For 2004, the cost of equipment sales increased, primarily
driven by overall higher handset sales including the impact of a
significant increase in customer gross additions and customer
migration to Cingular Wireless rate plans due to the acquisition
of AT&T Wireless.

Selling, general, and administrative expenses

Selling, general, and administrative expenses for 2004 increased
$656 when compared with the prior year, primarily due to the
incremental expense impact resulting from the addition of the
AT&T Wireless selling, general, and administrative expenses
during the fourth quarter of 2004. Selling, general, and
administrative expenses in 2004 also included cost increases
associated with increased customer gross additions and other
customer service and support initiatives. Selling expenses,
which include sales, marketing, advertising and commission
expenses, increased for 2004 compared with the prior year
primarily due to the addition of the incremental AT&T
Wireless selling expenses during the fourth quarter of 2004.
Higher sales, advertising and promotion costs and commissions
expenses were also a function of the increased customer gross
additions in 2004. Costs for maintaining and supporting the
customer base also increased for 2004 compared with the prior
year primarily due to the addition of the AT&T Wireless
expenses in the fourth quarter. Costs for maintaining and
supporting the customer base were also impacted by higher bad
debt expense, customer service expenses to support on-going
customer retention and other service improvement initiatives and
higher commission expenses associated with handset upgrades. Bad
debt expense increased primarily due to higher customer net
write-offs as a result of prior relaxed credit policies in
selected areas, which have been subsequently changed, as well as
residual impacts related to the implementation of wireless local
number portability in late 2003. Additionally, 2003 included a
net recovery of prior MCI write-offs. Upgrade commission
expenses were impacted by over one million customer migrations
to new rate plans as a result of the merger.

Depreciation and amortization

Depreciation expense increased by $249 in 2004, compared to
2003, and included an incremental $130 related to assets
acquired from AT&T Wireless. Other increases in depreciation
expense were primarily due to on-going capital spending,
including the GSM/GPRS/EDGE network overlay, in addition to
increased depreciation on TDMA assets in 2004 as a result of a
further review of estimated service lives. Amortization expense
decreased by $12 in 2004 compared to 2003 due to certain
historical Cingular Wireless finite-lived intangible assets
becoming fully amortized during 2004.





ADVERTISING & PUBLISHING GROUP

Our Advertising & Publishing Group is comprised of
companies that publish, print, sell advertising in and perform
related services concerning alphabetical and classified
telephone directories and electronic product offerings. In
November 2004, BellSouth and AT&T (formerly SBC)
entered into a joint venture that purchased
yellowpages.com®.
In late 2005,




36BELLSOUTH 2005



---



##### Table of Contents

we launched
YELLOWPAGES.COMtm
from BellSouth. This electronic product offering enables us to
expand our national advertising base and diversify our traffic
relationships.

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).
Under the issue basis, we recognized 100 percent 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 print 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 and early 2004, our Advertising & Publishing Group
was negatively affected by weak economic conditions and
competition. An improving economy, combined with the execution
of our business strategies, resulted in moderate revenue growth
in 2005. We expect this trend to continue in 2006.

|                                                    |                                                   |                    |     |       |                |   |     |          |  |   |      |       |   |      |      |      |   |  |      |     | 
|--------------------------------------------------- | ------------------------------------------------- | ------------------ | --- | ----- | -------------- | - | --- | -------- |  | - | ---- | ----- | - | ---- | ---- | ---- | - |  | ---- | --- | 
|                                                    |                                                   | For the Year Ended |     |       | Percent Change |  
|                                                    |                                                   | December 31,       |     |       |                |  
|                                                    |                                                   |                    |     |       | 2004 vs.       |   |     | 2005 vs. | 
|                                                    |                                                   | 2003               |     |       | 2004           |   |     | 2005     |  |   | 2003 |       |   | 2004 |     
|                                                    |                                                  
|Segment operating revenues                          |                                                   |                    |     |       |                |   |     |          |  |   |      |       |   |      |      |      |   |  |      |    
|                                                    | Advertising & Publishing
    revenues             |                    | $   | 1,906 |                |   |     | 1,878    |  |   | $    | 1,908 |   |      |      | (1.5 | ) |  |      | 1.6 | 
|                                                    | Commission revenues                               |                    |     | 144   |                |   |     | 141      |  |   |      | 152   |   |      |      | (2.1 | ) |  |      | 7.8 | 
|                                                    | Total segment operating revenues                  |                    |     | 2,050 |                |   |     | 2,019    |  |   |      | 2,060 |   |      |      | (1.5 | ) |  |      | 2.0 | 
|Segment operating expenses:                         |                                                   |                    |     |       |                |   |     |          |  |   |      |       |   |      |      |      |   |  |      |    
|                                                    | Cost of services and products                     |                    |     | 345   |                |   |     | 353      |  |   |      | 374   |   |      |      | 2.3  |   |  |      | 5.9 | 
|                                                    | Selling, general, and
    administrative expenses |                    |     | 706   |                |   |     | 684      |  |   |      | 704   |   |      |      | (3.1 | ) |  |      | 2.9 | 
|                                                    | Depreciation and amortization                     |                    |     | 26    |                |   |     | 28       |  |   |      | 28    |   |      |      | 7.7  |   |  |      |    | 
|                                                    | Total segment operating expenses                  |                    |     | 1,077 |                |   |     | 1,065    |  |   |      | 1,106 |   |      |      | (1.1 | ) |  |      | 3.8 | 
|Segment operating income                            |                                                   |                    | 973 |       |                |   | 954 |          |  |   | 954  |       |   |      | (2.0 | )    |   |  |     |    
|                                                   
|Segment net income                                  |                                                   | $                  | 600 |       |                | $ | 583 |          |  | $ | 595  |       |   |      | (2.8 | )    |   |  | 2.1  |    
|                                                   
|Unusual items excluded from segment
    net income: |                                                   |                    |     |       |                |   |     |          |  |   |      |       |   |      |      |      |   |  |      |    
|                                                    | Accounting change                                 |                    |     | (501  | )              |   |     |         |  |   |      |      |   |      |      | *    |   |  |      |    | 
|                                                    | Severance-related items                           |                    |     | (3    | )              |   |     |         |  |   |      |      |   |      |      | *    |   |  |      |    | 
|                                                    | Hurricane-related expenses                        |                    |     |      |                |   |     |         |  |   |      | (7    | ) |      |      |     |   |  |      | *   | 
|                                                   
|Segment net income including
    unusual items      |                                                   | $                  | 96  |       |                | $ | 583 |          |  | $ | 588  |       |   |      | *    |      |   |  | 0.9  |    
|                                                   
|Capital expenditures                                |                                                   | $                  | 28  |       |                | $ | 29  |          |  | $ | 28   |       |   |      | 3.6  |      |   |  | (3.4 | )  
|                                                   

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

2005 compared to 2004






sm out-of








37




---



##### Table of Contents

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

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

BELLSOUTH CORPORATION

2004 compared to 2003

SEGMENT OPERATING REVENUES

Segment operating revenues decreased $31 in 2004 compared to
2003. The decreases include a reduction in print revenues,
partially offset by an increase in electronic media revenues.
Sales agency commission revenues declined $3 in 2004 compared to
2003.

The print revenue decline between periods was primarily driven
by the amortization of revenues from directories issued in the
latter half of 2003. The decline in revenues from
2003 directories was attributable to the lingering effects
of weak economic conditions in 2003 that affected the directory
advertising environment, and the continued impact of online and
offline media competition. These factors also caused revenues
from directories issued in the first half of 2004 to be flat
when compared to their 2003 issues. Revenues from directories
issued in the second half of 2004, however, achieved positive
growth as a result of expanded product offerings, increased
distribution, growth in Internet sales, and an improving
economy. The $3 decline in sales agency commission revenues was
the result of the discontinuance of a line of business,
partially offset by growth in core sales.

SEGMENT OPERATING EXPENSES

Cost of services and products increased $8 in 2004 compared to
2003 driven by the impact of increased distribution. Selling,
general, and administrative expenses decreased $22 in 2004
compared to 2003 driven primarily by a $49 decrease in
uncollectible expense, the result of improved collection
performance between periods. Variable costs associated with
selling also decreased as a result of the reduction in revenues.
Partially offsetting these decreases were increases in employee
healthcare, pension and postretirement medical costs, as well as
increased spending for advertising in response to a more
competitive environment. Depreciation and amortization expense
increased $2 during 2004 reflecting an increase in capitalized
software.





Liquidity and Financial Condition

BellSouths cash generation and financial position enable
it to reinvest in its business while distributing substantial
cash to its shareholders. BellSouths priorities for the
use of cash are to fund investment opportunities, maintain a
capital structure that balances a low weighted average cost of
capital against an appropriate level of financial flexibility,
and distribute cash to shareholders in the form of dividends and
share repurchases.

SOURCES AND USES OF CASH

Our primary source of cash flow is dividends from our
consolidated operating subsidiaries. Our subsidiaries generate
sufficient cash flow to fund their capital expenditures.
Generally, we do not permit these subsidiaries to accumulate
cash, but require them to distribute cash to us in the form of
dividends. Our subsidiaries no longer issue external debt and
they redeem existing debt as it matures. Any subsidiary
financing needs are provided by BellSouth, either through
available cash or through external financing. In addition, after
funding capital expenditures and redeeming maturing debt,
Cingular Wireless distributes 40 percent of its remaining
cash, reflecting our ownership percentage, to BellSouth.

Our sources of funds  primarily from operations and,
to the extent necessary, from readily available external
financing arrangements  are sufficient to meet all
current obligations on a timely basis. We believe that these
sources of funds will be sufficient to meet the operating needs
of our business for at least the next twelve months. Information
about the Companys cash flows, by category, is presented
in the consolidated statement of cash flows.

|                                 |                      |      |     |        |      |   |      |                |   |   |          |        |   |      |   |       |   |  |   |      |  
|-------------------------------- | -------------------- | ---- | --- | ------ | ---- | - | ---- | -------------- | - | - | -------- | ------ | - | ---- | - | ----- | - |  | - | ---- | -
|                                 |                      |      |     |        |      |   |      | Percent Change |  
|                                 |                      |      |     |        |      |   |      |                |  
|                                 |                      |      |     |        |      |   |      | 2004 vs.       |   |   | 2005 vs. |       
|Net cash provided by (used for): |                      | 2003 |     |        | 2004 |   |      | 2005           |   |   | 2003     |        |   | 2004 |  
|                                 |                     
|Continuing Operations            |                      |      |     |        |      |   |      |                |   |   |          |        |   |      |   |       |   |  |   |     
|                                 | Operating activities |      | $   | 7,883  |      |   | $    | 6,801          |   |   | $        | 6,708  |   |      |   | (13.7 | ) |  |   | (1.4 | )
|                                 | Investing activities |      | $   | (2,706 | )    |   | $    | (13,560        | ) |   | $        | (483   | ) |      |   | *     |   |  |   | *    |  
|                                 | Financing activities |      | $   | (4,679 | )    |   | $    | 5,071          |   |   | $        | (6,363 | ) |      |   | *     |   |  |   | *    |  
|Discontinued Operations          |                      | $    | 428 |        |      | $ | (579 | )              |   | $ | (115     | )      |   |      | * |       |   |  | * |     
|                                

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







38




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##### Table of Contents

hurricane damage in 2004. Partially offsetting these increased
payments were decreases over the prior year of $141 in other
postretirement benefit funding and $45 in severance payments.

Operating cash flows in the next few years will be negatively
impacted by higher federal income tax payments as the timing of
accelerated tax deprecation in recent years begins to reverse.

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.

Our capital expenditures for continuing operations for 2001
through 2005 were as follows:

|     |  |          |       |  |              |  |      |  |  | 
|---- |  | -------- | ----- |  | ------------ |  | ---- |  |  | 
|     |  | Millions |       |  | % of Revenue |  |      | 
|     | 
|2001 |  | $        | 5,495 |  |              |  | 25.9 |  |  | 
|2002 |  | $        | 3,536 |  |              |  | 17.5 |  |  | 
|2003 |  | $        | 2,926 |  |              |  | 14.4 |  |  | 
|2004 |  | $        | 3,193 |  |              |  | 15.7 |  |  | 
|2005 |  | $        | 3,457 |  |              |  | 16.8 |  |  | 
|    





WIRELESS




DISTRIBUTIONS TO SHAREHOLDERS


Dividends




Share repurchases




EXTERNAL FINANCING


Credit ratings




Financing arrangements








39




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##### Table of Contents

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

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

BELLSOUTH CORPORATION

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.

Effective April 29, 2005, we entered into a syndicated line
of credit in the amount of $3.0 billion. This line of
credit serves as a backup facility for our commercial paper
program and will expire on April 29, 2008. 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. Further, the line of credit does not contain any
provisions that are tied to the ratings assigned to us or our
affiliates by an external debt rating agency. The line of credit
limits the debt of the Company and its consolidated subsidiaries
to 300 percent of consolidated earnings before interest,
taxes, depreciation and amortization for the preceding four
quarters. During 2005, this debt to earnings ratio was
approximately 210 percent. 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 defaults on any outstanding debt in excess of $200,
an event of default will occur under the line of credit.





Off-Balance Sheet Arrangements and Aggregate Contractual
Obligations

OFF-BALANCE SHEET ARRANGEMENTS

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

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.

CONTRACTUAL OBLIGATIONS

The following table discloses aggregate information about our
contractual obligations as of December 31, 2005 and the
periods in which payments are due:

|                                          |                                    |           |        |                        |        |   |       |           |  |   |           |       |  |            |       |       |  |   |        |        |  |  | 
|----------------------------------------- | ---------------------------------- | --------- | ------ | ---------------------- | ------ | - | ----- | --------- |  | - | --------- | ----- |  | ---------- | ----- | ----- |  | - | ------ | ------ |  |  | 
|                                          |                                    |           |        | Payments Due by Period |        |   |      
|                                          |                                   
|                                          |                                    | Less than |        |                        |       
|                                          |                                    | Total     |        |                        | 1 year |   |       | 2007-2009 |  |   | 2010-2012 |       |  | After 2012 |       |       | 
|                                          |                                   
|Debt maturing within 1 year               |                                    | $         | 4,109  |                        |        | $ | 4,109 |           |  | $ |          |       |  | $          |      |       |  | $ |       |        |  | 
|Long-term
    debt(1)                     |                                    | $         | 13,392 |                        |        | $ |      |           |  | $ | 2,992     |       |  | $          | 2,822 |       |  | $ | 7,578  |        |  | 
|Interest on long-term debt                |                                    | $         | 19,666 |                        |        | $ | 882   |           |  | $ | 2,382     |       |  | $          | 1,769 |       |  | $ | 14,633 |        |  | 
|Operating leases                          |                                    | $         | 582    |                        |        | $ | 114   |           |  | $ | 215       |       |  | $          | 76    |       |  | $ | 177    |        |  | 
|Unconditional purchase
    obligations(2) |                                    | $         | 2,633  |                        |        | $ | 936   |           |  | $ | 1,482     |       |  | $          | 215   |       |  | $ |       |        |  | 
|Interest rate
    swaps(3)                |                                    | $         | 49     |                        |        | $ | 14    |           |  | $ | 34        |       |  | $          | 1     |       |  | $ |       |        |  | 
|                                         
|                                          | Total contractual cash obligations |           | $      | 40,431                 |        |   | $     | 6,055     |  |   | $         | 7,105 |  |            | $     | 4,883 |  |   | $      | 22,388 |  |  | 
|                                         



|    |  |                                                                                                                                                                                                                                                                                                                                                                    
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) |  | The long-term debt amount above excludes $(61) of unamortized
    discounts and premiums included in long-term debt on the balance
    sheet as of December 31, 2005. Payments after the year 2012
    include the final principal amount of $500 for the Zero-to-Full
    Debentures due in 2095, which have a carrying value of $248 as
    of December 31, 2005.
|(2) |  | We have contracts in place to outsource certain services,
    principally information technology. We also have various
    commitments with vendors to purchase telecommunications
    equipment, software, and services. The unconditional purchase
    obligations include annual estimated expenditures based on
    anticipated volumes.                       
|(3) |  | The amounts due for the interest rate swaps and forward
    contracts are based on market valuations at December 31,
    2005. Actual payments, if any, may differ at settlement date.                                                                                                                                                                             

Putable obligations






40




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##### Table of Contents

Those issues, their amounts and the date of the related options,
are as follows:

|                                 |  |        |       |  |                    |                   |  | 
|-------------------------------- |  | ------ | ----- |  | ------------------ | ----------------- |  | 
|Issue                            |  | Amount |       |  | Date of Put Option |                   | 
|                                 | 
|20-put-1 remarketable securities |  | $      | 1,000 |  |                    | Annually in April |  | 
|Putable debentures               |  | $      | 281   |  |                    | November 2006     |  | 
|                                

Other potential obligations




RELATED PARTY TRANSACTIONS









|         |                                                          
|-------- | ---------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosure About Market Risk

DESCRIPTION OF RISK




Interest rate risk




Risk sensitivity




Summary of 2004 market risk






|                              |                   |                        |   |       |      |   |   |      |     |   |      |     |     |      |   |       |            |   |   |       |     |   |          |       |     |   |   |        |     |   |   |        |   | 
|----------------------------- | ----------------- | ---------------------- | - | ----- | ---- | - | - | ---- | --- | - | ---- | --- | --- | ---- | - | ----- | ---------- | - | - | ----- | --- | - | -------- | ----- | --- | - | - | ------ | --- | - | - | ------ | - | 
|                              |                   | Expected Maturity Date |  
|                              |                  
|                              |                   | Fair                   |  
|                              |                   | 2006                   |   |       | 2007 |   |   | 2008 |     |   | 2009 |     |     | 2010 |   |       | Thereafter |   |   | Total |     |   | Value(1) |      
|                              |                  
|Liabilities                   |                   |                        |   |       |      |   |   |      |     |   |      |     |     |      |   |       |            |   |   |       |     |   |          |       |     |   |   |        |     |   |   |       
|Long-term debt:               |                   |                        |   |       |      |   |   |      |     |   |      |     |     |      |   |       |            |   |   |       |     |   |          |       |     |   |   |        |     |   |   |       
|                              | Fixed Rate        |                        | $ | 2,299 |      |   | $ | 19   |     |   | $    | 621 |     |      | $ | 1,872 |            |   | $ | 1,023 |     |   | $        | 9,126 |     |   | $ | 14,961 |     |   | $ | 15,513 |  
|                              |                   | Average interest rate  |   |       | 4.8  | % |   |      | 6.3 | % |      |     | 5.7 | %    |   |       | 4.5        | % |   |       | 7.7 | % |          |       | 6.2 | % |   |        | 5.9 | % |   |        |   | 
|                              | Variable Rate     |                        | $ | 410   |      |   | $ | 500  |     |   | $    |    |     |      | $ |      |            |   | $ |      |     |   | $        |      |     |   | $ | 910    |     |   | $ | 910    |  
|                              |                   | Average interest rate  |   |       | 4.4  | % |   |      | 4.9 | % |      |     |     |      |   |       |            |   |   |       |     |   |          |       |     |   |   |        | 4.6 | % |   |        |   | 
|                             
|Interest Rate
    Derivatives |                   |                        |   |       |      |   |   |      |     |   |      |     |     |      |   |       |            |   |   |       |     |   |          |       |     |   |   |        |     |   |   |       
|Interest Rate Swaps:          |                   |                        |   |       |      |   |   |      |     |   |      |     |     |      |   |       |            |   |   |       |     |   |          |       |     |   |   |        |     |   |   |       
|                              | Fixed to Variable |                        | $ |      |      |   | $ |     |     |   | $    | 600 |     |      | $ | 800   |            |   | $ | 400   |     |   | $        |      |     |   | $ | 1,800  |     |   | $ | (44    | )
|                              |                   | Average pay rate       |   |       |      |   |   |      |     |   |      |     | 6.6 | %    |   |       | 5.7        | % |   |       | 8.8 | % |          |       |     |   |   |        | 6.7 | % |   |        |   | 
|                              |                   | Average receive rate   |   |       |      |   |   |      |     |   |      |     | 5.8 | %    |   |       | 4.8        | % |   |       | 7.8 | % |          |       |     |   |   |        | 5.8 | % |   |        |   | 
|                             



|    |  |                                                                                                                                               
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------
|(1) |  | Fair value amounts do not include accrued interest; accrued
    interest is classified as an other current liability in our
    balance sheet.



41




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##### Table of Contents

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

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

BELLSOUTH CORPORATION

PROPORTIONAL DEBT

We own a 40 percent interest in Cingular Wireless, and
share joint control of the venture with AT&T and, therefore,
do not consolidate these operations. Our proportional debt,
including our share of the face value of Cingular Wireless
non-affiliate debt and capitalized leases at December 31,
2005, is shown in the table below.

|                                    |  |   |        |  |  | 
|----------------------------------- |  | - | ------ |  |  | 
|                                   
|Consolidated debt                   |  | $ | 17,188 |  |  | 
|Plus: 40% of Cingular Wireless debt |  |   | 4,967  |  |  | 
|Proportional debt                   |  | $ | 22,155 |  |  | 
|                                   




Operating Environment


DOMESTIC ECONOMIC TRENDS






nine-state


WIRELINE REGULATORY ENVIRONMENT




Regulatory reform






Federal regulatory matters










42




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##### Table of Contents

and offer separately the underlying telecommunications transport
associated with our service. In addition, the new rules
prescribed equivalent treatment between our service and cable
modems with respect to contribution to the FCCs universal
service fund. The universal service fund change will be phased
in during 2006 and is subject to further FCC review.

FCC INTERCONNECTION, UNBUNDLING AND PRICING RULES

Under the 1996 Act, the FCC is required 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 network elements, the FCC can order access
only when failure to do so will impair the ability of the
requesting carrier to provide services. The elements provided
under these requirements are known as unbundled network elements
or UNEs. The FCC also establishes pricing policy for
elements. The policy currently in effect is TELRIC (an acronym
for total element long run incremental cost), which assumes a
hypothetical lowest cost, most efficient network for purposes of
establishing prices for elements. States have set prices for
elements under this policy since 1996. The FCCs unbundling
and pricing requirements have caused us to provide service to
competitors at deeply discounted artificial prices, often below
actual costs. The FCC adopted UNE rules in 1996, 1999 and 2003.
On each occasion, the rules required significant unbundling of
our loop, switching and transmission facilities. Although we
implemented the unbundling requirements as they were adopted, we
also participated in appeals that challenged their validity and
the courts generally invalidated the unbundling requirements on
each occasion.

Because we implemented the rules before the courts found them
invalid, we still have contracts under which we continue to
provide UNEs, and some of those contracts include the unbundled
network element platforms or
UNE-P. As the rules
were invalidated, we pursued options provided by law and options
provided by our contracts to reform our UNE offers. We have
recently also offered competitors commercial and tariff services
that would replace the services required by the invalidated
rules. These offerings have commercially negotiated prices and
require longer term commitments. We currently have approximately
190 commercial agreements with CLEC customers through which
our former UNE-P
service is replaced with a mutually acceptable commercial
offering.

The most recent invalidation of the FCC rules became effective
on June 16, 2004. The FCC later issued rules that
effectively relieved us of the obligation to accept new
UNE-P orders after
March 10, 2005. The order also provided for a
12-month transition
period to phase out
UNE-P service existing
before March 10, 2005. The FCC order also generally
requires us to offer as UNEs certain high capacity loop and
transport services that competitors use to serve business
customers. The obligation to provide the services as UNEs does
not apply to wire centers that meet certain thresholds. Only a
small percentage of wire centers in our region meet the
thresholds. Finally, the order permits competitors to convert
qualifying higher-priced special access tariff services to
lower-priced UNE services under certain conditions.

Depending on the extent to which competitors can and do choose
to order UNEs or convert existing tariff services to UNEs, we
could experience a material adverse effect on operations.

We believe the action requiring unbundling of high capacity loop
and transport services is a violation of earlier court orders,
and we, along with other incumbent carriers, have challenged the
action in the DC Circuit Court of Appeals. Other parties have
challenged the order, contending that the FCC was required to
maintain UNE-P and
provide additional unbundling. We expect a decision from the DC
circuit court during the second or third quarter of 2006. If the
outcome of the appeal requires us to increase the number or
scope of UNEs we must provide to competitors, or permits
competitors greater ability to substitute UNEs for special
access services, we could face a material adverse effect on
revenues and results of operations.

The FCC has a pending proceeding to consider modifications to
its TELRIC pricing policy. We are participating in the
proceeding and encouraging the adoption of a methodology that
allows appropriate recovery of the cost of operating an actual
network. To the extent the rules resulting from the proceeding
fail to permit recovery of the costs of operating an actual
network, we will continue to experience an adverse effect on
revenues and the results of operations.

The FCC also has pending a rulemaking addressing its special
access pricing flexibility rules and its general regulation of
special access services under federal price cap regulation.
Potential revenue loss from an adverse decision could be
material.

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.

ACCESS CHARGE REFORM

Access charge reform refers to the process through which the
historical subsidy for residential local service contained in
network access charges paid by long distance carriers is funded
instead by end-users, universal service funds, or some
combination of the two. For the past five years, we have
implemented an FCC order that reduced interstate network access
charges on long distance carriers and increased interstate
subscriber line charges paid by end-




BELLSOUTH 2005      43



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##### Table of Contents

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

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

BELLSOUTH CORPORATION

users. These rate changes have better aligned 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 an ongoing comprehensive examination of
intercarrier compensation  that is, payments among
telecommunications carriers resulting from use of their
respective interconnecting networks. In general, there are three
classes of intercarrier compensation: (1) reciprocal
compensation that applies to local calls; (2) access
charges that apply to long distance calls; and
(3) compensation for transit calls wherein we convey a call
from the originating carrier to the terminating carrier. The
FCCs examination could lead to permanent changes in the
methods carriers use to compensate one another and in the way
carriers receive compensation from their end-user customers. The
FCC has multiple policy models under consideration, each of
which would significantly reform current intercarrier
compensation methods. We expect any new methodology to address
rates for reciprocal compensation. There are other aspects of
access charges and universal service fund contribution
requirements that continue to be considered by state and federal
regulators that could result in greater expense levels or
reduced revenues.

UNIVERSAL SERVICE

The FCC has established a Universal Service Fund.
Telecommunications companies are required to pay a specific
percentage of their interstate and international revenues into
the fund to support programs established by the FCC. We began
contributing to the fund in 1998. During 2005, our wireline
operations contributed $430 to the Universal Service Fund. The
FCC does not require contributing companies to recover their
contributions directly from customers. Like many other
companies, however, BellSouth has chosen to recover Universal
Service Fund costs directly from 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 receives high-cost support for
service to residents in Alabama, Kentucky and Mississippi. The
Universal Service Fund also establishes significant discounts
for services to be provided to eligible schools and libraries
for telecommunications services, internal connections and
Internet access. In addition, it provides support for rural
health care providers so that they may pay rates comparable to
those paid by urban health care providers. Industry-wide annual
costs of the entire universal service program, estimated at
approximately $7 billion, are funded from the federal
Universal Service Fund.

IP-ENABLED SERVICES REGULATION

The FCC has pending dockets in which it continues to consider
the regulatory classification of various IP-enabled services.
The FCC and various state public service commissions also are
considering the rules and regulations that should apply to
various voice over Internet protocol (VoIP) services. We are
unable to predict the outcome of these proceedings. Because
wireline telephony is transitioning toward broadband services,
the materiality of the outcome of these proceedings to us is
increasing over time.

State regulatory matters

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

In recent years, various states, either through action by their
legislatures or their commissions, have reformed regulations
under which we operate or have taken action to exempt modern
services from regulation. Broadband services have been removed
from state commission jurisdiction in Alabama, Florida,
Kentucky, Mississippi, North Carolina and South Carolina.
Alabama, South Carolina, and Tennessee have removed service
bundles from state commission jurisdiction, and commissions in
Georgia and North Carolina have removed tariffing requirements
for service bundles. Alabamas legislature has removed
state commission jurisdiction over all telecommunications
service except basic services and features, and the Kentucky and
Mississippi legislatures are considering similar legislation.
Even with the reforms enacted, we have greater regulatory
burdens on our provision of telecommunications services than do
our competitors, and the continuing imposition of these burdens
or the imposition of new burdens could have a material adverse
effect on the results of operations.

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 the 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. While some plans are not subject
to either review or renewal, other plans contain specified
termination dates 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
2005, the state commission in North Carolina prescribed changes
to its price regulation plan that were not material to our
results of operations.




44BELLSOUTH 2005



---



##### Table of Contents

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 in 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 be
required to suspend our marketing and sale of long distance
services. We made immaterial payments in all states in 2004 and
2005, and likely will make immaterial payments in 2006. The
plans underwent revisions in eight states in 2005, and revisions
are pending in the ninth state.

WIRELESS REGULATORY ENVIRONMENT

Overview

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

To obtain the authority to have the exclusive use of radio
frequency spectrum to provide Commercial Mobile Radio Service
(CMRS) in an area subject to jurisdiction, wireless
communications systems must be licensed by the FCC to operate
the wireless network and wireless 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 Wireless ability to acquire and hold
    radio spectrum licenses or to lease spectrum;
    impose technical obligations on the operation of Cingular
    Wireless network;
    impose requirements on the ways Cingular Wireless provides
    service to and communicates with its customers;
    regulate the interconnection of Cingular Wireless network
    with the networks of other carriers;
    obligate Cingular Wireless to permit resale of its services by
    resellers, if it offers resale opportunities, and to serve
    roaming customers of other wireless carriers; and
    impose a variety of fees and charges on Cingular Wireless
    business that are used to finance numerous regulatory programs
    and a substantial part of the FCCs budget.Licenses are issued for only a fixed period of time, typically
10 years for CMRS licenses. Consequently, Cingular Wireless
must periodically seek renewal of those licenses. The FCC will
award a renewal expectancy to a CMRS 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. 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 applications competing
with a license renewal application may be considered in
comparative hearings and establish the qualifications for
competing applications and the standards to be applied in
hearings.

CMRS wireless systems are subject to Federal Aviation
Administration and FCC regulations governing the location,
lighting and construction of antenna structures on which
Cingular Wireless antennas and associated equipment are
located and are also subject to regulation under federal
environmental laws and the FCCs environmental regulations,
including limits on radio frequency radiation from wireless
handsets and antennas on towers. Zoning and land use
regulations, including compliance with historic preservation
requirements, also apply to tower siting and construction
activities.

Regulatory developments

The FCC eliminated the rules limiting the amount of spectrum a
wireless carrier can own in a market effective January 1,
2003. Except through a
case-by-case analysis
of individual transactions, it has not yet replaced these
spectrum limits with published rules or guidelines setting forth
how the FCC will review carriers spectrum aggregations.
The FCC also eliminated the prohibition on ownership of both
cellular licenses by a single entity, except it will review on a
case-by-case basis applications for authority to own both
cellular licenses in a rural area. Certain acquisitions of
spectrum would remain subject to approval of the US Department
of Justice.

The FCC has imposed rules requiring carriers to provide
emergency 911 services, including enhanced 911 services that
provide to local public safety dispatch agencies the
callers communications number and approximate location.
Providers are required to transmit the geographic coordinates of
the customers location within accuracy parameters set
forth by the FCC, either by means of network-based or
handset-based technologies. Providers may not demand cost
recovery as a condition of doing so, although they are permitted
to negotiate cost recovery if it is not mandated by the state or
local governments. Because of the delayed availability of vendor
equipment that could reasonably be relied upon to comply with
the FCCs location accuracy rules, Cingular Wireless and
other wireless carriers negotiated settlement arrangements with
the FCC that established increasingly rigorous compliance
standards and deadlines.

The FCC has established federal universal service requirements
that affect CMRS operators. Under the FCCs rules, CMRS
providers are potentially eligible to receive universal service
subsidies; however, they are also required to contribute to the
federal universal service fund and may be required to contribute
to state universal service funds. Contributions into the federal
fund are based on the




BELLSOUTH 2005      45



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##### Table of Contents

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

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

BELLSOUTH CORPORATION

interstate and international revenues generated by the
properties owned by a CMRS provider. For 2005, Cingular Wireless
had payment obligations into the federal universal service fund
of approximately $710. Because the amount that Cingular Wireless
is required to pay into the fund is based on revenues generated
by its properties, we anticipate that this amount should
continue to increase over time. Cingular Wireless recovers most
of this expense from its customers. Many states also are moving
forward to develop state universal service fund programs. A
number of these state funds require contributions, varying
greatly from state to state, from CMRS providers. If these
programs expand they will impose a correspondingly growing
expense on Cingular Wireless business. As mentioned, CMRS
providers are now eligible to receive universal service
subsidies if federal and state conditions are met. Cingular
Wireless is pursuing this funding in states where the
corresponding regulatory burdens do not exceed the benefits of
the subsidies.

In November 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 have increased competition, costs and customer churn
across the industry.

The FCC has adopted rules requiring wireless providers to
provide functions to facilitate electronic surveillance by law
enforcement officials pursuant to the Communications Assistance
for Law Enforcement Act of 1995. These obligations are likely to
result in significant costs to Cingular Wireless for the
purchase, installation and maintenance of network software and
other equipment needed.

The Communications Act and the FCCs rules grant various
rights and impose various obligations on CMRS providers when
they interconnect with the facilities of local exchange
carriers. Generally, CMRS providers are entitled to
reciprocal compensation in connection with the
termination of wireline-originated local traffic, in which they
are entitled to collect the same charges for terminating
wireline-to-wireless local traffic on their system similar to
the charges that the local exchange carriers levy for
terminating wireless-to-wireline local calls. Interconnection
agreements are typically negotiated by carriers, but in the
event of a dispute, state public utility commissions, courts and
the FCC all have a role in enforcing the interconnection
provisions of the Communications Act. Although Cingular Wireless
has interconnection agreements in place with the major local
exchange carriers in virtually all of its service areas, those
agreements are subject to modification, expiration or
termination in accordance with their terms. Moreover, Cingular
Wireless is negotiating and must continue to negotiate
interconnection agreements with a number of independent
telephone companies in its service areas. Until these agreements
are concluded, Cingular Wireless must accrue for contractual
liabilities associated with the resulting unpaid invoices from
those companies. Additionally, as Cingular Wireless expands its
coverage footprint, Cingular Wireless will be required to
negotiate interconnection arrangements with other wireline
carriers.

State regulation and local approvals

With the rapid growth and penetration of wireless services has
come a commensurate surge of interest on the part of state
legislatures and state public utility commissions and local
governmental authorities in regulating the domestic wireless
industry. This interest has taken the form of efforts to
regulate customer billing, termination of service arrangements,
advertising, filing of informational tariffs,
certification of operation, use of handsets when driving,
service quality, sales practices and many other areas. We
anticipate that this trend will continue. It will require
Cingular Wireless to devote legal and other resources to working
with the states to respond to their concerns while minimizing,
if not preventing, any new regulation that could increase
Cingular Wireless costs of doing business.

While the Communications Act generally preempts state and local
governments from regulating entry of, or the rates charged by,
wireless carriers, it also permits a state to petition the FCC
to allow it to impose CMRS rate regulation when market
conditions fail adequately to protect customers and such service
is a replacement for a substantial portion of the telephone
wireline exchange service within a state. No state currently has
such a petition on file. In addition, the Communications Act
does not expressly preempt the states from regulating the
terms and conditions of wireless service.

Several states have invoked this terms and
conditions authority to impose or propose various consumer
protection regulations on the wireless industry.
Californias recently enacted, but currently suspended,
rules are potentially quite costly. State attorneys general have
become more active in enforcing state consumer protection laws
against sales practices and services of wireless carriers.
Consent decrees negotiated with or imposed by the attorneys
general have the effect of indirectly regulating the targeted
wireless carrier. States also may impose their own universal
service support requirements on wireless and other
communications carriers, similar to the contribution
requirements that have been established by the FCC.

States have become more active in imposing new taxes on wireless
carriers, such as gross receipts taxes, and fees for items such
as the use of public rights of way. These taxes and fees are
generally passed through to Cingular Wireless customers
and result in higher costs to its customers.

At the local level, wireless facilities typically are subject to
zoning and land use regulation. Neither local nor state
governments may categorically prohibit the construction of
wireless facilities in any community or take actions, such as
indefinite moratoria, which have the effect of prohibiting
construction. Nonetheless, securing state and local government
approvals for new tower sites has been and is likely to continue
to be difficult, lengthy and costly.




46BELLSOUTH 2005



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##### Table of Contents

COMPETITION

Wireline services

Our wireline voice services face significant competition from
wireless, cable and other telecommunications service providers
and VoIP providers. Competition within the wireless industry has
created lower price point service offerings that include larger
buckets of anytime local and long distance minutes, resulting in
many customers choosing wireless service for their primary or
sole voice communications option. As wireless companies expand
their offerings to include high speed data services, we expect
this migration trend to continue.

We are also facing increasing competition from cable companies
and other entities for both our mass market broadband Internet
access service and voice services. Technological developments
have made it feasible for cable television networks to carry
data and voice communications. Our cable competitors are
increasingly targeting our mass market broadband Internet access
service. New competition for our voice services is also
resulting from the development of commercial applications using
Internet Protocol technology, such as VoIP. Both cable companies
and independent providers offer VoIP services to the public.

We compete with other telecommunication service providers for
wireline customers based principally on service offerings, price
and customer service. Both local and long distance services are
subject to this competition. 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 are able to
resell our local services, enter into commercial contracts with
us, or lease separate unbundled network elements (UNEs). They
can also resell long distance services at bulk rates or they can
provide those services over their own facilities. In addition,
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.

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.

Wireless services

There is substantial and increasing competition in all aspects
of the wireless communications industry. Cingular Wireless
expects this to continue as consolidation in the industry
continues. Cingular competes for customers based principally on
its reputation, network quality, customer service, price and
service offerings.

Cingular Wireless competitors are principally the other
national providers of cellular, PCS and other wireless
communications services, which together with Cingular serve over
90 percent of the US wireless customers. Cingular Wireless
competitors also include regional carriers, niche carriers and
resellers. Some of the indirect retailers who sell Cingular
Wireless services also sell its competitors services.

Regulatory policies favor robust competition in wireless
markets. Wireless Local Number Portability (WLNP), which was
implemented by the FCC late in 2003, has also increased the
level of competition in the industry. WLNP allows subscribers to
switch carriers without having to change their telephone numbers.

Consolidation, alliances and business ventures increase
competition. Consolidation and the formation of alliances and
business ventures within the wireless communications industry
have occurred, and Cingular Wireless expects that this trend
will continue. Consolidation may create larger,
better-capitalized competitors with substantial financial,
technical, marketing, distribution and other resources to
compete with its product and service offerings. In addition,
combinations of wireless carriers 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.

Cingular Wireless ability to compete successfully will
depend, in part, on the quality of its network, customer service
and sales and distribution channels, as well as its marketing
efforts and 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 Cingular
Wireless ability to take advantage of its relationship
with BellSouth and AT&T.

Advertising & Publishing

Competition in the yellow pages industry continues to intensify.
Major markets are seeing multiple competitors in the print
yellow pages business, with many different media competing for
advertising revenue. In addition, our online yellow pages see
competition from large and small Internet search engines.
Competition for directory sales agency contracts for the sale of
advertising in publications of nonaffiliated companies also
continues to be strong. We




BELLSOUTH 2005      47



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##### Table of Contents

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

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

BELLSOUTH CORPORATION

respond to the increasing competition and the dynamic media
environment with investments in product enhancements, multiple
delivery options, local promotions, customer value plans,
increased advertising, and sales execution.

TECHNOLOGY

Wireline

The wireline portion of the telecommunications industry is
rapidly transforming from a circuit switched voice environment
to broadband services network. This transformation has fiber
optic cable, Internet Protocol (IP), Ethernet and evolving
Digital Subscriber Line (DSL) technologies at its core.

BellSouth is well positioned for this transformation due to the
high level of fiber in its network and the advanced nature of
its IP network. Approximately half the homes in the BellSouth
region are expected to be within 5,000 feet of fiber and to
be served by Gigabit Ethernet-fed IP aware DSL technology by
December 31, 2007. This can be achieved at a reasonable
economic cost due to the Companys history of fiber
investment and deployment. At these short distances, data speeds
of 12Mbps+ (single lines) and 24Mbps+ (two bonded
lines) are possible with ADSL2+ technology, which is an
evolution of DSL technology. With the completion of even more
advanced standards in 2005, referred to as VDSL2, even higher
speeds are expected to be possible at shorter distances in 2007.

The transformation, when complete, will allow a single converged
IP network to provide voice, data, and video services. As an
example of potential new services, voice over IP (VoIP) may
enable cost savings and differentiated feature capabilities.
VoIP can also provide the basis for converged wireless/wireline
services in conjunction with Cingular. This capability would
combine the best of the wireless and wireline networks in a
handset that operates as a cell phone while away from the home
and as a VoIP cordless while in the home, for both
voice and data services. In the business markets BellSouth has
been successful with IP, Ethernet and Virtual Private Network
data services. The same Regional Internet Backbone that was
built to support these services will potentially be used to
transport VoIP and video services, again demonstrating the power
of converged IP networking.

Wireless

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  the
850 MHz band and the 1900 MHz band. The services
provided over these two frequency bands are commonly referred to
as cellular and PCS, respectively. PCS infrastructure is
characterized by shorter transmission distances and the need for
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 user from digital cellular service. Handsets contain
receivers and transmitters that allow the user to seamlessly
access both 850 and 1900 MHz networks utilizing the same
technology as that of the network infrastructure.

Cingular Wireless primary network technology is Global
System for Mobile Communication (GSM) with 95% of minutes being
carried on its GSM network as of December 31, 2005.
Hardware and software enhancements, referred to as General
Packet Radio Service (GPRS), and Enhanced Data Rates for GSM
Evolution (EDGE), allow higher-speed data communications, which
delivers two to three times higher data rates than GPRS
technology, provides Cingular Wireless customers with
greater connectivity and communications capabilities, including
faster speeds for accessing the wireless Internet.

Although many advances are still underway for enhanced capacity,
performance and features in GSM/ GPRS/ EDGE deployed
technologies, Cingular Wireless is building a network offering
3G technology using the Universal Mobile Telephone System (UMTS)
standard to support significantly higher data speeds and
capacity. UMTS also supports voice, so building this 3G network
will obviate the need to separately augment voice
infrastructures as network voice usage grows. Cingular
Wireless deployed 3G UMTS systems currently allow user
average data download speeds between 220-320 Kbps, providing the
capability for a variety of services such as streaming audio,
video and simultaneous voice and data applications. Much like
Cingular Wireless EDGE technology, UMTS allows for packet
data enabling always on connectivity, which is
useful for receiving email when it arrives, versus the need to
set aside time for an email download, and allowing billing based
on the amount of data transferred, rather than the amount of
time a given device is connected.

In January 2005, Cingular Wireless field tested a higher speed
downlink component of UMTS called High Speed Downlink
Packet Access (HSDPA). HSDPA has average mobile data
throughput speed in the 400-700 Kbps range and theoretical
data speeds of 14 Mbps. Development and deployment of UMTS
with HSDPA continued throughout 2005 and, in December 2005,
Cingular Wireless commercially launched 3G networks in the
following markets: Austin, Baltimore, Boston, Chicago, Dallas,
Houston, Las Vegas, Phoenix, Portland, Salt Lake City,
San Diego, San Francisco, San Jose, Seattle,
Tacoma and Washington DC. Cingular Wireless currently expects to
deploy UMTS/ HSDPA in most major metropolitan areas by the end
of 2006.

NEW ACCOUNTING PRONOUNCEMENTS

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




48BELLSOUTH 2005



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##### Table of Contents

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.

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:

|                                         |  |                           |       |  
|---------------------------------------- |  | ------------------------- | ----- | -
|                                         |  | 2006 Depreciation Expense |      
|                                         |  | Higher/(Lower)            |      
|                                         | 
|Increasing economic life by
    one year |  |                           | $(275 | )
|Decreasing economic life by
    one year |  |                           | $340  |  
|                                        

PENSIONS AND OTHER POSTRETIREMENT BENEFIT PLANS








| |   |                                                   
| | - | --------------------------------------------------
| |  | Asset returns                                     
| |  | Medical claims activity                           
| |  | Compensation increases                            
| |  | Employee separations, retirements, mortality, etc.



Sensitivity analysis




|                          |  |              |  |                   |             |  |                |  |           | 
|------------------------- |  | ------------ |  | ----------------- | ----------- |  | -------------- |  | --------- | 
|                          |  | Percentage   |  | December 31, 2005 |             |  |               
|                          |  | Point        |  | Obligation        |             |  | 2006 Expense   | 
|Assumption                |  | Change       |  | Higher/(Lower)    |             |  | Higher/(Lower) | 
|                          | 
|Discount rate             |  | +/- 0.5 pts. |  |                   | $(450)/$450 |  |                |  | $30/$(15) | 
|Expected return on assets |  | +/- 1.0 pts. |  |                   |            |  |                |  | (150)/150 | 
|                         



|                       |  |              |  |                   |                |  |                |  |           | 
|---------------------- |  | ------------ |  | ----------------- | -------------- |  | -------------- |  | --------- | 
|                       |  | Percentage   |  | December 31, 2005 |                |  |               
|                       |  | Point        |  | Obligation        |                |  | 2006 Expense   | 
|Assumption             |  | Change       |  | Higher/(Lower)    |                |  | Higher/(Lower) | 
|                       | 
|Discount rate          |  | +/- 0.5 pts. |  |                   | $(680)/$730    |  |                |  | $(50)/$50 | 
|Health care cost trend |  | +/- 1.0 pts. |  |                   | 1,200/ (1,000) |  |                |  | 175/(150) | 
|                      





49




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##### Table of Contents

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

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

BELLSOUTH CORPORATION

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.
Specific conclusions have not been reached by these standard
setters, and 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 business prospects,
financial trends and accounting policies that may affect our
future operating results, financial position and cash flows.
From time to time, we also may provide oral or written
forward-looking statements in other materials we release to the
public. Forward-looking statements give our current expectations
or forecasts of future events. You can identify these statements
by the fact that they do not relate strictly to historic or
current facts. They use words such as will,
anticipate, estimate,
expect, project, intend,
plan, believe, target,
forecast and other words and terms of similar
meaning in connection with any discussion of future operating or
financial performance. In particular, they include statements
relating to future actions, prospective products and services,
future performance or results of current and anticipated
products and services, sales efforts, capital expenditures,
expenses, interest rates, the outcome of contingencies, such as
legal proceedings, and financial results.

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:




    the impact and the success of Cingular Wireless, our wireless
    joint venture with AT&T, including marketing and product
    development efforts, technological changes and financial
    capacity;
    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
    acquisition of AT&T Wireless as a result of technical,
    logistical, regulatory and other factors;
    changes in 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 retail and wholesale services;
    the impact on our business of consolidation in the wireline and
    wireless industries in which we operate;
    the impact on our network and our business of adverse weather
    conditions;
    the issuance by the Financial Accounting Standards Board or
    other accounting bodies of new accounting standards or changes
    to existing standards;
    changes in available technology that increase the likelihood of
    our customers choosing alternate technology to our products
    (technology substitution);
    higher than anticipated start-up costs or significant up-front
    investments associated with new business initiatives;
    the outcome of pending litigation; and
    unanticipated higher capital spending from, or delays in, the
    deployment of new technologies.For a detailed discussion of certain risks facing our Company,
see Risk Factors.




50BELLSOUTH 2005



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##### Table of Contents

CONSOLIDATED STATEMENTS OF INCOME

BELLSOUTH CORPORATION

|                                                                       |                                                                                                       |                                 |       |        |        |   |       |        |        |   |       |        |        |  |  | 
|---------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------- | ------------------------------- | ----- | ------ | ------ | - | ----- | ------ | ------ | - | ----- | ------ | ------ |  |  | 
|                                                                       |                                                                                                       | For the Year Ended December 31, |       |        |       
|                                                                       |                                                                                                       |                                 |      
|(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)                                |                                                                                                       | 2003                            |       |        | 2004   |   |       | 2005   |        |   |      
|                                                                       |                                                                                                      
|Operating Revenues:                                                    |                                                                                                       |                                 |       |        |        |   |       |        |        |   |       |        |        | 
|                                                                       | Communications Group                                                                                  |                                 | $     | 18,269 |        |   | $     | 18,256 |        |   | $     | 18,451 |        |  | 
|                                                                       | Advertising & Publishing Group                                                                        |                                 |       | 2,033  |        |   |       | 2,005  |        |   |       | 2,046  |        |  | 
|                                                                       | All other                                                                                             |                                 |       | 39     |        |   |       | 39     |        |   |       | 50     |        |  | 
|                                                                      
|                                                                       |                                                                                                       | Total operating revenues        |       |        | 20,341 |   |       |        | 20,300 |   |       |        | 20,547 |  |  | 
|                                                                      
|Operating Expenses:                                                    |                                                                                                       |                                 |       |        |        |   |       |        |        |   |       |        |        | 
|                                                                       | Cost of services and products
    (excludes depreciation
    and amortization shown separately below) |                                 |       | 6,991  |        |   |       | 7,520  |        |   |       | 8,067  |        |  | 
|                                                                       | Selling, general, and
    administrative expenses                                                     |                                 |       | 3,777  |        |   |       | 3,816  |        |   |       | 3,873  |        |  | 
|                                                                       | Depreciation and amortization                                                                         |                                 |       | 3,811  |        |   |       | 3,636  |        |   |       | 3,661  |        |  | 
|                                                                       | Provisions for restructuring and
    asset impairments                                                |                                 |       | 205    |        |   |       | 39     |        |   |       | 276    |        |  | 
|                                                                      
|                                                                       |                                                                                                       | Total operating expenses        |       |        | 14,784 |   |       |        | 15,011 |   |       |        | 15,877 |  |  | 
|                                                                      
|Operating income                                                       |                                                                                                       |                                 | 5,557 |        |        |   | 5,289 |        |        |   | 4,670 |        |        | 
|Interest expense                                                       |                                                                                                       |                                 | 947   |        |        |   | 916   |        |        |   | 1,124 |        |        | 
|Net earnings of equity affiliates                                      |                                                                                                       |                                 | 452   |        |        |   | 68    |        |        |   | 165   |        |        | 
|Gain on sale of operations                                             |                                                                                                       |                                 |      |        |        |   | 462   |        |        |   | 351   |        |        | 
|Other income                                                           |                                                                                                       |                                 | 362   |        |        |   | 283   |        |        |   | 240   |        |        | 
|                                                                      
|Income from continuing operations
    before income taxes              |                                                                                                       |                                 | 5,424 |        |        |   | 5,186 |        |        |   | 4,302 |        |        | 
|Provision for income taxes                                             |                                                                                                       |                                 | 1,936 |        |        |   | 1,792 |        |        |   | 1,389 |        |        | 
|                                                                      
|Income from continuing operations                                      |                                                                                                       |                                 | 3,488 |        |        |   | 3,394 |        |        |   | 2,913 |        |        | 
|Income from discontinued
    operations, net of tax                    |                                                                                                       |                                 | 101   |        |        |   | 1,364 |        |        |   | 381   |        |        | 
|                                                                      
|Income before cumulative effect of
    changes in accounting principle |                                                                                                       |                                 | 3,589 |        |        |   | 4,758 |        |        |   | 3,294 |        |        | 
|Cumulative effect of changes in
    accounting principle, net of tax   |                                                                                                       |                                 | 315   |        |        |   |      |        |        |   |      |        |        | 
|                                                                      
|                                                                       |                                                                                                       | Net income                      |       | $      | 3,904  |   |       | $      | 4,758  |   |       | $      | 3,294  |  |  | 
|                                                                      
|Weighted-Average Common Shares
    Outstanding:                        |                                                                                                       |                                 |       |        |        |   |       |        |        |   |       |        |        | 
|                                                                       | Basic                                                                                                 |                                 |       | 1,848  |        |   |       | 1,832  |        |   |       | 1,823  |        |  | 
|                                                                       | Diluted                                                                                               |                                 |       | 1,852  |        |   |       | 1,836  |        |   |       | 1,829  |        |  | 
|Basic Earnings Per Share:                                              |                                                                                                       |                                 |       |        |        |   |       |        |        |   |       |        |        | 
|                                                                       | Income from continuing operations                                                                     |                                 | $     | 1.89   |        |   | $     | 1.85   |        |   | $     | 1.60   |        |  | 
|                                                                       | Discontinued operations, net of tax                                                                   |                                 | $     | 0.05   |        |   | $     | 0.74   |        |   | $     | 0.21   |        |  | 
|                                                                       | Cumulative effect of accounting
    changes, net of tax                                               |                                 | $     | 0.17   |        |   | $     |       |        |   | $     |       |        |  | 
|                                                                       | Net income*                                                                                           |                                 | $     | 2.11   |        |   | $     | 2.60   |        |   | $     | 1.81   |        |  | 
|Diluted Earnings Per Share:                                            |                                                                                                       |                                 |       |        |        |   |       |        |        |   |       |        |        | 
|                                                                       | Income from continuing operations                                                                     |                                 | $     | 1.88   |        |   | $     | 1.85   |        |   | $     | 1.59   |        |  | 
|                                                                       | Discontinued operations, net of tax                                                                   |                                 | $     | 0.05   |        |   | $     | 0.74   |        |   | $     | 0.21   |        |  | 
|                                                                       | Cumulative effect of accounting
    changes, net of tax                                               |                                 | $     | 0.17   |        |   | $     |       |        |   | $     |       |        |  | 
|                                                                       | Net income*                                                                                           |                                 | $     | 2.11   |        |   | $     | 2.59   |        |   | $     | 1.80   |        |  | 
|Dividends Declared Per Common Share                                    |                                                                                                       | $                               | 0.92  |        |        | $ | 1.06  |        |        | $ | 1.14  |        |        | 



|  |  |                                                 
|- |  | ------------------------------------------------
|* |  | Net income per share may not sum due to rounding

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




51




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##### Table of Contents

CONSOLIDATED BALANCE SHEETS

BELLSOUTH CORPORATION

|                                                                                                   |  |              |        |   |      |   |        |   |  | 
|-------------------------------------------------------------------------------------------------- |  | ------------ | ------ | - | ---- | - | ------ | - |  | 
|                                                                                                   |  | December 31,
|                                                                                                   |  |              |       
|(IN MILLIONS)                                                                                      |  | 2004         |        |   | 2005 |   |        |  
|                                                                                                   | 
|ASSETS                                                                                             |  |              |        |   |      |   |        |   |  | 
|Current Assets:                                                                                    |  |              |        |   |      |   |        |   |  | 
|Cash and cash
    equivalents                                                                      |  | $            | 680    |   |      | $ | 427    |   |  | 
|Short-term
    investments                                                                         |  |              | 16     |   |      |   |       |   |  | 
|Accounts
    receivable, net of allowance for uncollectibles of $317 and $289                      |  |              | 2,559  |   |      |   | 2,555  |   |  | 
|Material and
    supplies                                                                          |  |              | 321    |   |      |   | 385    |   |  | 
|Other current
    assets                                                                           |  |              | 969    |   |      |   | 842    |   |  | 
|Assets of
    discontinued operations                                                              |  |              | 1,068  |   |      |   |       |   |  | 
|                                                                                                  
|Total
    current assets                                                                           |  |              | 5,613  |   |      |   | 4,209  |   |  | 
|                                                                                                  
|                                                                                                  
|Investments in and advances to
    Cingular Wireless                                               |  |              | 22,771 |   |      |   | 21,274 |   |  | 
|Property, plant and equipment, net                                                                 |  |              | 22,039 |   |      |   | 21,723 |   |  | 
|Other assets                                                                                       |  |              | 7,329  |   |      |   | 7,814  |   |  | 
|Intangible assets, net                                                                             |  |              | 1,587  |   |      |   | 1,533  |   |  | 
|                                                                                                  
|                                                                                                  
|Total
    assets                                                                                   |  | $            | 59,339 |   |      | $ | 56,553 |   |  | 
|                                                                                                  
|                                                                                                  
|LIABILITIES AND
    SHAREHOLDERS EQUITY                                                           |  |              |        |   |      |   |        |   |  | 
|Current Liabilities:                                                                               |  |              |        |   |      |   |        |   |  | 
|Debt maturing
    within one year                                                                  |  | $            | 5,475  |   |      | $ | 4,109  |   |  | 
|Accounts payable                                                                                   |  |              | 1,047  |   |      |   | 1,040  |   |  | 
|Other current
    liabilities                                                                      |  |              | 3,018  |   |      |   | 3,505  |   |  | 
|Liabilities of
    discontinued operations                                                         |  |              | 830    |   |      |   |       |   |  | 
|                                                                                                  
|                                                                                                  
|Total
    current liabilities                                                                      |  |              | 10,370 |   |      |   | 8,654  |   |  | 
|                                                                                                  
|                                                                                                  
|Long-term debt                                                                                     |  |              | 15,108 |   |      |   | 13,079 |   |  | 
|                                                                                                  
|                                                                                                  
|Noncurrent Liabilities:                                                                            |  |              |        |   |      |   |        |   |  | 
|Deferred income
    taxes                                                                          |  |              | 6,406  |   |      |   | 6,607  |   |  | 
|Other noncurrent
    liabilities                                                                   |  |              | 4,389  |   |      |   | 4,679  |   |  | 
|                                                                                                  
|                                                                                                  
|Total
    noncurrent liabilities                                                                   |  |              | 10,795 |   |      |   | 11,286 |   |  | 
|                                                                                                  
|                                                                                                  
|Shareholders Equity:                                                                              |  |              |        |   |      |   |        |   |  | 
|Common stock, $1
    par value (8,650 shares authorized;   1,831
    and 1,798 shares outstanding) |  |              | 2,020  |   |      |   | 2,020  |   |  | 
|Paid-in capital                                                                                    |  |              | 7,840  |   |      |   | 7,960  |   |  | 
|Retained earnings                                                                                  |  |              | 19,267 |   |      |   | 20,383 |   |  | 
|Accumulated other
    comprehensive income (loss)                                                  |  |              | (157   | ) |      |   | (14    | ) |  | 
|Shares held in
    trust and treasury                                                              |  |              | (5,904 | ) |      |   | (6,815 | ) |  | 
|                                                                                                  
|                                                                                                  
|Total
    shareholders equity                                                                     |  |              | 23,066 |   |      |   | 23,534 |   |  | 
|                                                                                                  
|                                                                                                  
|Total
    liabilities and shareholders equity                                                     |  | $            | 59,339 |   |      | $ | 56,553 |   |  | 
|                                                                                                  

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




52




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##### Table of Contents

CONSOLIDATED STATEMENTS OF CASH FLOWS

BELLSOUTH CORPORATION

|                                                                                                         |                                                                                    |                                 |        |        |      |   |         |         |   |   |        |        |   |  |  | 
|-------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------- | ------------------------------- | ------ | ------ | ---- | - | ------- | ------- | - | - | ------ | ------ | - |  |  | 
|                                                                                                         |                                                                                    | For the Year Ended December 31, |        |        |     
|                                                                                                         |                                                                                    |                                 |       
|(IN MILLIONS)                                                                                            |                                                                                    | 2003                            |        |        | 2004 |   |         | 2005    |   |   |       
|                                                                                                         |                                                                                   
|                                                                                                        
|Cash Flows from Operating
    Activities:                                                                |                                                                                    |                                 |        |        |      |   |         |         |   |   |        |        |   | 
|Net income                                                                                               |                                                                                    | $                               | 3,904  |        |      | $ | 4,758   |         |   | $ | 3,294  |        |   | 
|                                                                                                         | Less income from discontinued
    operations, net of tax                           |                                 |        | (101   | )    |   |         | (1,364  | ) |   |        | (381   | ) |  | 
|                                                                                                         | Less cumulative effect of changes
    in accounting                                |                                 |        |        |      |   |         |         |   |   |        |        |   |  | 
|                                                                                                         |                                                                                    | principle, net of tax           |        |        | (315 | ) |         |         |  |   |        |        |  |  |  | 
|                                                                                                        
|Income from continuing operations                                                                        |                                                                                    | $                               | 3,488  |        |      | $ | 3,394   |         |   | $ | 2,913  |        |   | 
|Adjustments to reconcile income to
    cash provided by operating activities from continuing operations: |                                                                                    |                                 |        |        |      |   |         |         |   |   |        |        |   | 
|                                                                                                         | Depreciation and amortization                                                      |                                 |        | 3,811  |      |   |         | 3,636   |   |   |        | 3,661  |   |  | 
|                                                                                                         | Provision for uncollectibles                                                       |                                 |        | 523    |      |   |         | 384     |   |   |        | 348    |   |  | 
|                                                                                                         | Net earnings of equity
    affiliates                                              |                                 |        | (452   | )    |   |         | (68     | ) |   |        | (165   | ) |  | 
|                                                                                                         | Deferred income taxes and
    investment tax credits                               |                                 |        | 788    |      |   |         | 1,081   |   |   |        | 306    |   |  | 
|                                                                                                         | Pension income                                                                     |                                 |        | (534   | )    |   |         | (484    | ) |   |        | (532   | ) |  | 
|                                                                                                         | Stock-settled compensation expense                                                 |                                 |        | 124    |      |   |         | 116     |   |   |        | 94     |   |  | 
|                                                                                                         | Gain on sale of operations                                                         |                                 |        |       |      |   |         | (462    | ) |   |        | (351   | ) |  | 
|                                                                                                         | Asset impairments                                                                  |                                 |        | 52     |      |   |         |        |   |   |        | 166    |   |  | 
|Net change in:                                                                                           |                                                                                    |                                 |        |        |      |   |         |         |   |   |        |        |   | 
|                                                                                                         | Accounts receivable and other
    current assets                                   |                                 |        | (55    | )    |   |         | (419    | ) |   |        | (353   | ) |  | 
|                                                                                                         | Accounts payable and other current
    liabilities                                 |                                 |        | 110    |      |   |         | (644    | ) |   |        | 228    |   |  | 
|                                                                                                         | Deferred charges and other assets                                                  |                                 |        | 299    |      |   |         | (43     | ) |   |        | (128   | ) |  | 
|                                                                                                         | Other liabilities and deferred
    credits                                         |                                 |        | (276   | )    |   |         | 184     |   |   |        | 440    |   |  | 
|Other reconciling items, net                                                                             |                                                                                    |                                 | 5      |        |      |   | 126     |         |   |   | 81     |        |   | 
|                                                                                                        
|                                                                                                         | Net cash provided by operating
    activities from continuing operations           |                                 |        | 7,883  |      |   |         | 6,801   |   |   |        | 6,708  |   |  | 
|                                                                                                        
|Cash Flows from Investing
    Activities:                                                                |                                                                                    |                                 |        |        |      |   |         |         |   |   |        |        |   | 
|Capital expenditures                                                                                     |                                                                                    |                                 | (2,926 | )      |      |   | (3,193  | )       |   |   | (3,457 | )      |   | 
|Investment in short-term instruments                                                                     |                                                                                    |                                 | (3,439 | )      |      |   | (3,770  | )       |   |   | (822   | )      |   | 
|Proceeds from sale of short-term
    instruments                                                         |                                                                                    |                                 | 2,291  |        |      |   | 5,363   |         |   |   | 838    |        |   | 
|Proceeds from sale of operations                                                                         |                                                                                    |                                 |       |        |      |   | 3,392   |         |   |   | 1,555  |        |   | 
|Investments in debt and equity
    securities                                                            |                                                                                    |                                 | (194   | )      |      |   | (632    | )       |   |   | (285   | )      |   | 
|Proceeds from sale of debt and
    equity securities                                                     |                                                                                    |                                 | 27     |        |      |   | 286     |         |   |   | 87     |        |   | 
|Net repayments from (advances to)
    Cingular Wireless                                                  |                                                                                    |                                 |       |        |      |   | (646    | )       |   |   | 1,627  |        |   | 
|Proceeds from repayment of loans
    and advances                                                        |                                                                                    |                                 | 1,899  |        |      |   | 109     |         |   |   | 2      |        |   | 
|Settlement of derivatives on
    advances                                                                |                                                                                    |                                 | (352   | )      |      |   | (17     | )       |   |   |       |        |   | 
|Investments in equity affiliates                                                                         |                                                                                    |                                 |       |        |      |   | (14,445 | )       |   |   | (4     | )      |   | 
|Other investing activities, net                                                                          |                                                                                    |                                 | (12    | )      |      |   | (7      | )       |   |   | (24    | )      |   | 
|                                                                                                        
|                                                                                                         | Net cash used for investing
    activities from continuing operations              |                                 |        | (2,706 | )    |   |         | (13,560 | ) |   |        | (483   | ) |  | 
|                                                                                                        
|Cash Flows from Financing
    Activities:                                                                |                                                                                    |                                 |        |        |      |   |         |         |   |   |        |        |   | 
|Net borrowings (repayments) of
    short-term debt                                                       |                                                                                    |                                 | (431   | )      |      |   | 1,738   |         |   |   | (1,863 | )      |   | 
|Proceeds from the issuance of
    long-term debt                                                         |                                                                                    |                                 |       |        |      |   | 6,078   |         |   |   |       |        |   | 
|Repayments of long-term debt                                                                             |                                                                                    |                                 | (1,849 | )      |      |   | (759    | )       |   |   | (1,513 | )      |   | 
|Dividends paid                                                                                           |                                                                                    |                                 | (1,608 | )      |      |   | (1,901  | )       |   |   | (2,051 | )      |   | 
|Purchase of treasury shares                                                                              |                                                                                    |                                 | (858   | )      |      |   | (151    | )       |   |   | (1,096 | )      |   | 
|Other financing activities, net                                                                          |                                                                                    |                                 | 67     |        |      |   | 66      |         |   |   | 160    |        |   | 
|                                                                                                        
|                                                                                                         | Net cash (used in) provided by
    financing activities from continuing operations |                                 |        | (4,679 | )    |   |         | 5,071   |   |   |        | (6,363 | ) |  | 
|                                                                                                        
|Net (decrease) increase in
    cash and cash equivalents from continuing operations                      |                                                                                    |                                 | 498    |        |      |   | (1,688  | )       |   |   | (138   | )      |   | 
|                                                                                                        
|Cash flows from discontinued
    operations (Revised - See Note D)                                       |                                                                                    |                                 |        |        |      |   |         |         |   |   |        |        |   | 
|                                                                                                         | Net cash provided by operating
    activities                                      |                                 |        | 646    |      |   |         | 561     |   |   |        | 10     |   |  | 
|                                                                                                         | Net cash used for investing
    activities                                         |                                 |        | (140   | )    |   |         | (997    | ) |   |        | (125   | ) |  | 
|                                                                                                         | Net cash used in financing
    activities                                          |                                 |        | (78    | )    |   |         | (143    | ) |   |        |       |   |  | 
|                                                                                                        
|Net (decrease) increase in cash and
    cash equivalents from discontinued operations                    |                                                                                    |                                 | 428    |        |      |   | (579    | )       |   |   | (115   | )      |   | 
|                                                                                                        
|Net (decrease) increase in cash and
    cash equivalents                                                 |                                                                                    |                                 | 926    |        |      |   | (2,267  | )       |   |   | (253   | )      |   | 
|Cash and cash equivalents at
    beginning of period                                                     |                                                                                    |                                 | 2,021  |        |      |   | 2,947   |         |   |   | 680    |        |   | 
|                                                                                                        
|Cash and cash equivalents at end of
    period                                                           |                                                                                    | $                               | 2,947  |        |      | $ | 680     |         |   | $ | 427    |        |   | 
|                                                                                                        

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




53




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##### 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,
    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                    |  |                  |       |         |             |        |      |        |         |   |         |         |  |          |       |   |        |   |        |             |  |   | 155     |   |  |       |        |   |  |   |     |   |  |   | 155    |   |  | 
|                                                              |  |                  |       |         |             |        |      |        |         |   |         |         |  |          |       |   |        |   |        |             |  |   |         |   |  |       |        |   |  |   |     |   |  |  
|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 |   |  | 
|                                                             
|Net Income                                                    |  |                  |       |         |             |        |      |        |         |   |         |         |  |          |       |   |        |   | 4,758  |             |  |   |         |   |  |       |        |   |  |   |     |   |  |   | 4,758  |   |  | 
|Other comprehensive income, net of
    tax                    |  |                  |       |         |             |        |      |        |         |   |         |         |  |          |       |   |        |   |        |             |  |   | 428     |   |  |       |        |   |  |   |     |   |  |   | 428    |   |  | 
|                                                              |  |                  |       |         |             |        |      |        |         |   |         |         |  |          |       |   |        |   |        |             |  |   |         |   |  |       |        |   |  |   |     |   |  |  
|Total comprehensive income                                    |  |                  |       |         |             |        |      |        |         |   |         |         |  |          |       |   |        |   |        |             |  |   |         |   |  |       |        |   |  |   |     |   |  |   | 5,186  |   |  | 
|Dividends declared                                            |  |                  |       |         |             |        |      |        |         |   |         |         |  |          |       |   |        |   | (1,934 | )           |  |   |         |   |  |       |        |   |  |   |     |   |  |   | (1,934 | ) |  | 
|Share issuances for employee
    benefit plans                |  |                  |       |         |             |        | 7    |        |         |   |         |         |  |          | (59   | ) |        |   | (94    | )           |  |   |         |   |  |       | 241    |   |  |   |     |   |  |   | 88     |   |  | 
|Purchase of treasury stock                                    |  |                  |       |         |             |        | (6   | )      |         |   |         |         |  |          |       |   |        |   |        |             |  |   |         |   |  |       | (151   | ) |  |   |     |   |  |   | (151   | ) |  | 
|Purchases and sales of treasury
    stock with grantor trusts |  |                  |       |         |             |        |      |        |         |   |         |         |  |          | 2     |   |        |   |        |             |  |   |         |   |  |       | (2     | ) |  |   |     |   |  |   |       |   |  | 
|Stock-based compensation                                      |  |                  |       |         |             |        |      |        |         |   |         |         |  |          | 121   |   |        |   |        |             |  |   |         |   |  |       |        |   |  |   |     |   |  |   | 121    |   |  | 
|Tax benefit related to stock options                          |  |                  |       |         |             |        |      |        |         |   |         |         |  |          | 39    |   |        |   |        |             |  |   |         |   |  |       |        |   |  |   |     |   |  |   | 39     |   |  | 
|Other                                                         |  |                  |       |         |             |        |      |        |         |   |         |         |  |          | 8     |   |        |   | (3     | )           |  |   |         |   |  |       |        |   |  |   |     |   |  |   | 5      |   |  | 
|                                                             
|Balance at December 31,
    2004                              |  |                  | 2,020 |         |             |        | (189 | )      |         | $ | 2,020   |         |  | $        | 7,840 |   |        | $ | 19,267 |             |  | $ | (157    | ) |  | $     | (5,904 | ) |  | $ |    |   |  | $ | 23,066 |   |  | 
|                                                             
|Net Income                                                    |  |                  |       |         |             |        |      |        |         |   |         |         |  |          |       |   |        |   | 3,294  |             |  |   |         |   |  |       |        |   |  |   |     |   |  |   | 3,294  |   |  | 
|Other comprehensive income, net of
    tax                    |  |                  |       |         |             |        |      |        |         |   |         |         |  |          |       |   |        |   |        |             |  |   | 143     |   |  |       |        |   |  |   |     |   |  |   | 143    |   |  | 
|                                                              |  |                  |       |         |             |        |      |        |         |   |         |         |  |          |       |   |        |   |        |             |  |   |         |   |  |       |        |   |  |   |     |   |  |  
|Total comprehensive income                                    |  |                  |       |         |             |        |      |        |         |   |         |         |  |          |       |   |        |   |        |             |  |   |         |   |  |       |        |   |  |   |     |   |  |   | 3,437  |   |  | 
|Dividends declared                                            |  |                  |       |         |             |        |      |        |         |   |         |         |  |          |       |   |        |   | (2,087 | )           |  |   |         |   |  |       |        |   |  |   |     |   |  |   | (2,087 | ) |  | 
|Share issuances for employee
    benefit plans                |  |                  |       |         |             |        | 8    |        |         |   |         |         |  |          | (58   | ) |        |   | (91    | )           |  |   |         |   |  |       | 265    |   |  |   |     |   |  |   | 116    |   |  | 
|Purchase of treasury stock                                    |  |                  |       |         |             |        | (41  | )      |         |   |         |         |  |          |       |   |        |   |        |             |  |   |         |   |  |       | (1,096 | ) |  |   |     |   |  |   | (1,096 | ) |  | 
|Purchases and sales of treasury
    stock with grantor trusts |  |                  |       |         |             |        |      |        |         |   |         |         |  |          | 80    |   |        |   |        |             |  |   |         |   |  |       | (80    | ) |  |   |     |   |  |   |       |   |  | 
|Stock-based compensation                                      |  |                  |       |         |             |        |      |        |         |   |         |         |  |          | 94    |   |        |   |        |             |  |   |         |   |  |       |        |   |  |   |     |   |  |   | 94     |   |  | 
|Tax benefit related to stock options                          |  |                  |       |         |             |        |      |        |         |   |         |         |  |          | 4     |   |        |   |        |             |  |   |         |   |  |       |        |   |  |   |     |   |  |   | 4      |   |  | 
|                                                             
|Balance at December 31,
    2005                              |  |                  | 2,020 |         |             |        | (222 | )      |         | $ | 2,020   |         |  | $        | 7,960 |   |        | $ | 20,383 |             |  | $ | (14     | ) |  | $     | (6,815 | ) |  | $ |    |   |  | $ | 23,534 |   |  | 
|                                                             



|    |  |                                                                                                                                                                                                                        
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | Trust and treasury shares are not considered to be
    outstanding for financial reporting purposes. As of
    December 31, 2005, there were approximately 17 shares
    held in trust and 205 shares held in treasury.

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




54




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##### 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, the Company or
BellSouth.

ORGANIZATION

We are a communications company headquartered in Atlanta,
Georgia. For management purposes, our operations are organized
into three reportable segments: Communications Group; Wireless;
and Advertising & 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. All
significant intercompany transactions and accounts have been
eliminated. We own a 40 percent economic interest in Cingular
Wireless and we share control with AT&T. 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.

In accordance with Statement of Financial Accounting Standards
(SFAS) No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets (SFAS No. 144), we have
classified the results of our Latin American segment as
discontinued operations. The presentation of discontinued
operations includes revenues and expenses of the Latin American
operations as one line item on the income statement for all
periods presented. All Latin America related balance sheet items
at December 31, 2004 are presented in the assets and
liabilities of Discontinued Operations line items.

USE OF ESTIMATES

Our consolidated financial statements have been prepared in
accordance with Generally Accepted Accounting Principles (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 in continuing operations was $76 for 2003, $60 for
2004, and $23 for 2005.

Included in the December 31, 2004 cash balance of $680 are
cash balances of $148 held by our discontinued operations in
Latin America.

SHORT-TERM INVESTMENTS

Short-term investments represent auction rate securities which
are highly liquid, variable-rate debt securities. While the
underlying security has a long-term nominal maturity, the
interest rate is reset through dutch auctions that are typically
held every 7, 28 or 35 days, creating a short-term
instrument. The securities trade at par and are callable at par
on any interest payment date at the option of the issuer.
Interest is paid at the end of each auction period.

MATERIAL AND SUPPLIES

New and reusable material held at our telephone subsidiary is
carried in inventory, principally at average 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 in
continuing operations was $3,257 for 2003, $3,039 for 2004, and
$3,058 for 2005.

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




BELLSOUTH 2005      55



---



##### Table of Contents

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTSCONTINUED

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

BELLSOUTH CORPORATION

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 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 account for equity security investments in which we exercise
significant influence 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).

COST METHOD INVESTMENTS

We have investments in marketable securities, primarily common
stocks, which are accounted for under the cost method.
Securities classified as available-for-sale under SFAS
No. 115, Accounting for Certain Investments in Debt
and Equity Securities, 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. Gains or losses are calculated based on the original
cost of the specific investment. We periodically review cost
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. Equity securities that are restricted for more than
one year or not publicly traded are recorded at cost.

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. Cash flows resulting from
derivative financial instruments are classified in the same
category as the cash flows from the items being hedged.

REVENUE RECOGNITION

Revenues are recognized when earned. Certain revenues derived
from local telephone 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 & 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 in continuing operations was $523
for 2003, $384 for 2004, and $348 for 2005.

DEFERRED ACTIVATION AND INSTALLATION EXPENSES

We defer certain expenses associated with installation and
activation activities. Expense is only deferred to the extent
associated revenues are deferred. Service costs in excess




56BELLSOUTH 2005



---



##### Table of Contents

of revenues are recognized in the period incurred. The deferred
costs are recognized over approximately 4 years.

ADVERTISING

We expense advertising costs as they are incurred. These
expenses include production, media and other promotional and
sponsorship costs. Our total advertising expense in continuing
operations was $300 for 2003, $328 for 2004, and $298 for 2005.

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 and the basis
differential related to our equity investment in Cingular
Wireless. Interest payable on settlement of prior years
tax returns is included as a component of interest expense in
the consolidated income statement.

EARNINGS PER SHARE

Basic earnings per share are computed based on the
weighted-average number of common shares outstanding during each
year. Nonvested restricted stock carries dividend and voting
rights and, in accordance with GAAP, is not included in the
weighted average number of common shares outstanding used to
compute basic earnings per share. Diluted earnings per share are
based on the weighted-average number of common shares
outstanding plus net incremental shares arising out of employee
stock compensation and benefit plans. The earnings amounts used
for per-share calculations are the same for both the basic and
diluted methods. The following is a reconciliation of the
weighted-average share amounts (in millions) used in calculating
earnings per share:

|                                                                       |  |      |       |  |      |  |       |      |  |  |       |  |  | 
|---------------------------------------------------------------------- |  | ---- | ----- |  | ---- |  | ----- | ---- |  |  | ----- |  |  | 
|                                                                       |  | 2003 |       |  | 2004 |  |       | 2005 |  |  |      
|                                                                       | 
|Basic common shares outstanding                                        |  |      | 1,848 |  |      |  | 1,832 |      |  |  | 1,823 |  |  | 
|Incremental shares from stock-based
    compensation and benefit plans |  |      | 4     |  |      |  | 4     |      |  |  | 6     |  |  | 
|                                                                      
|Diluted common shares outstanding                                      |  |      | 1,852 |  |      |  | 1,836 |      |  |  | 1,829 |  |  | 
|                                                                      
|Stock options excluded from the
    computation                        |  |      | 92    |  |      |  | 79    |      |  |  | 77    |  |  | 
|                                                                      



INTANGIBLE ASSETS


98-1, Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use






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

SHARE-BASED PAYMENTS




CONDITIONAL ASSET RETIREMENT OBLIGATIONS






57




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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTSCONTINUED

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

BELLSOUTH CORPORATION

method of settlement. Uncertainty about the timing and (or)
method of settlement of a conditional asset retirement
obligation should be factored into the measurement of the
liability when sufficient information exists. FIN 47 also
clarifies when an entity would have sufficient information to
reasonably estimate the fair value of an asset retirement
obligation. We adopted the provisions of this interpretation
effective December 31, 2005. There was no material impact
on our results of operations, financial position or cash flows.



Note C 
    Changes in Accounting PrincipleASSET RETIREMENT OBLIGATIONS

SFAS No. 143 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 2003 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.

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 percent of the revenues and direct expenses at
the time the directories were published and delivered to
end-users. Under the deferral method, 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 2003 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.



Note D 
    Discontinued OperationsIn March 2004, we signed an agreement with Telefónica
Móviles, S.A., the wireless affiliate of Telefónica,
S.A., to sell all of our interests in Latin America.

During October 2004, we closed on the sale of 8 of the 10
properties: Venezuela, Colombia, Ecuador, Peru, Guatemala,
Nicaragua, Uruguay and Panama. During January 2005, we closed on
the sale of the operations in the remaining two Latin American
countries: Argentina and Chile.

SUMMARY OF SALE TRANSACTIONS

|                                |       |          |   |        |      |  |   |       | 
|------------------------------- | ----- | -------- | - | ------ | ---- |  | - | ----- | 
|                                |       |          |   | After- |     
|                                |       | Gross    |   |        | Tax  | 
|                                |       | Proceeds |   |        | Gain | 
|                                |      
|For the Year Ended December 31: |       |          |   |        |      |  |   |      
|                                | 2004  |          | $ | 4,037  |      |  | $ | 850   | 
|                                | 2005  |          | $ | 1,077  |      |  | $ | 390   | 
|                               
|                                | Total |          | $ | 5,114  |      |  | $ | 1,240 | 
|                               



SUMMARY FINANCIAL INFORMATION




|                                            |  |                    |       |  |      |   |       |      |  |   |     |  
|------------------------------------------- |  | ------------------ | ----- |  | ---- | - | ----- | ---- |  | - | --- | -
|                                            |  | For the Year Ended |      
|                                            |  | December 31,       |      
|                                            |  |                    |      
|                                            |  | 2003               |       |  | 2004 |   |       | 2005 | 
|                                            | 
|Operating revenue                           |  | $                  | 2,294 |  |      | $ | 2,429 |      |  | $ | 66  |  
|Operating income (loss)                     |  | $                  | 349   |  |      | $ | 647   |      |  | $ | (5  | )
|Gain on sale of operations                  |  | $                  |      |  |      | $ | 1,312 |      |  | $ | 629 |  
|Income before income taxes                  |  | $                  | 176   |  |      | $ | 1,525 |      |  | $ | 616 |  
|Provision for income taxes                  |  | $                  | 75    |  |      | $ | 161   |      |  | $ | 235 |  
|Net income from discontinued
    operations |  | $                  | 101   |  |      | $ | 1,364 |      |  | $ | 381 |  
|                                           



58




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##### Table of Contents

CASH FLOW INFORMATION

In 2005, the Company has separately disclosed the operating,
investing, and financing portions of the cash flows attributable
to its discontinued operations, which were, in prior periods,
reported on a combined basis as a single amount.



Note E 
    Investments in and Advances to Cingular Wireless

|           |  |              |        |  |      |   |        |  |  | 
|---------- |  | ------------ | ------ |  | ---- | - | ------ |  |  | 
|           |  | As of       
|           |  | December 31,
|           |  |             
|           |  | 2004         |        |  | 2005 |   |        | 
|          
|Investment |  | $            | 18,311 |  |      | $ | 18,447 |  |  | 
|Advances   |  |              | 4,460  |  |      |   | 2,827  |  |  | 
|          
|           |  | $            | 22,771 |  |      | $ | 21,274 |  |  | 
|          

INVESTMENT




|                               |  |      |        |  |      |   |        |  |  | 
|------------------------------ |  | ---- | ------ |  | ---- | - | ------ |  |  | 
|                               |  | 2004 |        |  | 2005 |   |        | 
|                              
|Balance Sheet
    Information: |  |      |        |  |      |   |        |  |  | 
|Current assets                 |  | $    | 5,570  |  |      | $ | 6,049  |  |  | 
|                              
|Noncurrent assets              |  | $    | 76,668 |  |      | $ | 73,270 |  |  | 
|                              
|Current liabilities            |  | $    | 7,983  |  |      | $ | 10,008 |  |  | 
|                              
|Noncurrent liabilities         |  | $    | 29,110 |  |      | $ | 23,790 |  |  | 
|                              
|Minority Interest              |  | $    | 609    |  |      | $ | 543    |  |  | 
|                              
|Members capital               |  | $    | 44,536 |  |      | $ | 44,978 |  |  | 
|                              

|                              |  |      |        |  |      |   |        |      |  |   |        |  |  | 
|----------------------------- |  | ---- | ------ |  | ---- | - | ------ | ---- |  | - | ------ |  |  | 
|                              |  | 2003 |        |  | 2004 |   |        | 2005 |  |   |       
|                              | 
|Income Statement Information: |  |      |        |  |      |   |        |      |  |  
|Revenues                      |  | $    | 15,577 |  |      | $ | 19,565 |      |  | $ | 34,433 |  |  | 
|                             
|Operating Income              |  | $    | 2,254  |  |      | $ | 1,528  |      |  | $ | 1,824  |  |  | 
|                             
|Net Income                    |  | $    | 977    |  |      | $ | 201    |      |  | $ | 333    |  |  | 
|                             





ADVANCE




REVOLVING LINE OF CREDIT


1-Month 1-Month


PROVISION OF SERVICES






59




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##### Table of Contents

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTSCONTINUED

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

BELLSOUTH CORPORATION

SUMMARY OF FINANCIAL TRANSACTIONS WITH CINGULAR

|                                |  |                    |     |  |      |   |     |      |  |   |     |  |  | 
|------------------------------- |  | ------------------ | --- |  | ---- | - | --- | ---- |  | - | --- |  |  | 
|                                |  | For the Year Ended |     |  |     
|                                |  | December 31,       |     |  |     
|                                |  |                   
|                                |  | 2003               |     |  | 2004 |   |     | 2005 |  |   |    
|                               
|Revenues                        |  | $                  | 426 |  |      | $ | 537 |      |  | $ | 724 |  |  | 
|Interest income on advances     |  | $                  | 256 |  |      | $ | 230 |      |  | $ | 204 |  |  | 
|Interest expense on credit line |  | $                  |    |  |      | $ |    |      |  | $ | 2   |  |  | 
|                               





|                                  |  |              |    |  |      |   |    |  |  | 
|--------------------------------- |  | ------------ | -- |  | ---- | - | -- |  |  | 
|                                  |  | As of        |    |  |     
|                                  |  | December 31, |    |  |     
|                                  |  |              |   
|                                  |  | 2004         |    |  | 2005 |   |    | 
|                                  | 
|Receivable from Cingular Wireless |  | $            | 56 |  |      | $ | 51 |  |  | 
|Payable to Cingular Wireless      |  | $            | 44 |  |      | $ | 54 |  |  | 
|                                 

Note F  Other Assets




|                                                           |  |      |       |  |      |   |       |  |  | 
|---------------------------------------------------------- |  | ---- | ----- |  | ---- | - | ----- |  |  | 
|                                                           |  | 2004 |       |  | 2005 |   |       | 
|                                                           | 
|Deferred activation and
    installation expenses          |  | $    | 1,405 |  |      | $ | 1,227 |  |  | 
|Prepaid pension and postretirement
    benefits            |  |      | 4,291 |  |      |   | 4,915 |  |  | 
|Equity method investments other
    than Cingular Wireless |  |      | 275   |  |      |   | 33    |  |  | 
|Cost method investments                                    |  |      | 921   |  |      |   | 1,192 |  |  | 
|Other                                                      |  |      | 437   |  |      |   | 447   |  |  | 
|                                                          
|Other assets                                               |  | $    | 7,329 |  |      | $ | 7,814 |  |  | 
|                                                          

DEFERRED ACTIVATION AND INSTALLATION EXPENSES


|                                                                    |  |   |       |   |  | 
|------------------------------------------------------------------- |  | - | ----- | - |  | 
|                                                                   
|Deferred activation and
    installation expenses December 31, 2003 |  | $ | 1,614 |   |  | 
|Amortization of previous deferrals                                  |  |   | (811  | ) |  | 
|Current period deferrals                                            |  |   | 602   |   |  | 
|                                                                   
|Deferred activation and
    installation expenses December 31, 2004 |  |   | 1,405 |   |  | 
|Amortization of previous deferrals                                  |  |   | (730  | ) |  | 
|Current period deferrals                                            |  |   | 552   |   |  | 
|                                                                   
|Deferred activation and
    installation expenses December 31, 2005 |  | $ | 1,227 |   |  | 
|                                                                   

EQUITY METHOD INVESTMENTS OTHER THAN CINGULAR




|                      |  |            |       |  |            |   |     |            |  |  |            |  |  |   |    | 
|--------------------- |  | ---------- | ----- |  | ---------- | - | --- | ---------- |  |  | ---------- |  |  | - | -- | 
|                      |  | 2004       |       |  | 2005       |  
|                      | 
|                      |  | Ownership  |       |  | Investment |   |     | Ownership  |  |  | Investment | 
|                      |  | Percentage |       |  | Balance    |   |     | Percentage |  |  | Balance    | 
|                      | 
|Cellcom (Israel)      |  |            | 34.8% |  |            | $ | 242 |            |  |  |           |  |  | $ |   | 
|Internet Yellow Pages |  |            | 34.0% |  |            |   | 33  |            |  |  | 34.0%      |  |  |   | 33 | 
|                     
|                      |  |            |       |  |            | $ | 275 |            |  |  |            |  |  | $ | 33 | 
|                     

INVESTMENT IN CELLCOM






COST METHOD INVESTMENTS






60




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The components of cost investments are as follows:

|                                                      |  |       |       |  |             |   |     |          |  |   |       | 
|----------------------------------------------------- |  | ----- | ----- |  | ----------- | - | --- | -------- |  | - | ----- | 
|                                                      | 
|                                                      |  | Cost  |       |  | Unrealized  |   |     | Recorded | 
|                                                      |  | Basis |       |  | Gain (Loss) |   |     | Basis    | 
|                                                      | 
|Equity securities with unrealized
    gains           |  | $     | 633   |  |             | $ | 111 |          |  | $ | 744   | 
|Equity securities with unrealized
    losses<  1 year |  |       | 108   |  |             |   | (11 | )        |  |   | 97    | 
|                                                     
|Total equity securities                               |  |       | 741   |  |             |   | 100 |          |  |   | 841   | 
|                                                     
|Total debt securities                                 |  |       | 60    |  |             |   |    |          |  |   | 60    | 
|Other investments                                     |  |       | 20    |  |             |   |    |          |  |   | 20    | 
|                                                     
|As of December 31, 2004                               |  | $     | 821   |  |             | $ | 100 |          |  | $ | 921   | 
|                                                     
|Equity securities with unrealized
    gains           |  | $     | 682   |  |             | $ | 199 |          |  | $ | 881   | 
|Equity securities with unrealized
    losses<  1 year |  |       | 92    |  |             |   | (5  | )        |  |   | 87    | 
|Equity securities with unrealized
    losses>  1 year |  |       | 136   |  |             |   | (14 | )        |  |   | 122   | 
|                                                     
|Total equity securities                               |  |       | 910   |  |             |   | 180 |          |  |   | 1,090 | 
|                                                     
|Debt securities                                       |  |       | 12    |  |             |   |    |          |  |   | 12    | 
|Debt securities with unrealized
    losses>  1 year   |  |       | 82    |  |             |   | (2  | )        |  |   | 80    | 
|                                                     
|Total debt securities                                 |  |       | 94    |  |             |   | (2  | )        |  |   | 92    | 
|                                                     
|Other investments                                     |  |       | 10    |  |             |   |    |          |  |   | 10    | 
|                                                     
|As of December 31,
    2005                           |  | $     | 1,014 |  |             | $ | 178 |          |  | $ | 1,192 | 
|                                                     





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

PROPERTY, PLANT AND EQUIPMENT




|                                   |                   |             |       |       |           |  |      |      |  |   |        |        |  |   |        |        |  |  | 
|---------------------------------- | ----------------- | ----------- | ----- | ----- | --------- |  | ---- | ---- |  | - | ------ | ------ |  | - | ------ | ------ |  |  | 
|                                   |                   | Estimated   |       |       |           |  |      |      |  |   |       
|                                   |                   | Depreciable |       |       | Average   |  |      |      |  |   |        |       
|                                   |                   | Lives       |       |       | Remaining |  |      |      |  |   |        |       
|                                   |                   | (In Years)  |       |       | Life      |  |      | 2004 |  |   | 2005   |        |  |  
|                                   |                  
|Central office equipment           |                   |             | 811  |       |           |  | 4.6  |      |  | $ | 26,539 |        |  | $ | 27,029 |        |  | 
|Outside plant:                     |                   |             |       |       |           |  |      |      |  |   |        |        |  |   |        |        |  | 
|                                   | Copper cable      |             |       | 1516 |           |  |      | 6.6  |  |   |        | 20,440 |  |   |        | 20,615 |  |  | 
|                                   | Fiber cable       |             |       | 20    |           |  |      | 10.9 |  |   |        | 3,270  |  |   |        | 3,519  |  |  | 
|                                   | Poles and conduit |             |       | 3655 |           |  |      | 28.0 |  |   |        | 3,620  |  |   |        | 3,631  |  |  | 
|Operating and
    other equipment  |                   |             | 515  |       |           |  | 3.4  |      |  |   | 1,684  |        |  |   | 1,672  |        |  | 
|Building and building improvements |                   |             | 2545 |       |           |  | 28.0 |      |  |   | 4,597  |        |  |   | 4,635  |        |  | 
|Furniture and fixtures             |                   |             | 1015 |       |           |  | 9.3  |      |  |   | 2,429  |        |  |   | 2,388  |        |  | 
|Station equipment                  |                   |             | 6     |       |           |  | 3.2  |      |  |   | 542    |        |  |   | 569    |        |  | 
|Land                               |                   |             |      |       |           |  |     |      |  |   | 274    |        |  |   | 277    |        |  | 
|Plant under construction           |                   |             |      |       |           |  |     |      |  |   | 206    |        |  |   | 239    |        |  | 
|                                  
|                                   |                   |             |       |       |           |  |      |      |  |   | 63,601 |        |  |   | 64,574 |        |  | 
|Less: accumulated depreciation     |                   |             |       |       |           |  |      |      |  |   | 41,562 |        |  |   | 42,851 |        |  | 
|                                  
|Property, plant and equipment, net |                   |             |       |       |           |  |      |      |  | $ | 22,039 |        |  | $ | 21,723 |        |  | 
|                                  

INTANGIBLE ASSETS




|                               |  |      |       |  |      |   |       | 
|------------------------------ |  | ---- | ----- |  | ---- | - | ----- | 
|                               |  | 2004 |       |  | 2005 |  
|                              
|Capitalized software           |  | $    | 2,930 |  |      | $ | 2,924 | 
|Intellectual property          |  |      | 37    |  |      |   | 40    | 
|Wireless licenses              |  |      | 20    |  |      |   | 34    | 
|                              
|                               |  |      | 2,987 |  |      |   | 2,998 | 
|                              
|Less: accumulated amortization |  |      | 1,400 |  |      |   | 1,465 | 
|                              
|Intangible assets, net         |  | $    | 1,587 |  |      | $ | 1,533 | 
|                              















|                   |  |   |     | 
|------------------ |  | - | --- | 
|For the year ended |  |   |     | 
|December 31,       |  |   |     | 
|2006               |  | $ | 525 | 
|2007               |  |   | 401 | 
|2008               |  |   | 277 | 
|2009               |  |   | 167 | 
|2010               |  |   | 55  | 
|                  



61




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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTSCONTINUED

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

BELLSOUTH CORPORATION

OTHER CURRENT LIABILITIES

Other current liabilities are summarized as follows at
December 31:

|                                           |  |      |       |  |      |   |       |  |  | 
|------------------------------------------ |  | ---- | ----- |  | ---- | - | ----- |  |  | 
|                                           |  | 2004 |       |  | 2005 |   |       | 
|                                          
|Advanced billing and customer
    deposits |  | $    | 832   |  |      | $ | 785   |  |  | 
|Interest and rents accrued                 |  |      | 382   |  |      |   | 342   |  |  | 
|Taxes payable                              |  |      | 222   |  |      |   | 642   |  |  | 
|Dividends payable                          |  |      | 493   |  |      |   | 529   |  |  | 
|Salaries and wages payable                 |  |      | 403   |  |      |   | 392   |  |  | 
|Accrued compensated absences               |  |      | 229   |  |      |   | 236   |  |  | 
|Restructuring and severance accrual        |  |      | 26    |  |      |   | 100   |  |  | 
|Other                                      |  |      | 431   |  |      |   | 479   |  |  | 
|                                          
|Other current liabilities                  |  | $    | 3,018 |  |      | $ | 3,505 |  |  | 
|                                          

OTHER NONCURRENT LIABILITIES




|                                                  |  |      |       |  |      |   |       |  |  | 
|------------------------------------------------- |  | ---- | ----- |  | ---- | - | ----- |  |  | 
|                                                  |  | 2004 |       |  | 2005 |   |       | 
|                                                  | 
|Deferred installation and
    activation revenues |  | $    | 1,405 |  |      | $ | 1,227 |  |  | 
|Accrued postretirement benefits                   |  |      | 1,136 |  |      |   | 1,597 |  |  | 
|Deferred credits                                  |  |      | 652   |  |      |   | 578   |  |  | 
|Compensation related accruals                     |  |      | 879   |  |      |   | 974   |  |  | 
|Postemployment benefits                           |  |      | 254   |  |      |   | 228   |  |  | 
|Derivatives liability                             |  |      | 32    |  |      |   | 44    |  |  | 
|Other                                             |  |      | 31    |  |      |   | 31    |  |  | 
|                                                 
|Other noncurrent liabilities                      |  | $    | 4,389 |  |      | $ | 4,679 |  |  | 
|                                                 

SUPPLEMENTAL CASH FLOW FROM CONTINUING OPERATIONS
INFORMATION


|               |  |      |     |  |      |   |       |      |  |   |       |  |  | 
|-------------- |  | ---- | --- |  | ---- | - | ----- | ---- |  | - | ----- |  |  | 
|               |  | 2003 |     |  | 2004 |   |       | 2005 |  |   |      
|               | 
|Cash paid for: |  |      |     |  |      |   |       |      |  |   |       |  |  | 
|Income taxes   |  | $    | 678 |  |      | $ | 1,279 |      |  | $ | 816   |  |  | 
|              
|Interest       |  | $    | 867 |  |      | $ | 842   |      |  | $ | 1,056 |  |  | 
|              

INVESTMENT IN AND ADVANCE TO SONOFON




Note H  Debt


DEBT MATURING WITHIN ONE YEAR




|                                     |                               |      |       |       |      |   |       |       | 
|------------------------------------ | ----------------------------- | ---- | ----- | ----- | ---- | - | ----- | ----- | 
|                                     |                               | 2004 |       |       | 2005 |  
|                                     |                              
|Commercial paper                     |                               | $    | 3,248 |       |      | $ | 1,386 |      
|Current maturities of long-term debt |                               |      | 2,227 |       |      |   | 2,723 |      
|                                    
|                                     | Debt maturing within one year |      | $     | 5,475 |      |   | $     | 4,109 | 
|                                    



|                 |  |      |       |  |      |  |       |  |  | 
|---------------- |  | ---- | ----- |  | ---- |  | ----- |  |  | 
|                 |  | 2004 |       |  | 2005 |  |       | 
|                 | 
|Commercial paper |  |      | 2.26% |  |      |  | 4.22% |  |  | 
|                



|                                 |  |      |       |  |      |   |       |  |  | 
|-------------------------------- |  | ---- | ----- |  | ---- | - | ----- |  |  | 
|                                 |  | 2004 |       |  | 2005 |   |       | 
|                                 | 
|Available committed credit lines |  | $    | 3,523 |  |      | $ | 3,000 |  |  | 
|Borrowings under credit lines    |  | $    |      |  |      | $ |      |  |  | 
|                                



LONG-TERM DEBT




|                                                 |  |                                               |         |      |        |   |        |   |        |  |  | 
|------------------------------------------------ |  | --------------------------------------------- | ------- | ---- | ------ | - | ------ | - | ------ |  |  | 
|                                                 |  |                                               |         | 2004 |        |   | 2005   |   |        | 
|                                                 | 
|Issued by BellSouth
    Telecommunications, Inc. |  |                                               |         |      |        |  
|5.85%5.88%                                      |  | 20092045(1)                                  |         | $    | 437    |   |        | $ | 429    |  |  | 
|6.13%7%                                         |  | 20062033(1)                                  |         |      | 1,949  |   |        |   | 1,091  |  |  | 
|7.63%                                            |  | 2035                                          |         |      | 300    |   |        |   |       |  |  | 
|7%                                               |  | 2095                                          |         |      | 500    |   |        |   | 500    |  |  | 
|2.48%4.37%                                      |  | Extendible liquidity securities due
    2006  |         |      | 745    |   |        |   | 410    |  |  | 
|6.65%                                            |  | Zero-to-full debentures due 2095              |         |      | 232    |   |        |   | 248    |  |  | 
|6.3%                                             |  | Amortizing debentures due 2015                |         |      | 261    |   |        |   | 244    |  |  | 
|Issued by BellSouth Corporation                  |  |                                               |         |      |        |  
|2.42%4.47%                                      |  | 2007                                          |         |      | 500    |   |        |   | 500    |  |  | 
|4.2%4.75%                                       |  | 20092012(1)                                  |         |      | 2,299  |   |        |   | 2,285  |  |  | 
|5%6.88%                                         |  | 20062034(1)                                  |         |      | 6,631  |   |        |   | 6,623  |  |  | 
|7.75%7.88%                                      |  | 20102030(1)                                  |         |      | 2,000  |   |        |   | 1,996  |  |  | 
|7.12%                                            |  | 2097                                          |         |      | 500    |   |        |   | 500    |  |  | 
|4.09%4.26%                                      |  | 20-put-1 remarketable securities
    due 2021 |         |      | 1,000  |   |        |   | 1,000  |  |  | 
|Capital leases and other                         |  |                                               | 58      |      |        |   | 37     |   |        | 
|Unamortized discount, net of premium             |  |                                               | (77     | )    |        |   | (61    | ) |        | 
|                                                
|                                                 |  |                                               |         |      | 17,335 |   |        |   | 15,802 |  |  | 
|Current maturities                               |  |                                               | (2,227  | )    |        |   | (2,723 | ) |        | 
|Long-term debt                                   |  |                                               | $15,108 |      |        | $ | 13,079 |   |        | 
|                                                

|    |  |                                                                                                             
|--- |  | ------------------------------------------------------------------------------------------------------------
|(1) |  | These debt maturities are affected by FAS 133 accounting
    requirements to mark hedged debt to fair value.





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##### Table of Contents

which may 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 remarketable securities
    due 2021 |  | Annually in April 
|Putable debentures                            |  | November 2006     
|                                             







|           |  |   |        |  |  | 
|---------- |  | - | ------ |  |  | 
|Maturities |  |   |        |  |  | 
|2006       |  | $ | 2,723  |  |  | 
|2007       |  |   | 526    |  |  | 
|2008       |  |   | 611    |  |  | 
|2009       |  |   | 1,855  |  |  | 
|2010       |  |   | 1,022  |  |  | 
|Thereafter |  |   | 9,378  |  |  | 
|          
|Total      |  | $ | 16,115 |  |  | 
|          



|                   |  |      |       |  |          |  |      |           |  |   |     | 
|------------------ |  | ---- | ----- |  | -------- |  | ---- | --------- |  | - | --- | 
|                   |  | Rate |       |  | Maturity |  |      | Principal | 
|                   | 
|Maturing debt:     |  |      |       |  |          |  |      |           |  |   |     | 
|                   |  |      | 6.50% |  |          |  |      |           |  | $ | 300 | 
|                   |  |      | 7.00% |  |          |  |      |           |  | $ | 150 | 
|                   |  |      | 2.42% |  |          |  |      |           |  | $ | 110 | 
|                   |  |      | 3.39% |  |          |  |      |           |  | $ | 225 | 
|Early redemptions: |  |      |       |  |          |  |      |           |  |   |     | 
|                   |  |      | 6.75% |  |          |  | 2033 |           |  | $ | 400 | 
|                   |  |      | 7.63% |  |          |  | 2035 |           |  | $ | 300 | 
|                  





Note I  Income Taxes






|                                 |         |      |       |       |      |   |       |       |  |   |       |     |   |  | 
|-------------------------------- | ------- | ---- | ----- | ----- | ---- | - | ----- | ----- |  | - | ----- | --- | - |  | 
|                                 |         | 2003 |       |       | 2004 |   |       | 2005  |  |   |      
|                                 |        
|Current                          |         |      |       |       |      |   |       |       |  |   |       |     |   | 
|                                 | Federal |      | $     | 1,020 |      |   | $     | 645   |  |   | $     | 983 |   |  | 
|                                 | State   |      |       | 128   |      |   |       | 66    |  |   |       | 100 |   |  | 
|                                
|                                 |         |      | 1,148 |       |      |   | 711   |       |  |   | 1,083 |     |   | 
|                                
|Deferred, net                    |         |      |       |       |      |   |       |       |  |   |       |     |   | 
|                                 | Federal |      |       | 730   |      |   |       | 1,010 |  |   |       | 351 |   |  | 
|                                 | State   |      |       | 85    |      |   |       | 71    |  |   |       | (45 | ) |  | 
|                                
|                                 |         |      | 815   |       |      |   | 1,081 |       |  |   | 306   |     |   | 
|                                
|Investment tax credits, net      |         |      |       |       |      |   |       |       |  |   |       |     |   | 
|                                 | Federal |      |       | (27   | )    |   |       |      |  |   |       |    |   |  | 
|                                
|Total provision for income taxes |         | $    | 1,936 |       |      | $ | 1,792 |       |  | $ | 1,389 |     |   | 
|                                



|                                                |  |      |        |   |      |   |        |   |  | 
|----------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | - |  | 
|                                                |  | 2004 |        |   | 2005 |   |        |  
|                                               
|Operating loss and tax credit
    carryforwards |  | $    | 363    |   |      | $ | 412    |   |  | 
|Capital loss carryforwards                      |  |      | 658    |   |      |   | 390    |   |  | 
|Allowance for uncollectibles                    |  |      | 125    |   |      |   | 122    |   |  | 
|Deferred revenue                                |  |      | 231    |   |      |   | 214    |   |  | 
|Other                                           |  |      | 146    |   |      |   | 149    |   |  | 
|                                               
|                                                |  |      | 1,523  |   |      |   | 1,287  |   |  | 
|Valuation Allowance                             |  |      | (873   | ) |      |   | (732   | ) |  | 
|                                               
|Deferred tax assets                             |  | $    | 650    |   |      | $ | 555    |   |  | 
|                                               
|Tangible and intangible property                |  | $    | (4,667 | ) |      | $ | (4,551 | ) |  | 
|Equity investments                              |  |      | (1,853 | ) |      |   | (2,133 | ) |  | 
|Compensation related                            |  |      | (131   | ) |      |   | (117   | ) |  | 
|Other                                           |  |      | (147   | ) |      |   | (98    | ) |  | 
|                                               
|Deferred tax liabilities                        |  |      | (6,798 | ) |      |   | (6,899 | ) |  | 
|                                               
|Net deferred tax liability                      |  | $    | (6,148 | ) |      | $ | (6,344 | ) |  | 
|                                               



|                                  |  |      |        |   |      |   |        |  
|--------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                  |  | 2004 |        |   | 2005 |  
|                                  | 
|Current deferred tax asset        |  | $    | 258    |   |      | $ | 263    |  
|Noncurrent deferred tax liability |  |      | (6,406 | ) |      |   | (6,607 | )
|                                 
|Net deferred tax liability        |  | $    | (6,148 | ) |      | $ | (6,344 | )
|                                 





63




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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTSCONTINUED

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

BELLSOUTH CORPORATION

At December 31, 2005, net deferred tax liabilities include
a deferred tax asset of $360 relating to compensation expense
recognized under SFAS 123, Accounting for Stock-Based
Compensation. 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 provisions of SFAS 123 prohibit
us from recording a valuation allowance on the deferred tax
asset related to these options. If the full value of the
deferred tax asset is not realized either at the exercise or
expiration of the options, the deferred tax asset will reverse
against equity to the extent of previously recognized excess tax
benefits, otherwise against income tax expense. At
December 31, 2005, accumulated excess tax benefits of $75
have been recorded to equity. The amount of these accumulated
excess tax benefits may increase upon the adoption of
SFAS 123 (Revised 2004).

A reconciliation of the federal statutory income tax rate to the
effective tax rate attributable to continuing operations follows:

|                                                          |  |      |      |   |      |  |      |      |  |  |      |   |  | 
|--------------------------------------------------------- |  | ---- | ---- | - | ---- |  | ---- | ---- |  |  | ---- | - |  | 
|                                                          |  | 2003 |      |   | 2004 |  |      | 2005 |  |  |     
|                                                          | 
|Federal statutory tax rate                                |  |      | 35.0 | % |      |  | 35.0 | %    |  |  | 35.0 | % |  | 
|State income taxes, net of federal
    income tax benefit |  |      | 2.6  |   |      |  | 1.7  |      |  |  | 0.8  |   |  | 
|Net earnings (losses) of equity
    affiliates            |  |      | (0.3 | ) |      |  | (0.3 | )    |  |  | (0.2 | ) |  | 
|Investment tax credits                                    |  |      | (0.3 | ) |      |  |     |      |  |  |     |   |  | 
|Medicare drug subsidy                                     |  |      |     |   |      |  | (0.6 | )    |  |  | (1.0 | ) |  | 
|Valuation allowance release on
    capital losses         |  |      |     |   |      |  |     |      |  |  | (2.5 | ) |  | 
|Other                                                     |  |      | (1.3 | ) |      |  | (1.2 | )    |  |  | 0.2  |   |  | 
|                                                         
|Effective tax rate                                        |  |      | 35.7 | % |      |  | 34.6 | %    |  |  | 32.3 | % |  | 
|                                                         





|         |                  
|-------- | -----------------
|Note J  | Hurricane Katrina









Note K  Workforce Reduction and
Restructuring


WORKFORCE REDUCTION CHARGES




|     |  |           |  |         |  | 
|---- |  | --------- |  | ------- |  | 
|     |  |           |  | Related |  | 
|     |  | Employees |  | Charge  |  | 
|     | 
|2003 |  | 3,500     |  | $132    |  | 
|2004 |  | 1,400     |  | $51     |  | 
|2005 |  | 2,200     |  | $114    |  | 
|    

RESTRUCTURING LIABILITY






64




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##### Table of Contents



|                                 |  |              |     |   |            |   |    |       |  |   |     |   |  | 
|-------------------------------- |  | ------------ | --- | - | ---------- | - | -- | ----- |  | - | --- | - |  | 
|                                 |  | Type of Cost |     |   |           
|                                 | 
|                                 |  | Employee     |     |   | Other Exit |   |    |      
|                                 |  | Separations  |     |   | Costs      |   |    | Total |  |   |    
|                                 | 
|Balance at December 31, 2003     |  | $            | 66  |   |            | $ | 6  |       |  | $ | 72  |   |  | 
|                                
|Accruals                         |  |              | 51  |   |            |   |   |       |  |   | 51  |   |  | 
|Cash payments                    |  |              | (80 | ) |            |   | (1 | )     |  |   | (81 | ) |  | 
|Adjustments                      |  |              | (12 | ) |            |   | (4 | )     |  |   | (16 | ) |  | 
|                                
|Balance at December 31, 2004     |  | $            | 25  |   |            | $ | 1  |       |  | $ | 26  |   |  | 
|                                
|Accruals                         |  |              | 114 |   |            |   |   |       |  |   | 114 |   |  | 
|Cash payments                    |  |              | (35 | ) |            |   | (1 | )     |  |   | (36 | ) |  | 
|Adjustments                      |  |              | (4  | ) |            |   |   |       |  |   | (4  | ) |  | 
|                                
|Balance at December 31,
    2005 |  | $            | 100 |   |            | $ |   |       |  | $ | 100 |   |  | 
|                                



Note L  Employee Benefit Plans




|                  |  |          |  |          |  | 
|----------------- |  | -------- |  | -------- |  | 
|                  |  |          |  | Other    |  | 
|                  |  | Pensions |  | Benefits |  | 
|                  | 
|Active employees: |  |          |  |          |  | 
|Management        |  | 20,600   |  | 16,000   |  | 
|Non-management    |  | 42,500   |  | 41,600   |  | 
|                 
|                  |  | 63,100   |  | 57,600   |  | 
|Retirees:         |  |          |  |          |  | 
|Management        |  | 18,200   |  | 23,400   |  | 
|Non-management    |  | 46,700   |  | 42,700   |  | 
|                 
|                  |  | 64,900   |  | 66,100   |  | 
|                 
|Total             |  | 128,000  |  | 123,700  |  | 
|                 

PENSION PLANS








OTHER POSTRETIREMENT BENEFITS














65




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##### Table of Contents

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTSCONTINUED

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

BELLSOUTH CORPORATION

increase to the obligation of approximately $3.5 billion in
2004 and is being recognized in income over the remaining years
of future service to full eligibility of active plan
participants, or approximately 14 years.

MEDICARE PRESCRIPTION DRUG, IMPROVEMENT AND MODERNIZATION ACT
OF 2003

In December 2003, the Medicare Prescription Drug Act was signed
into law. The Act allows companies that provide certain
prescription drug benefits for retirees to receive a federal
subsidy beginning in 2006. In accordance with final FASB
guidance, we accounted for the government subsidy provided for
in the Medicare Act as an actuarial gain in determining our post
retirement benefit obligations. Based on preliminary guidance,
we previously calculated the benefit of the subsidy using the
actuarial equivalence tests on the individual benefit plans
separately. On January 21, 2005, the Centers for Medicare
and Medicaid Services released final federal regulations
regarding the calculation of actuarial equivalence and
eligibility for the subsidy. As a result of the final
regulations, we calculated actuarial equivalence based on
weighted average benefits and premiums of all Medicare eligible
participants as a whole rather than calculating equivalence
separately for each group of retirees. On this basis, our plans
are projected to satisfy actuarial equivalence for all
participants in future years. The present value of the subsidy
is $1.4 billion as of December 31, 2005.

ASSUMPTIONS AND APPROACH USED

A discount rate is selected annually to measure the present
value of the benefit obligations. In determining the selection
of a discount rate, we estimated the timing and amounts of
expected future benefit payments and applied a yield curve
developed to reflect yields available on high-quality bonds. The
yield curve is based on an externally published index
specifically designed to meet the criteria of GAAP. The discount
rates selected as of December 31, 2005, 5.25% for pension
and 5.50% for other benefits, reflect the results of this yield
curve analysis and are unchanged from December 31, 2004.

Our assumption regarding expected return on plan assets reflects
asset allocations, investment strategy and the views of
investment managers, as well as historical experience. We use an
assumed return of 8.5% for our pension trusts, which represent
nearly 80% of invested assets. Actual asset returns for these
trusts were approximately 15% in 2004 and 11% in 2005. As of
December 2005, the
5-year average return
on our pension assets was 6.3%, the
10-year average return
was 9.5%, and the average return since inception was 10.9%.

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. Due to their differing demographics,
we developed separate inflation rates for pre- and post-age 65
retirees as well as medical claims and prescription drugs.
Health care cost trend rates are assumed to decline by 75 to
150 basis points per year until they reach an ultimate rate
of 5% in 2011. On average, health care cost trend rates over the
latest five year period have been in line with initial year
trend rate assumptions. Recent trend rates did not decline as
anticipated, so changes to trend assumptions were made in the
2005 valuation. 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, 2005:

|                                                             |  |                |       |  |                |   |        |  
|------------------------------------------------------------ |  | -------------- | ----- |  | -------------- | - | ------ | -
|                                                             |  | 1-Percentage   |       |  | 1-Percentage   |  
|                                                             |  | Point Increase |       |  | Point Decrease |  
|                                                             | 
|Effect on total service
    and interest
    cost components |  | $              | 110   |  |                | $ | (80    | )
|Effect on other postretirement
    benefit obligation        |  | $              | 1,200 |  |                | $ | (1,000 | )
|                                                            





66




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##### Table of Contents

MEASUREMENT RESULTS

The following tables summarize benefit obligations, changes in
plan assets, and funded status, as well as the assumptions, at
or for the years ended December 31. The company uses a
December 31 measurement date for its plans.

|                                                                                           |  |                  |        |   |                |   |        |      |  |   |        |   |  |   |        |   |  | 
|------------------------------------------------------------------------------------------ |  | ---------------- | ------ | - | -------------- | - | ------ | ---- |  | - | ------ | - |  | - | ------ | - |  | 
|                                                                                           |  | Pension Benefits |        |   | Other Benefits |   |        |     
|                                                                                           | 
|                                                                                           |  | 2004             |        |   | 2005           |   |        | 2004 |  |   | 2005   |   |  |  
|                                                                                           | 
|                                                                                          
|Change in benefit
    obligation:                                                          |  |                  |        |   |                |   |        |      |  |   |        |   |  |   |        |   |  | 
|Benefit obligation at the beginning
    of the year                                        |  | $                | 11,620 |   |                | $ | 11,725 |      |  | $ | 7,156  |   |  | $ | 10,883 |   |  | 
|Service cost                                                                               |  |                  | 177    |   |                |   | 207    |      |  |   | 66     |   |  |   | 122    |   |  | 
|Interest cost                                                                              |  |                  | 696    |   |                |   | 588    |      |  |   | 472    |   |  |   | 583    |   |  | 
|Amendments                                                                                 |  |                  | 27     |   |                |   |       |      |  |   | 3,315  |   |  |   | (383   | ) |  | 
|Actuarial (gain) loss                                                                      |  |                  | 288    |   |                |   | 334    |      |  |   | 347    |   |  |   | 199    |   |  | 
|Gross benefits and lump sums paid                                                          |  |                  | (1,083 | ) |                |   | (954   | )    |  |   | (473   | ) |  |   | (501   | ) |  | 
|                                                                                          
|                                                                                          
|Benefit obligation at the end of
    the year                                              |  | $                | 11,725 |   |                | $ | 11,900 |      |  | $ | 10,883 |   |  | $ | 10,903 |   |  | 
|                                                                                          
|Change in plan assets:                                                                     |  |                  |        |   |                |   |        |      |  |   |        |   |  |   |        |   |  | 
|Fair value of plan assets at the
    beginning of the year                                 |  | $                | 14,605 |   |                | $ | 15,612 |      |  | $ | 3,693  |   |  | $ | 4,198  |   |  | 
|Actual return (loss) on plan assets                                                        |  |                  | 2,090  |   |                |   | 1,657  |      |  |   | 556    |   |  |   | 457    |   |  | 
|Employer contribution                                                                      |  |                  |       |   |                |   |       |      |  |   | 422    |   |  |   | 401    |   |  | 
|Plan participants contributions                                                            |  |                  |       |   |                |   |       |      |  |   | 39     |   |  |   | 43     |   |  | 
|Benefits and lump sums paid                                                                |  |                  | (1,083 | ) |                |   | (954   | )    |  |   | (512   | ) |  |   | (543   | ) |  | 
|                                                                                          
|                                                                                          
|Fair value of plan assets at the
    end of year                                           |  | $                | 15,612 |   |                | $ | 16,315 |      |  | $ | 4,198  |   |  | $ | 4,556  |   |  | 
|                                                                                          
|Funded status:                                                                             |  |                  |        |   |                |   |        |      |  |   |        |   |  |   |        |   |  | 
|As of the end of the year                                                                  |  | $                | 3,887  |   |                | $ | 4,415  |      |  | $ | (6,685 | ) |  | $ | (6,347 | ) |  | 
|Unrecognized prior service cost                                                            |  |                  | (362   | ) |                |   | (321   | )    |  |   | 3,266  |   |  |   | 2,715  |   |  | 
|Unrecognized net (gain) loss                                                               |  |                  | 454    |   |                |   | 417    |      |  |   | 2,376  |   |  |   | 2,339  |   |  | 
|Unrecognized net
    (asset) obligation                                                    |  |                  |       |   |                |   |       |      |  |   | 219    |   |  |   | 100    |   |  | 
|                                                                                          
|                                                                                          
|Prepaid (accrued) benefit
    cost                                                         |  | $                | 3,979  |   |                | $ | 4,511  |      |  | $ | (824   | ) |  | $ | (1,193 | ) |  | 
|                                                                                          
|Amounts recognized in the
    consolidated balance sheets at December 31:                  |  |                  |        |   |                |   |        |      |  |   |        |   |  |   |        |   |  | 
|Prepaid benefit cost                                                                       |  | $                | 3,979  |   |                | $ | 4,511  |      |  | $ | 312    |   |  | $ | 404    |   |  | 
|Accrued benefit cost                                                                       |  |                  |       |   |                |   |       |      |  |   | (1,136 | ) |  |   | (1,597 | ) |  | 
|                                                                                          
|                                                                                          
|Net amount recognized                                                                      |  | $                | 3,979  |   |                | $ | 4,511  |      |  | $ | (824   | ) |  | $ | (1,193 | ) |  | 
|                                                                                          
|                                                                                          
|Weighted-average assumptions
    used to determine benefit obligations at
    December 31: |  |                  |        |   |                |   |        |      |  |   |        |   |  |   |        |   |  | 
|Discount rate                                                                              |  |                  | 5.25%  |   |                |   | 5.25%  |      |  |   | 5.50%  |   |  |   | 5.50%  |   |  | 
|Rate of compensation increase                                                              |  |                  | 4.50%  |   |                |   | 4.50%  |      |  |   | 4.50%  |   |  |   | 4.50%  |   |  | 
|Health care cost trend rate assumed
    for the following year (Pre-age 65)                |  |                  |        |   |                |   |        |      |  |   | 8.33%  |   |  |   | 9.00%  |   |  | 
|Health care cost trend rate assumed
    for the following year (Post-age 65)               |  |                  |        |   |                |   |        |      |  |   | 11.67% |   |  |   | 12.00% |   |  | 
|Rate to which the cost trend rate
    is assumed to decline (the ultimate trend rate)      |  |                  |        |   |                |   |        |      |  |   | 5.00%  |   |  |   | 5.00%  |   |  | 
|Year that the rate reaches the
    ultimate trend rate                                     |  |                  |        |   |                |   |        |      |  |   | 2010   |   |  |   | 2011   |   |  | 
|                                                                                          







67




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##### Table of Contents

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTSCONTINUED

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

BELLSOUTH CORPORATION

The other benefits funded status above, includes a plan with a
positive funded status of $461 and $546 for December 31,
2004 and 2005, respectively. For the remaining plans, the
unfunded status was comprised of the following:

|                          |  |                 |        |   |      |   |        |  
|------------------------- |  | --------------- | ------ | - | ---- | - | ------ | -
|                          |  | At December 31, |       
|                          |  |                 |       
|                          |  | 2004            |        |   | 2005 |  
|                          | 
|Benefit obligation        |  | $               | 10,492 |   |      | $ | 10,505 |  
|Fair value of plan assets |  |                 | 3,346  |   |      |   | 3,612  |  
|                         
|Funded status             |  | $               | (7,146 | ) |      | $ | (6,893 | )
|                         



|                                                                                                              |                        |                  |        |    |                |   |        |      |  |   |        |   |  |      |        |   |      |   |        |   |  |   |        |   |  |  | 
|------------------------------------------------------------------------------------------------------------- | ---------------------- | ---------------- | ------ | -- | -------------- | - | ------ | ---- |  | - | ------ | - |  | ---- | ------ | - | ---- | - | ------ | - |  | - | ------ | - |  |  | 
|                                                                                                              |                        | Pension Benefits |        |    | Other Benefits |   |        |     
|                                                                                                              |                       
|                                                                                                              |                        | 2003             |        |    | 2004           |   |        | 2005 |  |   | 2003   |   |  | 2004 |        |   | 2005 |   |        |  
|                                                                                                              |                       
|                                                                                                             
|Components of net periodic
    benefit cost:                                                                  |                        |                  |        |    |                |   |        |      |  |   |        |   |  |      |        |   |      |   |        |   |  |   |        |   |  | 
|Service cost                                                                                                  |                        | $                | 181    |    |                | $ | 177    |      |  | $ | 207    |   |  | $    | 50     |   |      | $ | 66     |   |  | $ | 122    |   |  | 
|Interest cost                                                                                                 |                        |                  | 742    |    |                |   | 696    |      |  |   | 588    |   |  |      | 478    |   |      |   | 472    |   |  |   | 583    |   |  | 
|Expected return on plan assets                                                                                |                        |                  | (1,386 | )  |                |   | (1,319 | )    |  |   | (1,286 | ) |  |      | (315   | ) |      |   | (321   | ) |  |   | (336   | ) |  | 
|Amortization of prior service cost                                                                            |                        |                  | (39    | )  |                |   | (43    | )    |  |   | (41    | ) |  |      | 149    |   |      |   | 235    |   |  |   | 225    |   |  | 
|Amortization of actuarial
    (gain) loss                                                                     |                        |                  | (28    | )  |                |   | 5      |      |  |   |       |   |  |      | 108    |   |      |   | 88     |   |  |   | 103    |   |  | 
|Amortization of transition
    (asset) obligation                                                             |                        |                  | (5     | )  |                |   |       |      |  |   |       |   |  |      | 66     |   |      |   | 80     |   |  |   | 73     |   |  | 
|                                                                                                             
|                                                                                                             
|Net periodic benefit
    cost                                                                                 |                        | $                | (535   | )  |                | $ | (484   | )    |  | $ | (532   | ) |  | $    | 536    |   |      | $ | 620    |   |  | $ | 770    |   |  | 
|                                                                                                              | Settlement (gain) loss |                  |        | 49 |                |   |        |     |  |   |        |  |  |      |        |  |      |   |        |  |  |   |        |  |  |  | 
|                                                                                                             
|Net periodic benefit cost with
    adjustments                                                                |                        | $                | (486   | )  |                | $ | (484   | )    |  | $ | (532   | ) |  | $    | 536    |   |      | $ | 620    |   |  | $ | 770    |   |  | 
|                                                                                                             
|                                                                                                             
|Weighted-average assumptions
    used to determine net periodic benefit cost for years ended
    December 31: |                        |                  |        |    |                |   |        |      |  |   |        |   |  |      |        |   |      |   |        |   |  |   |        |   |  | 
|Discount rate                                                                                                 |                        |                  | 6.75%  |    |                |   | 6.25%  |      |  |   | 5.25%  |   |  |      | 6.75%  |   |      |   | 6.00%  |   |  |   | 5.50%  |   |  | 
|Expected return on plan assets                                                                                |                        |                  | 8.50%  |    |                |   | 8.50%  |      |  |   | 8.50%  |   |  |      | 8.00%  |   |      |   | 8.00%  |   |  |   | 8.25%  |   |  | 
|Rate of compensation increase                                                                                 |                        |                  | 5.10%  |    |                |   | 5.10%  |      |  |   | 4.50%  |   |  |      | 4.80%  |   |      |   | 4.80%  |   |  |   | 4.50%  |   |  | 
|Health care cost trend rate
    pre-age 65                                                                    |                        |                  |        |    |                |   |        |      |  |   |        |   |  |      | 10.00% |   |      |   | 9.00%  |   |  |   | 8.33%  |   |  | 
|Health care cost trend rate
    post-age 65                                                                   |                        |                  |        |    |                |   |        |      |  |   |        |   |  |      | 12.00% |   |      |   | 13.00% |   |  |   | 11.67% |   |  | 

PLAN ASSETS




|                  |       |              |       |         |      |  |              |       |          |  |        |     |   |      |       |   |      |  |    |     |   |  |    |     |   |  | 
|----------------- | ----- | ------------ | ----- | ------- | ---- |  | ------------ | ----- | -------- |  | ------ | --- | - | ---- | ----- | - | ---- |  | -- | --- | - |  | -- | --- | - |  | 
|                  |       |              |       |         |      |  |              | Other |          |  |       
|                  |       |              |       | Pension |      |  |              |       | Benefits |  |        |    
|                  |      
|                  |       | At           |       |         |      |  | At           |       |          | 
|                  |       | December 31, |       |         |      |  | December 31, |       |          | 
|                  |       |              |      
|Asset Category    |       | Target       |       |         | 2004 |  |              | 2005  |          |  | Target |     |   | 2004 |       |   | 2005 |  |    |    
|                  |      
|Equity securities |       |              | 55-65 | %       |      |  | 58           | %     |          |  | 58     | %   |   |      | 60-80 | % |      |  | 81 | %   |   |  | 82 | %   |   | 
|Debt securities   |       |              | 15-25 |         |      |  | 20           |       |          |  | 21     |     |   |      | 0-5   |   |      |  | 3  |     |   |  | 3  |     |   | 
|Real estate       |       |              | 10-15 |         |      |  | 10           |       |          |  | 10     |     |   |      | 5-15  |   |      |  | 4  |     |   |  | 4  |     |   | 
|Other             |       |              | 10-15 |         |      |  | 12           |       |          |  | 11     |     |   |      | 15-25 |   |      |  | 12 |     |   |  | 11 |     |   | 
|                 
|                  | Total |              |       |         |      |  |              | 100   | %        |  |        | 100 | % |      |       |   |      |  |    | 100 | % |  |    | 100 | % |  | 
|                 



| |   |                                                                         
| | - | ------------------------------------------------------------------------
| |  | 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.  





CASH FLOWS


Contributions






68




---



##### Table of Contents

to the VEBA trusts to fund other benefit payments. Contributions
for 2006 are estimated to be in the range of $350 to $400.

Estimated future benefit payments

The following benefit payments, which reflect expected future
service, as appropriate, are expected to be paid over the next
ten years. Based on current business conditions, we expect to
have the necessary cash flows to fund our obligations.

|                |  |                |       |          |       |   |         |          |  |   |      |   |  |   |       | 
|--------------- |  | -------------- | ----- | -------- | ----- | - | ------- | -------- |  | - | ---- | - |  | - | ----- | 
|                | 
|                |  | Other Benefits |      
|                |  |                |      
|                |  |                |       | Medicare |       |   |        
|                |  | Pension        |       |          |       |   | Subsidy |          |  |  
|                |  | Benefits       |       |          | Gross |   |         | Receipts |  |   | Net  |  
|                | 
|2006            |  | $              | 1,049 |          |       | $ | 594     |          |  | $ | (32  | ) |  | $ | 562   | 
|2007            |  |                | 1,059 |          |       |   | 644     |          |  |   | (36  | ) |  |   | 608   | 
|2008            |  |                | 1,075 |          |       |   | 686     |          |  |   | (42  | ) |  |   | 644   | 
|2009            |  |                | 1,084 |          |       |   | 725     |          |  |   | (46  | ) |  |   | 679   | 
|2010            |  |                | 1,056 |          |       |   | 759     |          |  |   | (52  | ) |  |   | 707   | 
|Years 2011-2015 |  |                | 5,032 |          |       |   | 4,011   |          |  |   | (353 | ) |  |   | 3,658 | 
|               

CASH BALANCE PENSION PLAN




SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN




|                                                                                    |  |              |      |   |      |   |      |   |  | 
|----------------------------------------------------------------------------------- |  | ------------ | ---- | - | ---- | - | ---- | - |  | 
|                                                                                    |  | December 31, |      |   |     
|                                                                                    |  |              |      |   |     
|                                                                                    |  | 2004         |      |   | 2005 |   |      |  
|                                                                                    | 
|Projected benefit obligation                                                        |  | $            | 584  |   |      | $ | 637  |   |  | 
|Accumulated benefit obligation (net
    amount recognized pre-tax)                  |  |              | 515  |   |      |   | 552  |   |  | 
|Fair value of plan assets                                                           |  |              |     |   |      |   |     |   |  | 
|                                                                                   
|Amounts recognized in the
    consolidated balance sheet at December 31:            |  |              |      |   |      |   |      |   |  | 
|Accrued benefit cost included in
    other noncurrent liabilities                   |  |              | (320 | ) |      |   | (353 | ) |  | 
|Additional minimum liability
    recognized in other comprehensive income (pre-tax) |  |              | (195 | ) |      |   | (199 | ) |  | 
|                                                                                   



DEFINED CONTRIBUTION PLANS




|                     |  |      |    |  |      |   |    |      |  |   |     | 
|-------------------- |  | ---- | -- |  | ---- | - | -- | ---- |  | - | --- | 
|                     |  | 2003 |    |  | 2004 |   |    | 2005 | 
|                     | 
|Compensation expense |  | $    | 55 |  |      | $ | 94 |      |  | $ | 121 | 
|                    

Note M  Financial Instruments






69




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##### Table of Contents

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTSCONTINUED

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

BELLSOUTH CORPORATION

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

|                                                     |                                 |          |        |        |            |   |        |        |  
|---------------------------------------------------- | ------------------------------- | -------- | ------ | ------ | ---------- | - | ------ | ------ | -
|                                                     |                                 | 2004     |       
|                                                     |                                
|                                                     |                                 | Recorded |        |        | Estimated  |  
|                                                     |                                 | Amount   |        |        | Fair Value |  
|                                                     |                                
|Assets:                                              |                                 |          |        |        |            |   |        |       
|Advances to Cingular Wireless                        |                                 | $        | 4,460  |        |            | $ | 4,460  |       
|Cost-method investments                              |                                 | $        | 921    |        |            | $ | 921    |       
|Debt:(1)                                             |                                 |          |        |        |            |   |        |       
|                                                     | Issued by BST                   |          | $      | 4,482  |            |   | $      | 4,699  |  
|                                                     | Issued by BellSouth Corporation |          |        | 16,179 |            |   |        | 16,999 |  
|                                                     | FMV adjustment on hedged debt   |          |        | (1     | )          |   |        | (1     | )
|                                                     | Other debt and discounts        |          |        | (77    | )          |   |        | (76    | )
|                                                     |                                 |         
|                                                     |                                 | $        | 20,583 |        |            | $ | 21,621 |       
|Fair value interest rate swaps, net
    liability(1) |                                 | $        | 1      |        |            | $ | 1      |       
|Cash flow interest rate swap, net
    liability(1)   |                                 | $        | 28     |        |            | $ | 28     |       
|                                                    

|                                                     |                                 |          |        |        |            |   |        |        |  
|---------------------------------------------------- | ------------------------------- | -------- | ------ | ------ | ---------- | - | ------ | ------ | -
|                                                     |                                 | 2005     |       
|                                                     |                                
|                                                     |                                 | Recorded |        |        | Estimated  |  
|                                                     |                                 | Amount   |        |        | Fair Value |  
|                                                     |                                
|Assets:                                              |                                 |          |        |        |            |   |        |       
|Advances to Cingular Wireless                        |                                 | $        | 2,827  |        |            | $ | 2,827  |       
|Cost-method investments                              |                                 | $        | 1,192  |        |            | $ | 1,192  |       
|Debt:(1)                                             |                                 |          |        |        |            |   |        |       
|                                                     | Issued by BST                   |          | $      | 2,975  |            |   | $      | 3,086  |  
|                                                     | Issued by BellSouth Corporation |          |        | 14,317 |            |   |        | 14,759 |  
|                                                     | FMV adjustment on hedged debt   |          |        | (44    | )          |   |        | (44    | )
|                                                     | Other debt and discounts        |          |        | (60    | )          |   |        | (60    | )
|                                                     |                                 |         
|                                                     |                                 | $        | 17,188 |        |            | $ | 17,741 |       
|Fair value interest rate swaps, net
    liability(1) |                                 | $        | 44     |        |            | $ | 44     |       
|                                                    



|    |  |                                                                                                                                          
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------
|(1) |  | These amounts do not include accrued interest; accrued
    interest is classified as an other current liability in our
    balance sheet.

DERIVATIVE FINANCIAL INSTRUMENTS




INTEREST RATE SWAPS




|                                                   |                                  |                    |   |       |      |  |   |       |  |  | 
|-------------------------------------------------- | -------------------------------- | ------------------ | - | ----- | ---- |  | - | ----- |  |  | 
|                                                   |                                  | For the Year Ended
|                                                   |                                  | December 31,      
|                                                   |                                  |                   
|                                                   |                                  | 2004               |   |       | 2005 |  |   |      
|                                                  
|Pay fixed/receive variable (cash
    flow hedge):  |                                  |                    |   |       |      | 
|                                                   | Weighted average notional amount |                    | $ | 1,000 |      |  | $ | 967   |  |  | 
|                                                   | Rate paid                        |                    |   | 5.90% |      |  |   | 5.90% |  |  | 
|                                                   | Rate received                    |                    |   | 1.36% |      |  |   | 3.25% |  |  | 
|Pay variable/receive fixed (fair
    value hedge): |                                  |                    |   |       |      | 
|                                                   | Weighted average notional amount |                    | $ | 955   |      |  | $ | 1,612 |  |  | 
|                                                   | Rate paid                        |                    |   | 3.25% |      |  |   | 4.89% |  |  | 
|                                                   | Rate received                    |                    |   | 5.53% |      |  |   | 5.55% |  |  | 
|                                                  

|                                                   |                 |              |   |       |      |  |   |       |  |  | 
|-------------------------------------------------- | --------------- | ------------ | - | ----- | ---- |  | - | ----- |  |  | 
|                                                   |                 | As of       
|                                                   |                 | December 31,
|                                                   |                 |              |  
|                                                   |                 | 2004         |   |       | 2005 |  |   |      
|                                                   |                
|Pay fixed/receive variable (cash
    flow hedge):  |                 |              |   |       |      | 
|                                                   | Notional amount |              | $ | 1,000 |      |  | $ |      |  |  | 
|Pay variable/receive fixed (fair
    value hedge): |                 |              |   |       |      | 
|                                                   | Notional amount |              | $ | 1,400 |      |  | $ | 1,800 |  |  | 
|                                                  



CONCENTRATIONS OF CREDIT RISK




Note N  Shareholders Equity


COMMON STOCK AUTHORIZED






70




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##### Table of Contents

cations, 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, 2005, 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. This plan was amended
in 2005. 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 15% 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 15% or more of the common stock. If a person or
group acquires 15% 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:

|                                  |  |               |     |  |        |   |        |               |  |  |        |  |  |   |       | 
|--------------------------------- |  | ------------- | --- |  | ------ | - | ------ | ------------- |  |  | ------ |  |  | - | ----- | 
|                                  |  | 2004          |     |  | 2005   |  
|                                  | 
|                                  |  | Shares        |     |  |        |   | Shares |               |  | 
|                                  |  | (in millions) |     |  | Amount |   |        | (in millions) |  |  | Amount | 
|                                  | 
|Shares held in treasury           |  |               | 163 |  |        | $ | 5,524  |               |  |  | 205    |  |  | $ | 6,616 | 
|Shares held by grantor trusts     |  |               | 26  |  |        |   | 380    |               |  |  | 17     |  |  |   | 199   | 
|                                 
|Shares held in trust and treasury |  |               | 189 |  |        | $ | 5,904  |               |  |  | 222    |  |  | $ | 6,815 | 
|                                 

Treasury shares




|      |  |               |      |  |           |   |       |           |  |   |       | 
|----- |  | ------------- | ---- |  | --------- | - | ----- | --------- |  | - | ----- | 
|      | 
|      |  | Number of     |      |  |          
|      |  | shares        |      |  | Aggregate |   |       | Average   | 
|      |  | purchased (in |      |  | purchase  |   |       | price per | 
|      |  | millions)     |      |  | price     |   |       | share     | 
|      | 
|2003  |  |               | 35.0 |  |           | $ | 858   |           |  | $ | 24.50 | 
|2004  |  |               | 5.8  |  |           | $ | 151   |           |  | $ | 26.17 | 
|2005  |  |               | 40.7 |  |           | $ | 1,096 |           |  | $ | 26.91 | 
|     
|Total |  |               | 81.5 |  |           | $ | 2,105 |           |  | $ | 25.83 | 
|     



Grantor trusts


Accounting for Deferred
Compensation Arrangements Where Amounts Are Held in a Rabbi
Trust and Invested,


OTHER COMPREHENSIVE INCOME




|                                                       |  |      |      |   |      |   |      |   |  | 
|------------------------------------------------------ |  | ---- | ---- | - | ---- | - | ---- | - |  | 
|                                                       |  | 2004 |      |   | 2005 |   |      |  
|                                                       | 
|Cumulative foreign currency
    translation adjustment |  | $    | (79  | ) |      | $ | (2   | ) |  | 
|Minimum pension liability adjustment                   |  |      | (129 | ) |      |   | (133 | ) |  | 
|Net unrealized (losses) gains on
    derivatives       |  |      | (12  | ) |      |   | 5    |   |  | 
|Net unrealized gains on securities                     |  |      | 63   |   |      |   | 116  |   |  | 
|                                                      
|                                                       |  | $    | (157 | ) |      | $ | (14  | ) |  | 
|                                                      



|                                     |                          |                    |       |      |      |   |       |      |   |   |       |    |   |  | 
|------------------------------------ | ------------------------ | ------------------ | ----- | ---- | ---- | - | ----- | ---- | - | - | ----- | -- | - |  | 
|                                     |                          | For the Year Ended |       |      |     
|                                     |                          | December 31,       |       |      |     
|                                     |                          |                   
|Total Comprehensive Income           |                          | 2003               |       |      | 2004 |   |       | 2005 |   |   |      
|                                    
|Net Income                           |                          | $                  | 3,904 |      |      | $ | 4,758 |      |   | $ | 3,294 |    |   | 
|Foreign currency
    translation(1): |                          |                    |       |      |      |   |       |      |   |   |       |    |   | 
|                                     | Adjustments              |                    |       | (103 | )    |   |       | (43  | ) |   |       | (1 | ) |  | 
|                                     | Sale of foreign entities |                    |       | 268  |      |   |       | 408  |   |   |       | 78 |   |  | 
|                                     |                          |                   
|                                     |                          |                    | 165   |      |      |   | 365   |      |   |   | 77    |    |   | 
|                                     |                          |                   



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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTSCONTINUED

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

BELLSOUTH CORPORATION

|                                                                               |                                                                                                                |                    |       |     |      |   |       |      |  |   |       |    |   |  | 
|------------------------------------------------------------------------------ | -------------------------------------------------------------------------------------------------------------- | ------------------ | ----- | --- | ---- | - | ----- | ---- |  | - | ----- | -- | - |  | 
|                                                                               |                                                                                                                | For the Year Ended |       |     |     
|                                                                               |                                                                                                                | December 31,       |       |     |     
|                                                                               |                                                                                                                |                   
|Total Comprehensive Income                                                     |                                                                                                                | 2003               |       |     | 2004 |   |       | 2005 |  |   |      
|                                                                              
|Minimum pension liability
    adjustment, net of tax of $(10), $(20), and $(1) |                                                                                                                |                    | (18   | )   |      |   | (40   | )    |  |   | (4    | )  |   | 
|Deferred gains (losses) on
    derivatives:                                    |                                                                                                                |                    |       |     |      |   |       |      |  |   |       |    |   | 
|                                                                               | Deferred gains (losses), net of tax
    of $8, $20, and $10                                                    |                    |       | 14  |      |   |       | 36   |  |   |       | 19 |   |  | 
|                                                                               | Reclassification adjustment for
    (gains) losses included in net income, net of tax of $(7), $0,
    and $0  |                    |       | (13 | )    |   |       | 8    |  |   |       | (2 | ) |  | 
|                                                                               |                                                                                                                |                   
|                                                                               |                                                                                                                |                    | 1     |     |      |   | 44    |      |  |   | 17    |    |   | 
|                                                                               |                                                                                                                |                   
|Unrealized gains (losses) on
    securities:                                   |                                                                                                                |                    |       |     |      |   |       |      |  |   |       |    |   | 
|                                                                               | Unrealized holdings gains (losses),
    net of tax of $21, $33, and $31                                        |                    |       | 39  |      |   |       | 57   |  |   |       | 54 |   |  | 
|                                                                               | Reclassification adjustment for
    (gains) losses included in net income, net of tax of $(17), $1,
    and $0 |                    |       | (32 | )    |   |       | 2    |  |   |       | (1 | ) |  | 
|                                                                               |                                                                                                                |                   
|                                                                               |                                                                                                                |                    | 7     |     |      |   | 59    |      |  |   | 53    |    |   | 
|                                                                               |                                                                                                                |                   
|Total comprehensive income                                                     |                                                                                                                | $                  | 4,059 |     |      | $ | 5,186 |      |  | $ | 3,437 |    |   | 
|                                                                              



|    |                                                                                                                                                                                                                                                                                                        
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Foreign currency translation amounts had no tax impacts in
    2003. In 2004, the Adjustments are net of tax of $(42). There
    were no tax impacts on the 2004 sale of foreign entities. In
    2005, the sale of foreign entities was net of tax of $42 and
    there was no tax on the Adjustments.

Note O  Stock Compensation Plans






|                        |  |                    |     |  |      |   |     |      |  |   |     |  |  | 
|----------------------- |  | ------------------ | --- |  | ---- | - | --- | ---- |  | - | --- |  |  | 
|                        |  | For the Year Ended |     |  |     
|                        |  | December 31,       |     |  |     
|                        |  |                    |    
|                        |  | 2003               |     |  | 2004 |   |     | 2005 |  |   |    
|                        |  |                    |    
|Stock options           |  | $                  | 114 |  |      | $ | 78  |      |  | $ | 41  |  |  | 
|Restricted stock        |  |                    | 23  |  |      |   | 43  |      |  |   | 54  |  |  | 
|Performance share units |  |                    | 15  |  |      |   | 40  |      |  |   | 71  |  |  | 
|                       
|Totals                  |  | $                  | 152 |  |      | $ | 161 |      |  | $ | 166 |  |  | 
|                       



STOCK OPTION AWARDS




|                                                                                        |  |      |             |   |      |  |             |      |  |  |             |  
|--------------------------------------------------------------------------------------- |  | ---- | ----------- | - | ---- |  | ----------- | ---- |  |  | ----------- | -
|                                                                                        |  | 2003 |             |   | 2004 |  |             | 2005 | 
|                                                                                        | 
|Options outstanding at January 1                                                        |  |      | 106,328,465 |   |      |  | 112,840,873 |      |  |  | 105,763,573 |  
|Options granted                                                                         |  |      | 14,374,127  |   |      |  | 369,076     |      |  |  | 69,247      |  
|Options exercised                                                                       |  |      | (4,495,974  | ) |      |  | (4,832,564  | )    |  |  | (6,427,203  | )
|Options forfeited                                                                       |  |      | (3,365,745  | ) |      |  | (2,613,812  | )    |  |  | (2,602,828  | )
|Options outstanding at
    December 31                                                  |  |      | 112,840,873 |   |      |  | 105,763,573 |      |  |  | 96,802,789  |  
|                                                                                       
|Weighted-average option prices per
    common share:                                    |  |      |             |   |      |  |             |      |  |  |             |  
|Outstanding at January 1                                                                |  |      | $35.68      |   |      |  | $34.52      |      |  |  | $35.19      |  
|Granted at fair market value                                                            |  |      | $21.96      |   |      |  | $27.25      |      |  |  | $26.40      |  
|Exercised                                                                               |  |      | $17.94      |   |      |  | $18.54      |      |  |  | $20.59      |  
|Forfeited                                                                               |  |      | $38.85      |   |      |  | $36.37      |      |  |  | $36.46      |  
|Outstanding at December 31                                                              |  |      | $34.52      |   |      |  | $35.19      |      |  |  | $36.12      |  
|                                                                                       
|Weighted-average fair value of
    options granted at fair market value during the year |  |      | $4.20       |   |      |  | $5.66       |      |  |  | $5.20       |  
|                                                                                       
|Options exercisable at
    December 31                                                  |  |      | 70,615,852  |   |      |  | 75,627,927  |      |  |  | 82,252,669  |  
|Shares available for grant at
    December 31                                           |  |      | 54,881,922  |   |      |  | 79,886,521  |      |  |  | 77,532,962  |  
|                                                                                       





72




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##### Table of Contents

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:

|                        |  |      |       |  |      |  |       |      |  |  |       | 
|----------------------- |  | ---- | ----- |  | ---- |  | ----- | ---- |  |  | ----- | 
|                        |  | 2003 |       |  | 2004 |  |       | 2005 | 
|                        | 
|Expected life (years)   |  |      | 5     |  |      |  | 5     |      |  |  | 5     | 
|Dividend yield          |  |      | 3.87% |  |      |  | 3.67% |      |  |  | 4.08% | 
|Expected volatility     |  |      | 29.0% |  |      |  | 29.0% |      |  |  | 28.0% | 
|Risk-free interest rate |  |      | 2.65% |  |      |  | 3.46% |      |  |  | 3.90% | 
|                       



|               |                 |             |         |          |              |         |           |          |       |  |  |           |          |  |       |  |            |  |  |   |       | 
|-------------- | --------------- | ----------- | ------- | -------- | ------------ | ------- | --------- | -------- | ----- |  |  | --------- | -------- |  | ----- |  | ---------- |  |  | - | ----- | 
|               |                 | Outstanding |         |          | Exercisable  |        
|               |                 |             |         |          |              |        
|               |                 |             |         | Weighted |              |         | Wtd. Avg. |          |       |  |  | Wtd. Avg. |         
|Exercise Price |                 |             |         |          | Average      |         |           | Exercise |       |  |  |           | Exercise | 
|Range          |                 |             | Options |          |              | Life(a) |           |          | Price |  |  | Options   |          |  | Price | 
|               |                
|               | $19.22  $22.1  |             |         |          | 9 20,460,094 |         |           |          | 4.71  |  |  | $         | 21.81    |  |       |  | 8,738,594  |  |  | $ | 21.90 | 
|               | $22.20  $30.91 |             |         |          | 17,403,568   |         |           |          | 3.59  |  |  | $         | 29.92    |  |       |  | 14,858,732 |  |  | $ | 30.27 | 
|               | $31.03  $41.00 |             |         |          | 15,906,638   |         |           |          | 5.76  |  |  | $         | 38.96    |  |       |  | 15,636,854 |  |  | $ | 38.93 | 
|               | $41.26  $43.66 |             |         |          | 17,825,304   |         |           |          | 5.03  |  |  | $         | 42.59    |  |       |  | 17,811,304 |  |  | $ | 42.59 | 
|               | $44.48  $51.78 |             |         |          | 25,207,185   |         |           |          | 3.62  |  |  | $         | 45.66    |  |       |  | 25,207,185 |  |  | $ | 45.66 | 
|              
|               | $19.22  $51.78 |             |         |          | 96,802,789   |         |           |          | 4.46  |  |  | $         | 36.12    |  |       |  | 82,252,669 |  |  | $ | 38.41 | 
|              



|    |  |                                                      
|--- |  | -----------------------------------------------------
|(a) |  | Weighted-average remaining contractual life in years.

RESTRICTED STOCK AWARDS




|                                                                 |  |      |           |   |      |  |           |      |  |  |            |  
|---------------------------------------------------------------- |  | ---- | --------- | - | ---- |  | --------- | ---- |  |  | ---------- | -
|                                                                 |  | 2003 |           |   | 2004 |  |           | 2005 | 
|                                                                 | 
|Restricted shares:                                               |  |      |           |   |      |  |           |      |  |  |            |  
|Outstanding at January 1                                         |  |      | 2,163,250 |   |      |  | 2,267,667 |      |  |  | 3,974,851  |  
|Granted                                                          |  |      | 772,250   |   |      |  | 2,264,300 |      |  |  | 2,353,430  |  
|Vested                                                           |  |      | (489,691  | ) |      |  | (407,286  | )    |  |  | (1,842,870 | )
|Forfeited                                                        |  |      | (178,142  | ) |      |  | (149,830  | )    |  |  | (215,331   | )
|Outstanding at December 31                                       |  |      | 2,267,667 |   |      |  | 3,974,851 |      |  |  | 4,270,080  |  
|                                                                
|Weighted-average grant date fair
    value per restricted share: |  |      |           |   |      |  |           |      |  |  |            |  
|Outstanding at January 1                                         |  |      | $34.69    |   |      |  | $29.91    |      |  |  | $28.24     |  
|Granted                                                          |  |      | $22.11    |   |      |  | $27.60    |      |  |  | $26.07     |  
|Vested                                                           |  |      | $36.45    |   |      |  | $34.28    |      |  |  | $28.40     |  
|Forfeited                                                        |  |      | $36.20    |   |      |  | $27.31    |      |  |  | $27.27     |  
|Outstanding at December 31                                       |  |      | $29.91    |   |      |  | $28.24    |      |  |  | $27.02     |  
|                                                                

PERFORMANCE SHARE UNIT AWARDS




|                                                                       |                            |      |        |           |      |  |        |           |   |  |        |            |  
|---------------------------------------------------------------------- | -------------------------- | ---- | ------ | --------- | ---- |  | ------ | --------- | - |  | ------ | ---------- | -
|                                                                       |                            | 2003 |        |           | 2004 |  |        | 2005      |  
|                                                                       |                           
|Performance share units                                                |                            |      |        |           |      |  |        |           |   |  |        |           
|                                                                       | Outstanding at January 1   |      |        | 1,017,050 |      |  |        | 1,718,400 |   |  |        | 3,788,782  |  
|                                                                       | Units granted              |      |        | 1,244,700 |      |  |        | 2,699,400 |   |  |        | 3,431,475  |  
|                                                                       | Units vested               |      |        | (448,200  | )    |  |        | (504,815  | ) |  |        | (1,256,222 | )
|                                                                       | Units forfeited            |      |        | (95,150   | )    |  |        | (124,203  | ) |  |        | (106,430   | )
|                                                                       | Outstanding at December 31 |      |        | 1,718,400 |      |  |        | 3,788,782 |   |  |        | 5,857,605  |  
|                                                                      
|Weighted-average grant date stock
    price per performance share unit |                            |      | $26.71 |           |      |  | $28.22 |           |   |  | $26.04 |           
|                                                                      



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##### Table of Contents

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTSCONTINUED

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

BELLSOUTH CORPORATION

Note P  Segment Information

We have three reportable operating segments:
(1) Communications Group; (2) Wireless; and
(3) Advertising & Publishing Group.

We own a 40 percent economic interest in Cingular Wireless, and
share joint control of the venture with AT&T. We account for
the investment under the equity method. For management purposes
we evaluate our wireless segment based on our proportionate
share of Cingular Wireless results. Accordingly, results
for our wireless segment reflect the proportional consolidation
of 40 percent of Cingular Wireless results.

The following table provides information for each operating
segment as of and for the year ended December 31:

|                                               |                        |      |        |        |      |   |        |        |  |   |        |        |  |  | 
|---------------------------------------------- | ---------------------- | ---- | ------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ |  |  | 
|                                               |                        | 2003 |        |        | 2004 |   |        | 2005   |  |   |       
|                                               |                       
|Communications Group                           |                        |      |        |        |      |   |        |        |  |   |        |        |  | 
|External revenues                              |                        | $    | 18,269 |        |      | $ | 18,306 |        |  | $ | 18,404 |        |  | 
|Intersegment revenues                          |                        |      | 138    |        |      |   | 107    |        |  |   | 108    |        |  | 
|                                               | Total segment revenues |      |        | 18,407 |      |   |        | 18,413 |  |   |        | 18,512 |  |  | 
|Depreciation and amortization                  |                        |      | 3,787  |        |      |   | 3,609  |        |  |   | 3,633  |        |  | 
|Segment operating income                       |                        |      | 4,813  |        |      |   | 4,597  |        |  |   | 4,255  |        |  | 
|Interest expense                               |                        |      | 414    |        |      |   | 374    |        |  |   | 391    |        |  | 
|Income taxes                                   |                        |      | 1,612  |        |      |   | 1,526  |        |  |   | 1,389  |        |  | 
|Segment net income                             |                        | $    | 2,829  |        |      | $ | 2,727  |        |  | $ | 2,543  |        |  | 
|Segment assets                                 |                        | $    | 33,269 |        |      | $ | 33,252 |        |  | $ | 33,599 |        |  | 
|Capital expenditures                           |                        | $    | 2,898  |        |      | $ | 3,164  |        |  | $ | 3,429  |        |  | 
|                                              
|Wireless (40% proportional
    interest)       |                        |      |        |        |      |   |        |        |  |   |        |        |  | 
|External revenues                              |                        | $    | 6,231  |        |      | $ | 7,826  |        |  | $ | 13,773 |        |  | 
|Intersegment revenues                          |                        |      |       |        |      |   |       |        |  |   |       |        |  | 
|                                               | Total segment revenues |      |        | 6,231  |      |   |        | 7,826  |  |   |        | 13,773 |  |  | 
|Depreciation and amortization                  |                        |      | 835    |        |      |   | 1,073  |        |  |   | 1,778  |        |  | 
|Segment operating income                       |                        |      | 915    |        |      |   | 895    |        |  |   | 1,811  |        |  | 
|Interest expense                               |                        |      | 343    |        |      |   | 360    |        |  |   | 504    |        |  | 
|Net earnings (losses) of
    equity affiliates |                        |      | (129   | )      |      |   | (156   | )      |  |   | 2      |        |  | 
|Income taxes                                   |                        |      | 159    |        |      |   | 146    |        |  |   | 594    |        |  | 
|Segment net income                             |                        | $    | 261    |        |      | $ | 209    |        |  | $ | 701    |        |  | 
|Segment assets                                 |                        | $    | 10,212 |        |      | $ | 32,895 |        |  | $ | 31,728 |        |  | 
|Capital expenditures                           |                        | $    | 1,094  |        |      | $ | 1,380  |        |  | $ | 2,990  |        |  | 
|                                              
|Advertising & Publishing
    Group             |                        |      |        |        |      |   |        |        |  |   |        |        |  | 
|External revenues                              |                        | $    | 2,033  |        |      | $ | 2,005  |        |  | $ | 2,046  |        |  | 
|Intersegment revenues                          |                        |      | 17     |        |      |   | 14     |        |  |   | 14     |        |  | 
|                                               | Total segment revenues |      |        | 2,050  |      |   |        | 2,019  |  |   |        | 2,060  |  |  | 
|Depreciation and amortization                  |                        |      | 26     |        |      |   | 28     |        |  |   | 28     |        |  | 
|Segment operating income                       |                        |      | 973    |        |      |   | 954    |        |  |   | 954    |        |  | 
|Interest expense                               |                        |      | 7      |        |      |   | 8      |        |  |   | 12     |        |  | 
|Income taxes                                   |                        |      | 368    |        |      |   | 363    |        |  |   | 346    |        |  | 
|Segment net income                             |                        | $    | 600    |        |      | $ | 583    |        |  | $ | 595    |        |  | 
|Segment assets                                 |                        | $    | 1,002  |        |      | $ | 1,057  |        |  | $ | 1,102  |        |  | 
|Capital expenditures                           |                        | $    | 28     |        |      | $ | 29     |        |  | $ | 28     |        |  | 

RECONCILIATION TO


CONSOLIDATED FINANCIAL INFORMATION


|                                                                |  |      |        |   |      |   |        |      |  |   |         |   |  |  
|--------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------- | - |  | -
|                                                                |  | 2003 |        |   | 2004 |   |        | 2005 |  |   |        
|                                                                | 
|Operating revenues                                              |  |      |        |   |      |   |        |      |  |   |         |   |  |  
|Total reportable segments                                       |  | $    | 26,688 |   |      | $ | 28,258 |      |  | $ | 34,345  |   |  |  
|Cingular Wireless proportional
    consolidation                |  |      | (6,231 | ) |      |   | (7,826 | )    |  |   | (13,773 |   |  | )
|Deferred revenue adjustment                                     |  |      |       |   |      |   |       |      |  |   | 47      |   |  |  
|South Carolina regulatory settlement                            |  |      |       |   |      |   | (50    | )    |  |   |        |   |  |  
|Corporate, eliminations and other                               |  |      | (116   | ) |      |   | (82    | )    |  |   | (72     |   |  | )
|                                                               
|Total consolidated                                              |  | $    | 20,341 |   |      | $ | 20,300 |      |  | $ | 20,547  |   |  |  
|                                                               
|                                                               
|Operating income                                                |  |      |        |   |      |   |        |      |  |   |         |   |  |  
|Total reportable segments                                       |  | $    | 6,701  |   |      | $ | 6,446  |      |  | $ | 7,020   |   |  |  
|Cingular Wireless proportional
    consolidation                |  |      | (915   | ) |      |   | (895   | )    |  |   | (1,811  | ) |  |  
|Restructuring charge and asset
    impairment                   |  |      | (158   | ) |      |   | (50    | )    |  |   | (262    | ) |  |  
|Pension settlement loss                                         |  |      | (47    | ) |      |   |       |      |  |   |         |   |  |  
|Deferred revenue adjustment                                     |  |      |       |   |      |   |       |      |  |   | 47      |   |  |  
|South Carolina regulatory settlement                            |  |      |       |   |      |   | (53    | )    |  |   |        |   |  |  
|Hurricane-related expenses                                      |  |      |       |   |      |   | (164   | )    |  |   | (360    | ) |  |  
|Corporate, eliminations and other                               |  |      | (24    | ) |      |   | 5      |      |  |   | 36      |   |  |  
|                                                               
|Total consolidated                                              |  | $    | 5,557  |   |      | $ | 5,289  |      |  | $ | 4,670   |   |  |  
|                                                               
|                                                               
|Net income                                                      |  |      |        |   |      |   |        |      |  |   |         |   |  |  
|Total reportable segments                                       |  | $    | 3,690  |   |      | $ | 3,519  |      |  | $ | 3,839   |   |  |  
|Restructuring charge and asset
    impairment                   |  |      | (97    | ) |      |   | (31    | )    |  |   | (161    | ) |  |  
|Pension settlement loss                                         |  |      | (29    | ) |      |   |       |      |  |   |        |   |  |  
|Net gain on ownership transactions                              |  |      |       |   |      |   | 295    |      |  |   | 228     |   |  |  
|Net losses on sale or impairment of
    securities              |  |      | (5     | ) |      |   |       |      |  |   |        |   |  |  
|Early extinguishment of debt                                    |  |      | (11    | ) |      |   |       |      |  |   | (26     | ) |  |  
|Deferred revenue adjustment                                     |  |      |       |   |      |   |       |      |  |   | 29      |   |  |  
|South Carolina regulatory settlement                            |  |      |       |   |      |   | (33    | )    |  |   |        |   |  |  
|Hurricane-related expenses                                      |  |      |       |   |      |   | (100   | )    |  |   | (247    | ) |  |  
|Wireless merger integration costs
    and fair value adjustment |  |      |       |   |      |   | (66    | )    |  |   | (197    | ) |  |  
|Cingular Wireless lease accounting
    adjustments              |  |      |       |   |      |   | (43    | )    |  |   |        |   |  |  
|Wireless merger intangible
    amortization                     |  |      |       |   |      |   | (80    | )    |  |   | (374    | ) |  |  
|Income from discontinued operations                             |  |      | 101    |   |      |   | 1,364  |      |  |   | 381     |   |  |  
|Cumulative effect of changes in
    accounting principle        |  |      | 315    |   |      |   |       |      |  |   |        |   |  |  
|Corporate, eliminations and other                               |  |      | (60    | ) |      |   | (67    | )    |  |   | (178    | ) |  |  
|                                                               
|Total consolidated                                              |  | $    | 3,904  |   |      | $ | 4,758  |      |  | $ | 3,294   |   |  |  
|                                                               



74




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##### Table of Contents



|                                  |  |      |         |   |      |   |         |      |  |   |         |  |  |  
|--------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- |  |  | -
|                                  |  | 2003 |         |   | 2004 |   |         | 2005 |  |   |        
|                                  | 
|Total assets                      |  |      |         |   |      |   |         |      |  |   |         |  |  |  
|Total reportable segments         |  | $    | 44,483  |   |      | $ | 67,204  |      |  | $ | 66,429  |  |  |  
|Cingular Wireless proportional    |  |      | (10,212 | ) |      |   | (32,895 | )    |  |   | (31,728 |  |  | )
|Cingular investment               |  |      | 7,679   |   |      |   | 22,771  |      |  |   | 21,274  |  |  |  
|Corporate, eliminations and other |  |      | 7,672   |   |      |   | 2,259   |      |  |   | 578     |  |  |  
|                                 
|Total consolidated                |  | $    | 49,622  |   |      | $ | 59,339  |      |  | $ | 56,553  |  |  |  
|                                 









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

LEASES




|           |  |         |     | 
|---------- |  | ------- | --- | 
|           |  | Minimum |    
|           |  | Rentals |    
|           | 
|2006       |  | $       | 114 | 
|2007       |  |         | 93  | 
|2008       |  |         | 70  | 
|2009       |  |         | 52  | 
|2010       |  |         | 30  | 
|Thereafter |  |         | 223 | 
|          
|Total      |  | $       | 582 | 
|          

OUTSIDE PLANT




GUARANTEES




PURCHASE OBLIGATIONS






|                                          |  |                        |       |  |        |   |     |           |  |   |           |  |  |            |     |  |  |  |   |  |  | 
|----------------------------------------- |  | ---------------------- | ----- |  | ------ | - | --- | --------- |  | - | --------- |  |  | ---------- | --- |  |  |  | - |  |  | 
|                                          |  | Payments Due by Period |       |  |       
|                                          | 
|                                          |  | Less than              |       |  |       
|                                          |  | Total                  |       |  | 1 year |   |     | 2007-2009 |  |   | 2010-2012 |  |  | After 2012 |     |  | 
|                                          | 
|Unconditional purchase
    obligations(1) |  | $                      | 2,633 |  |        | $ | 936 |           |  | $ | 1,482     |  |  | $          | 215 |  |  |  |  |  |  | 
|                                         



|    |  |                                                                                                               
|--- |  | --------------------------------------------------------------------------------------------------------------
|(1) |  | The unconditional purchase obligations include annual
    estimated expenditures based on anticipated volumes.

REGULATORY MATTERS






75




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##### Table of Contents

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTSCONTINUED

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

BELLSOUTH CORPORATION

this time, the likely outcome of the case cannot be predicted,
nor can a reasonable estimate of gain, if any, be made.
Accordingly, no revenue has been recognized with respect to this
matter in our consolidated financial statements.

On November 4, 2005, AT&T sued BellSouth Long Distance,
Inc. (BSLD) and Qwest Communications Corporation (Qwest) in
US District Court for the Southern District of New York.
AT&T has asserted claims of breach of contract, fraudulent
misrepresentation and unjust enrichment against BSLD and related
claims against Qwest. AT&Ts claims arise from a
contract with BSLD pursuant to which BSLD purchased wholesale
long distance minutes that it resold to Qwest. The complaint
does not specify the amount of damages sought by AT&T. 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.

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
US 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 Telecommunications at any time since April 29,
1998, and a class of all African-American salaried workers
employed by BellSouth Telecommunications 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 and ERISA 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 US 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 in July 2003 on
behalf of two putative classes: (1) purchasers of BellSouth
stock during the period November 7, 2000 through
February 19, 2003 (the class period) for alleged violations
of Sections 10(b) and 20 of the Securities Exchange Act of
1934 and (2) participants in BellSouths Direct
Investment Plan during the class period for alleged violations
of Sections 11, 12 and 15 of the Securities Act of 1933.
Four outside directors were named as additional defendants. The
Consolidated and Amended Class Action Complaint alleged that
during the class period the Company (1) overstated the
unbilled receivables balance of its Advertising & Publishing
subsidiary; (2) failed to properly implement SAB 101 with
regard to its recognition of Advertising & 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.

On February 8, 2005, the District Court dismissed the
Exchange Act claims, except for those relating to the writedown
of Latin American goodwill. On that date, the District Court
also dismissed the Securities Act claims, except for those
relating to the writedown of Latin American goodwill, the
allegations relating to unbilled receivables of the
Companys Advertising & Publishing subsidiary, the
implementation of SAB 101 regarding recognition of
Advertising & Publishing revenues and alleged improper
billing of CLECs. 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. In July
2003, the federal court issued a ruling that the case should be
remanded to Fulton County Superior Court. The Fulton County
Superior Court has stayed the case pending resolution of the
federal case. 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 US 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) plans
(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
Plans participants and beneficiaries; (2) failing to
ensure that the Plans assets were invested properly;
(3) failing to monitor the Plans fiduciaries;
(4) failing to disregard Plan




76BELLSOUTH 2005



---



##### Table of Contents

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 & Publishing subsidiary and its former 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.

Antitrust claims

In December 2002, a consumer class action alleging antitrust
violations of Section 1 of the Sherman Antitrust Act was
filed against BellSouth, Verizon, SBC and Qwest, captioned
William Twombly, et al v. Bell Atlantic Corp., et al, in
US District Court for the Southern District of New York.
The complaint alleged that defendants conspired to restrain
competition by agreeing not to compete with one another and to
impede competition with others. 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. In October 2005, the Second Circuit Court of Appeals
reversed the District Courts decision and remanded the
case to the District Court for further proceedings. At this
time, the likely outcome of the case cannot be predicted, nor
can a reasonable estimate of loss, if any, be made.

In June 2004, the US Court of Appeals for the
11th
Circuit affirmed the District Courts dismissal of most of
the antitrust and state law claims brought by a plaintiff CLEC
in a case captioned Covad Communications Company, et al v.
BellSouth Corporation, et al. The appellate court, however,
permitted a price squeeze claim and certain state tort claims to
proceed. In November 2005, Covad dismissed with prejudice the
civil action and then contemporaneously filed complaints with
the public service commissions of Florida and Georgia and filed
an informal complaint with the Federal Communications
Commission. The commission complaints allege breaches of our
interconnection contracts approved by the state commissions,
including failure to provide collocation, mishandling of orders,
ineffective support systems, and failure to provide unbundled
loops. The complaints also allege improper solicitation of Covad
customers. These claims are similar to the claims raised in the
civil action dismissed by Covad. The complaints seek credits and
equitable relief. Covad has asked the state commissions to stay
proceedings on its complaints pending resolutions of its FCC
complaint. At this time, the likely outcome of the case cannot
be predicted, nor can a reasonable estimate of loss, if any, be
made.

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, including
environmental liabilities, rates and contracts. Certain
contingent liabilities for pre-divestiture events are shared
with AT&T Inc. 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 
    Subsidiary Financial InformationWe 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, 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. 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.




BELLSOUTH 2005      77



---



##### Table of Contents

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTSCONTINUED

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

BELLSOUTH CORPORATION

CONDENSED CONSOLIDATING STATEMENTS OF INCOME

|                                                                     |  |                                      |        |         |       |   |       |        |  |   |       |   |  |       |        |   |  |   |        |  |  | 
|-------------------------------------------------------------------- |  | ------------------------------------ | ------ | ------- | ----- | - | ----- | ------ |  | - | ----- | - |  | ----- | ------ | - |  | - | ------ |  |  | 
|                                                                     |  | For the Year Ended December 31, 2003
|                                                                     |  |                                     
|                                                                     |  |                                      |        | Adjust- |       |   |      
|                                                                     |  | BST                                  |        |         | Other |   |       | Parent |  |   | ments |   |  | Total |        |   | 
|                                                                    
|Total operating revenues                                             |  | $                                    | 17,400 |         |       | $ | 5,695 |        |  | $ |      |   |  | $     | (2,754 | ) |  | $ | 20,341 |  |  | 
|Total operating expenses                                             |  |                                      | 14,838 |         |       |   | 4,169 |        |  |   | 25    |   |  |       | (4,248 | ) |  |   | 14,784 |  |  | 
|                                                                    
|Operating income (loss)                                              |  |                                      | 2,562  |         |       |   | 1,526 |        |  |   | (25   | ) |  |       | 1,494  |   |  |   | 5,557  |  |  | 
|Interest expense                                                     |  |                                      | 537    |         |       |   | 73    |        |  |   | 580   |   |  |       | (243   | ) |  |   | 947    |  |  | 
|Net earnings (losses) of equity
    affiliates                       |  |                                      | 1,067  |         |       |   | 498   |        |  |   | 3,799 |   |  |       | (4,912 | ) |  |   | 452    |  |  | 
|Other income (expense), net                                          |  |                                      | (10    | )       |       |   | 275   |        |  |   | 111   |   |  |       | (14    | ) |  |   | 362    |  |  | 
|                                                                    
|Income (loss) from continuing
    operations before income taxes     |  |                                      | 3,082  |         |       |   | 2,226 |        |  |   | 3,305 |   |  |       | (3,189 | ) |  |   | 5,424  |  |  | 
|Provision (benefit) for income taxes                                 |  |                                      | 730    |         |       |   | 770   |        |  |   | (183  | ) |  |       | 619    |   |  |   | 1,936  |  |  | 
|                                                                    
|Income (loss) from continuing
    operations                         |  |                                      | 2,352  |         |       |   | 1,456 |        |  |   | 3,488 |   |  |       | (3,808 | ) |  |   | 3,488  |  |  | 
|Income (loss) from discontinued
    operations, net of tax           |  |                                      |       |         |       |   | 101   |        |  |   | 101   |   |  |       | (101   | ) |  |   | 101    |  |  | 
|Cumulative effect of changes in
    accounting principle, net of tax |  |                                      | 816    |         |       |   | (501  | )      |  |   | 315   |   |  |       | (315   | ) |  |   | 315    |  |  | 
|                                                                    
|Net income (loss)                                                    |  | $                                    | 3,168  |         |       | $ | 1,056 |        |  | $ | 3,904 |   |  | $     | (4,224 | ) |  | $ | 3,904  |  |  | 
|                                                                    

|                                                                 |  |                                      |        |  |       |   |       |        |  |   |             |   |  |       |        |   |  |   |        |  |  | 
|---------------------------------------------------------------- |  | ------------------------------------ | ------ |  | ----- | - | ----- | ------ |  | - | ----------- | - |  | ----- | ------ | - |  | - | ------ |  |  | 
|                                                                 |  | For the Year Ended December 31, 2004
|                                                                 |  |                                     
|                                                                 |  | BST                                  |        |  | Other |   |       | Parent |  |   | Adjustments |   |  | Total |        |   | 
|                                                                
|Total operating revenues                                         |  | $                                    | 16,884 |  |       | $ | 6,452 |        |  | $ |            |   |  | $     | (3,036 | ) |  | $ | 20,300 |  |  | 
|Total operating expenses                                         |  |                                      | 14,993 |  |       |   | 4,627 |        |  |   | 11          |   |  |       | (4,620 | ) |  |   | 15,011 |  |  | 
|                                                                
|Operating income (loss)                                          |  |                                      | 1,891  |  |       |   | 1,825 |        |  |   | (11         | ) |  |       | 1,584  |   |  |   | 5,289  |  |  | 
|Interest expense                                                 |  |                                      | 529    |  |       |   | 26    |        |  |   | 607         |   |  |       | (246   | ) |  |   | 916    |  |  | 
|Net earnings (losses) of equity
    affiliates                   |  |                                      | 1,125  |  |       |   | 80    |        |  |   | 3,700       |   |  |       | (4,837 | ) |  |   | 68     |  |  | 
|Other income (expense), net                                      |  |                                      | 12     |  |       |   | 667   |        |  |   | 114         |   |  |       | (48    | ) |  |   | 745    |  |  | 
|                                                                
|Income (loss) from continuing
    operations before income taxes |  |                                      | 2,499  |  |       |   | 2,546 |        |  |   | 3,196       |   |  |       | (3,055 | ) |  |   | 5,186  |  |  | 
|Provision (benefit) for income taxes                             |  |                                      | 484    |  |       |   | 858   |        |  |   | (198        | ) |  |       | 648    |   |  |   | 1,792  |  |  | 
|                                                                
|Income (loss) from continuing
    operations                     |  |                                      | 2,015  |  |       |   | 1,688 |        |  |   | 3,394       |   |  |       | (3,703 | ) |  |   | 3,394  |  |  | 
|Income (loss) from discontinued
    operations, net of tax       |  |                                      |       |  |       |   | 1,364 |        |  |   | 1,364       |   |  |       | (1,364 | ) |  |   | 1,364  |  |  | 
|                                                                
|Net income (loss)                                                |  | $                                    | 2,015  |  |       | $ | 3,052 |        |  | $ | 4,758       |   |  | $     | (5,067 | ) |  | $ | 4,758  |  |  | 
|                                                                

|                                                                 |  |                                      |        |   |       |   |       |        |  |   |             |   |  |       |        |   |  |   |        |  |  | 
|---------------------------------------------------------------- |  | ------------------------------------ | ------ | - | ----- | - | ----- | ------ |  | - | ----------- | - |  | ----- | ------ | - |  | - | ------ |  |  | 
|                                                                 |  | For the Year Ended December 31, 2005
|                                                                 |  |                                     
|                                                                 |  | BST                                  |        |   | Other |   |       | Parent |  |   | Adjustments |   |  | Total |        |   | 
|                                                                
|Total operating revenues                                         |  | $                                    | 16,851 |   |       | $ | 7,191 |        |  | $ |            |   |  | $     | (3,495 | ) |  | $ | 20,547 |  |  | 
|Total operating expenses                                         |  |                                      | 15,556 |   |       |   | 5,330 |        |  |   | 119         |   |  |       | (5,128 | ) |  |   | 15,877 |  |  | 
|                                                                
|Operating income (loss)                                          |  |                                      | 1,295  |   |       |   | 1,861 |        |  |   | (119        | ) |  |       | 1,633  |   |  |   | 4,670  |  |  | 
|Interest expense                                                 |  |                                      | 513    |   |       |   | 29    |        |  |   | 891         |   |  |       | (309   | ) |  |   | 1,124  |  |  | 
|Net earnings (losses) of equity
    affiliates                   |  |                                      | 1,195  |   |       |   | 171   |        |  |   | 3,223       |   |  |       | (4,424 | ) |  |   | 165    |  |  | 
|Other income (expense), net                                      |  |                                      | (12    | ) |       |   | 552   |        |  |   | 225         |   |  |       | (174   | ) |  |   | 591    |  |  | 
|                                                                
|Income (loss) from continuing
    operations before income taxes |  |                                      | 1,965  |   |       |   | 2,555 |        |  |   | 2,438       |   |  |       | (2,656 | ) |  |   | 4,302  |  |  | 
|Provision (benefit) for income taxes                             |  |                                      | 257    |   |       |   | 952   |        |  |   | (475        | ) |  |       | 655    |   |  |   | 1,389  |  |  | 
|                                                                
|Income (loss) from continuing
    operations                     |  |                                      | 1,708  |   |       |   | 1,603 |        |  |   | 2,913       |   |  |       | (3,311 | ) |  |   | 2,913  |  |  | 
|Income (loss) from discontinued
    operations, net of tax       |  |                                      |       |   |       |   | 381   |        |  |   | 381         |   |  |       | (381   | ) |  |   | 381    |  |  | 
|                                                                
|Net income (loss)                                                |  | $                                    | 1,708  |   |       | $ | 1,984 |        |  | $ | 3,294       |   |  | $     | (3,692 | ) |  | $ | 3,294  |  |  | 
|                                                                



78




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##### Table of Contents

CONDENSED CONSOLIDATING BALANCE SHEETS

|                                                  |  |                   |        |         |                   |   |        |        |  |   |         |   |  |       |         |   |     |   |        |       |  |   |        |  |  |       |        |  |       |   |        |   |  |   |         |   |  |   |        |  |  | 
|------------------------------------------------- |  | ----------------- | ------ | ------- | ----------------- | - | ------ | ------ |  | - | ------- | - |  | ----- | ------- | - | --- | - | ------ | ----- |  | - | ------ |  |  | ----- | ------ |  | ----- | - | ------ | - |  | - | ------- | - |  | - | ------ |  |  | 
|                                                  |  | December 31, 2004 |        |         | December 31, 2005
|                                                  |  |                   |        |         |                  
|                                                  |  |                   |        | Adjust- |                   |   |        |        |  |   | Adjust- |   |  |      
|                                                  |  | BST               |        |         | Other             |   |        | Parent |  |   | ments   |   |  | Total |         |   | BST |   |        | Other |  |   | Parent |  |  | ments |        |  | Total |   |        |  
|                                                 
|ASSETS                                            |  |                   |        |         |                   |   |        |        |  |   |         |   |  |       |         |   |     |   |        |       |  |   |        |  |  |       |        |  |       |   |        |   |  |   |         |   |  |   |        |  |  | 
|Current assets:                                   |  |                   |        |         |                   |   |        |        |  |   |         |   |  |       |         |   |     |   |        |       |  |   |        |  |  |       |        |  |       |   |        |   |  |   |         |   |  |   |        |  |  | 
|Cash and cash equivalents                         |  | $                 | 7      |         |                   | $ | 405    |        |  | $ | 265     |   |  | $     | 3       |   |     | $ | 680    |       |  | $ | 98     |  |  | $     | 141    |  |       | $ | 138    |   |  | $ | 50      |   |  | $ | 427    |  |  | 
|Short-term investments                            |  |                   |       |         |                   |   |       |        |  |   | 16      |   |  |       |        |   |     |   | 16     |       |  |   |       |  |  |       |       |  |       |   |       |   |  |   |        |   |  |   |       |  |  | 
|Accounts receivable, net                          |  |                   | 75     |         |                   |   | 1,005  |        |  |   | 2,918   |   |  |       | (1,439  | ) |     |   | 2,559  |       |  |   | 25     |  |  |       | 2,058  |  |       |   | 4,510  |   |  |   | (4,038  | ) |  |   | 2,555  |  |  | 
|Other current assets                              |  |                   | 528    |         |                   |   | 4,418  |        |  |   | 58      |   |  |       | (3,714  | ) |     |   | 1,290  |       |  |   | 537    |  |  |       | 531    |  |       |   | 39     |   |  |   | 120     |   |  |   | 1,227  |  |  | 
|Assets of discontinued operations                 |  |                   |       |         |                   |   | 1,068  |        |  |   |        |   |  |       |        |   |     |   | 1,068  |       |  |   |       |  |  |       |       |  |       |   |       |   |  |   |        |   |  |   |       |  |  | 
|                                                  |  |                  
|Total current assets                              |  |                   | 610    |         |                   |   | 6,896  |        |  |   | 3,257   |   |  |       | (5,150  | ) |     |   | 5,613  |       |  |   | 660    |  |  |       | 2,730  |  |       |   | 4,687  |   |  |   | (3,868  | ) |  |   | 4,209  |  |  | 
|                                                  |  |                  
|Investments and advances to
    Cingular Wireless |  |                   | 3,515  |         |                   |   | 21,686 |        |  |   | 1,539   |   |  |       | (3,969  | ) |     |   | 22,771 |       |  |   |       |  |  |       | 21,069 |  |       |   | 205    |   |  |   |        |   |  |   | 21,274 |  |  | 
|Property, plant and equipment, net                |  |                   | 21,339 |         |                   |   | 665    |        |  |   | 3       |   |  |       | 32      |   |     |   | 22,039 |       |  |   | 21,045 |  |  |       | 644    |  |       |   | 3      |   |  |   | 31      |   |  |   | 21,723 |  |  | 
|Deferred charges and other assets                 |  |                   | 5,267  |         |                   |   | 293    |        |  |   | 39,234  |   |  |       | (37,465 | ) |     |   | 7,329  |       |  |   | 9,117  |  |  |       | 611    |  |       |   | 34,322 |   |  |   | (36,236 | ) |  |   | 7,814  |  |  | 
|Intangible assets, net                            |  |                   | 1,072  |         |                   |   | 391    |        |  |   | 9       |   |  |       | 115     |   |     |   | 1,587  |       |  |   | 1,040  |  |  |       | 400    |  |       |   | 3      |   |  |   | 90      |   |  |   | 1,533  |  |  | 
|                                                  |  |                  
|Total assets                                      |  | $                 | 31,803 |         |                   | $ | 29,931 |        |  | $ | 44,042  |   |  | $     | (46,437 | ) |     | $ | 59,339 |       |  | $ | 31,862 |  |  | $     | 25,454 |  |       | $ | 39,220 |   |  | $ | (39,983 | ) |  | $ | 56,553 |  |  | 
|                                                  |  |                  
|LIABILITIES AND
    SHAREHOLDERS EQUITY          |  |                   |        |         |                   |   |        |        |  |   |         |   |  |       |         |   |     |   |        |       |  |   |        |  |  |       |        |  |       |   |        |   |  |   |         |   |  |   |        |  |  | 
|Current liabilities:                              |  |                   |        |         |                   |   |        |        |  |   |         |   |  |       |         |   |     |   |        |       |  |   |        |  |  |       |        |  |       |   |        |   |  |   |         |   |  |   |        |  |  | 
|Debt maturing within one year                     |  | $                 | 3,016  |         |                   | $ | 15     |        |  | $ | 4,248   |   |  | $     | (1,804  | ) |     | $ | 5,475  |       |  | $ | 5,003  |  |  | $     | 270    |  |       | $ | 3,985  |   |  | $ | (5,149  | ) |  | $ | 4,109  |  |  | 
|Other current liabilities                         |  |                   | 3,941  |         |                   |   | 1,165  |        |  |   | 4,905   |   |  |       | (5,946  | ) |     |   | 4,065  |       |  |   | 3,307  |  |  |       | 1,437  |  |       |   | 1,113  |   |  |   | (1,312  | ) |  |   | 4,545  |  |  | 
|Liabilities of discontinued
    operations        |  |                   |       |         |                   |   | 830    |        |  |   |        |   |  |       |        |   |     |   | 830    |       |  |   |       |  |  |       |       |  |       |   |       |   |  |   |        |   |  |   |       |  |  | 
|                                                  |  |                  
|Total current liabilities                         |  |                   | 6,957  |         |                   |   | 2,010  |        |  |   | 9,153   |   |  |       | (7,750  | ) |     |   | 10,370 |       |  | $ | 8,310  |  |  |       | 1,707  |  |       |   | 5,098  |   |  |   | (6,461  | ) |  |   | 8,654  |  |  | 
|                                                  |  |                  
|Long-term debt                                    |  |                   | 3,704  |         |                   |   | 107    |        |  |   | 11,874  |   |  |       | (577    | ) |     |   | 15,108 |       |  |   | 2,931  |  |  |       | 99     |  |       |   | 10,571 |   |  |   | (522    | ) |  |   | 13,079 |  |  | 
|                                                  |  |                  
|Noncurrent liabilities:                           |  |                   |        |         |                   |   |        |        |  |   |         |   |  |       |         |   |     |   |        |       |  |   |        |  |  |       |        |  |       |   |        |   |  |   |         |   |  |   |        |  |  | 
|Deferred income taxes                             |  |                   | 5,063  |         |                   |   | 1,735  |        |  |   | (576    | ) |  |       | 184     |   |     |   | 6,406  |       |  |   | 5,032  |  |  |       | 1,927  |  |       |   | (574   | ) |  |   | 222     |   |  |   | 6,607  |  |  | 
|Other noncurrent liabilities                      |  |                   | 2,974  |         |                   |   | 791    |        |  |   | 525     |   |  |       | 99      |   |     |   | 4,389  |       |  |   | 3,185  |  |  |       | 757    |  |       |   | 591    |   |  |   | 146     |   |  |   | 4,679  |  |  | 
|                                                  |  |                  
|Total noncurrent liabilities                      |  |                   | 8,037  |         |                   |   | 2,526  |        |  |   | (51     | ) |  |       | 283     |   |     |   | 10,795 |       |  |   | 8,217  |  |  |       | 2,684  |  |       |   | 17     |   |  |   | 368     |   |  |   | 11,286 |  |  | 
|                                                  |  |                  
|Shareholders equity                              |  |                   | 13,105 |         |                   |   | 25,288 |        |  |   | 23,066  |   |  |       | (38,393 | ) |     |   | 23,066 |       |  |   | 12,404 |  |  |       | 20,964 |  |       |   | 23,534 |   |  |   | (33,368 | ) |  |   | 23,534 |  |  | 
|                                                  |  |                  
|Total liabilities and
    shareholders equity    |  | $                 | 31,803 |         |                   | $ | 29,931 |        |  | $ | 44,042  |   |  | $     | (46,437 | ) |     | $ | 59,339 |       |  | $ | 31,862 |  |  | $     | 25,454 |  |       | $ | 39,220 |   |  | $ | (39,983 | ) |  | $ | 56,553 |  |  | 
|                                                  |  |                  



79




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##### Table of Contents

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTSCONTINUED

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

BELLSOUTH CORPORATION

CONDENSED CONSOLIDATING CASH FLOW STATEMENTS

|                                            |                                      |                                      |   |        |       |   |     |        |   |   |             |        |   |       |    |        |   |   |     |        |  
|------------------------------------------- | ------------------------------------ | ------------------------------------ | - | ------ | ----- | - | --- | ------ | - | - | ----------- | ------ | - | ----- | -- | ------ | - | - | --- | ------ | -
|                                            |                                      | For the Year Ended December 31, 2003 |  
|                                            |                                      |                                      |  
|                                            |                                      | BST                                  |   |        | Other |   |     | Parent |   |   | Adjustments |        |   | Total |   
|                                            |                                     
|Cash flows from continuing
    operations:  |                                      |                                      |   |        |       |   |     |        |   |   |             |        |   |       |    |        |   |   |     |       
|                                            | Cash flows from operating activities |                                      | $ | 7,654  |       |   | $   | 1,637  |   |   | $           | 4,038  |   |       | $  | (5,446 | ) |   | $   | 7,883  |  
|                                            | Cash flows from investing activities |                                      |   | (2,918 | )     |   |     | (545   | ) |   |             | (777   | ) |       |    | 1,534  |   |   |     | (2,706 | )
|                                            | Cash flows from financing activities |                                      |   | (4,731 | )     |   |     | (1,082 | ) |   |             | (2,825 | ) |       |    | 3,959  |   |   |     | (4,679 | )
|Cash flows from discontinued
    operations |                                      |                                      |  |        |       |   | 428 |        |   |   |            |        |   |       |   |        |   |   | 428 |       
|                                           
|Net increase in cash                        |                                      | $                                    | 5 |        |       | $ | 438 |        |   | $ | 436         |        |   | $     | 47 |        |   | $ | 926 |       
|                                           

|                                            |                                      |                                      |   |        |       |   |      |         |   |   |             |         |   |       |      |         |   |   |        |         |  
|------------------------------------------- | ------------------------------------ | ------------------------------------ | - | ------ | ----- | - | ---- | ------- | - | - | ----------- | ------- | - | ----- | ---- | ------- | - | - | ------ | ------- | -
|                                            |                                      | For the Year Ended December 31, 2004 |  
|                                            |                                      |                                      |  
|                                            |                                      | BST                                  |   |        | Other |   |      | Parent  |   |   | Adjustments |         |   | Total |     
|                                            |                                     
|Cash flows from continuing
    operations:  |                                      |                                      |   |        |       |   |      |         |   |   |             |         |   |       |      |         |   |   |        |        
|                                            | Cash flows from operating activities |                                      | $ | 5,456  |       |   | $    | 1,347   |   |   | $           | 3,210   |   |       | $    | (3,212  | ) |   | $      | 6,801   |  
|                                            | Cash flows from investing activities |                                      |   | (2,971 | )     |   |      | (14,363 | ) |   |             | (13,751 | ) |       |      | 17,525  |   |   |        | (13,560 | )
|                                            | Cash flows from financing activities |                                      |   | (2,483 | )     |   |      | 12,810  |   |   |             | 9,188   |   |       |      | (14,444 | ) |   |        | 5,071   |  
|Cash flows from discontinued
    operations |                                      |                                      |  |        |       |   | (579 | )       |   |   |            |         |   |       |     |         |   |   | (579   | )      
|                                           
|Net increase (decrease) in cash             |                                      | $                                    | 2 |        |       | $ | (785 | )       |   | $ | (1,353      | )       |   | $     | (131 | )       |   | $ | (2,267 | )      
|                                           

|                                            |                                      |                                      |    |        |       |   |      |        |   |   |             |        |   |       |    |        |   |   |      |        |  
|------------------------------------------- | ------------------------------------ | ------------------------------------ | -- | ------ | ----- | - | ---- | ------ | - | - | ----------- | ------ | - | ----- | -- | ------ | - | - | ---- | ------ | -
|                                            |                                      | For the Year Ended December 31, 2005 |   
|                                            |                                      |                                      |   
|                                            |                                      | BST                                  |    |        | Other |   |      | Parent |   |   | Adjustments |        |   | Total |   
|                                            |                                     
|Cash flows from continuing
    operations:  |                                      |                                      |    |        |       |   |      |        |   |   |             |        |   |       |    |        |   |   |      |       
|                                            | Cash flows from operating activities |                                      | $  | 5,341  |       |   | $    | 1,616  |   |   | $           | 7,267  |   |       | $  | (7,516 | ) |   | $    | 6,708  |  
|                                            | Cash flows from investing activities |                                      |    | (3,165 | )     |   |      | 4,727  |   |   |             | 820    |   |       |    | (2,865 | ) |   |      | (483   | )
|                                            | Cash flows from financing activities |                                      |    | (2,085 | )     |   |      | (6,492 | ) |   |             | (8,214 | ) |       |    | 10,428 |   |   |      | (6,363 | )
|Cash flows from discontinued
    operations |                                      |                                      |   |        |       |   | (115 | )      |   |   |            |        |   |       |   |        |   |   | (115 | )     
|                                           
|Net increase (decrease) in cash             |                                      | $                                    | 91 |        |       | $ | (264 | )      |   | $ | (127        | )      |   | $     | 47 |        |   | $ | (253 | )     
|                                           

SUPPLEMENTAL DATA


|                                          |  |                                      |       |  |       |   |     |        |  |   |             |  |  |       |    |  |  |   |       | 
|----------------------------------------- |  | ------------------------------------ | ----- |  | ----- | - | --- | ------ |  | - | ----------- |  |  | ----- | -- |  |  | - | ----- | 
|                                          |  | For the Year Ended December 31, 2003 |      
|                                          |  |                                      |      
|                                          |  | BST                                  |       |  | Other |   |     | Parent |  |   | Adjustments |  |  | Total |   
|                                          | 
|Depreciation and amortization
    expense |  | $                                    | 3,543 |  |       | $ | 191 |        |  | $ | 2           |  |  | $     | 75 |  |  | $ | 3,811 | 
|Capital expenditures                      |  | $                                    | 2,704 |  |       | $ | 186 |        |  | $ | 4           |  |  | $     | 32 |  |  | $ | 2,926 | 
|                                         

|                                          |  |                                      |       |  |       |   |     |        |  |   |             |  |  |       |    |  |  |   |       | 
|----------------------------------------- |  | ------------------------------------ | ----- |  | ----- | - | --- | ------ |  | - | ----------- |  |  | ----- | -- |  |  | - | ----- | 
|                                          |  | For the Year Ended December 31, 2004 |      
|                                          |  |                                      |      
|                                          |  | BST                                  |       |  | Other |   |     | Parent |  |   | Adjustments |  |  | Total |   
|                                          | 
|Depreciation and amortization
    expense |  | $                                    | 3,365 |  |       | $ | 217 |        |  | $ | 3           |  |  | $     | 51 |  |  | $ | 3,636 | 
|Capital expenditures                      |  | $                                    | 2,910 |  |       | $ | 255 |        |  | $ | 6           |  |  | $     | 22 |  |  | $ | 3,193 | 
|                                         

|                                          |  |                                      |       |  |       |   |     |        |  |   |             |  |  |       |    |  |  |   |       | 
|----------------------------------------- |  | ------------------------------------ | ----- |  | ----- | - | --- | ------ |  | - | ----------- |  |  | ----- | -- |  |  | - | ----- | 
|                                          |  | For the Year Ended December 31, 2005 |      
|                                          |  |                                      |      
|                                          |  | BST                                  |       |  | Other |   |     | Parent |  |   | Adjustments |  |  | Total |   
|                                          | 
|Depreciation and amortization
    expense |  | $                                    | 3,369 |  |       | $ | 243 |        |  | $ | 2           |  |  | $     | 47 |  |  | $ | 3,661 | 
|Capital expenditures                      |  | $                                    | 3,248 |  |       | $ | 189 |        |  | $ | 3           |  |  | $     | 17 |  |  | $ | 3,457 | 
|                                         



80




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##### Table of Contents

Note S   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 |  |  | Total |       |  | 
|                                   | 
|2004                               |  |         |       |  |         |   |       |         |  |   |         |  |  |       |       |  |  |   |        |  |  | 
|Operating revenues                 |  | $       | 4,976 |  |         | $ | 5,083 |         |  | $ | 5,095   |  |  | $     | 5,146 |  |  | $ | 20,300 |  |  | 
|Operating income                   |  |         | 1,358 |  |         |   | 1,442 |         |  |   | 1,401   |  |  |       | 1,088 |  |  |   | 5,289  |  |  | 
|Provision for income taxes         |  |         | 623   |  |         |   | 516   |         |  |   | 465     |  |  |       | 188   |  |  |   | 1,792  |  |  | 
|Income from continuing operations  |  |         | 1,150 |  |         |   | 939   |         |  |   | 852     |  |  |       | 453   |  |  |   | 3,394  |  |  | 
|Net income                         |  | $       | 1,599 |  |         | $ | 996   |         |  | $ | 799     |  |  | $     | 1,364 |  |  | $ | 4,758  |  |  | 
|Basic earnings per
    share(a):   |  |         |       |  |         |   |       |         |  |   |         |  |  |       |       |  |  |   |        |  |  | 
|Income from continuing operations  |  | $       | 0.63  |  |         | $ | 0.51  |         |  | $ | 0.47    |  |  | $     | 0.25  |  |  | $ | 1.85   |  |  | 
|Net income                         |  | $       | 0.87  |  |         | $ | 0.54  |         |  | $ | 0.44    |  |  | $     | 0.74  |  |  | $ | 2.60   |  |  | 
|Diluted earnings per
    share(a): |  |         |       |  |         |   |       |         |  |   |         |  |  |       |       |  |  |   |        |  |  | 
|Income from continuing operations  |  | $       | 0.63  |  |         | $ | 0.51  |         |  | $ | 0.46    |  |  | $     | 0.25  |  |  | $ | 1.85   |  |  | 
|Net income                         |  | $       | 0.87  |  |         | $ | 0.54  |         |  | $ | 0.44    |  |  | $     | 0.74  |  |  | $ | 2.59   |  |  | 
|Total comprehensive income         |  | $       | 1,713 |  |         | $ | 1,007 |         |  | $ | 789     |  |  | $     | 1,677 |  |  | $ | 5,186  |  |  | 
|2005                               |  |         |       |  |         |   |       |         |  |   |         |  |  |       |       |  |  |   |        |  |  | 
|Operating revenues                 |  | $       | 5,091 |  |         | $ | 5,142 |         |  | $ | 5,072   |  |  | $     | 5,242 |  |  | $ | 20,547 |  |  | 
|Operating income                   |  |         | 1,352 |  |         |   | 1,350 |         |  |   | 971     |  |  |       | 997   |  |  |   | 4,670  |  |  | 
|Provision for income taxes         |  |         | 354   |  |         |   | 394   |         |  |   | 392     |  |  |       | 249   |  |  |   | 1,389  |  |  | 
|Income from continuing operations  |  |         | 683   |  |         |   | 795   |         |  |   | 817     |  |  |       | 618   |  |  |   | 2,913  |  |  | 
|Net income                         |  | $       | 1,064 |  |         | $ | 795   |         |  | $ | 817     |  |  | $     | 618   |  |  | $ | 3,294  |  |  | 
|Basic earnings per
    share(a):   |  |         |       |  |         |   |       |         |  |   |         |  |  |       |       |  |  |   |        |  |  | 
|Income from continuing operations  |  | $       | 0.37  |  |         | $ | 0.43  |         |  | $ | 0.45    |  |  | $     | 0.34  |  |  | $ | 1.60   |  |  | 
|Net income                         |  | $       | 0.58  |  |         | $ | 0.43  |         |  | $ | 0.45    |  |  | $     | 0.34  |  |  | $ | 1.81   |  |  | 
|Diluted earnings per
    share(a): |  |         |       |  |         |   |       |         |  |   |         |  |  |       |       |  |  |   |        |  |  | 
|Income from continuing operations  |  | $       | 0.37  |  |         | $ | 0.43  |         |  | $ | 0.44    |  |  | $     | 0.34  |  |  | $ | 1.59   |  |  | 
|Net income                         |  | $       | 0.58  |  |         | $ | 0.43  |         |  | $ | 0.44    |  |  | $     | 0.34  |  |  | $ | 1.80   |  |  | 
|Total comprehensive income         |  | $       | 1,141 |  |         | $ | 805   |         |  | $ | 859     |  |  | $     | 632   |  |  | $ | 3,437  |  |  | 



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



2004




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | First quarter included a gain related to the sale of our
    operations in Denmark, which increased net income by $295, or
    $0.16 per share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | First quarter also included a charge for a settlement with the
    South Carolina Consumer Advocate, which decreased net income by
    $33, or 0.02 per share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | We recorded losses related to service repairs in the wireline
    business due to Hurricanes Charley, Frances, Ivan and Jeanne,
    which reduced net income by $23, or $0.01 per share in the
    third quarter and by $77, or $0.04 per share, in the fourth
    quarter.                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | Our equity in earnings from Cingular Wireless included losses
    related to wireless merger integration costs for the Cingular
    Wireless/AT&T Wireless merger, a fair value adjustment for
    the sale of Cingular Wireless Interactive, and lease accounting
    adjustments, which reduced our net income by $17, or
    $0.01 per share, in the third quarter and by $92, or
    $0.05 per share in the fourth quarter. In addition, our
    equity in earnings from Cingular Wireless included amortization
    of intangibles, primarily customer lists, that were acquired as
    part of Cingulars merger with AT&T Wireless. These
    charges reduced our net income by $80, or $0.04 per share, in
    the fourth quarter.
| |  | Fourth quarter also included charges related to severance and
    lease termination payments, which reduced net income by $18, or
    $0.01 per share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | We recorded income (losses) related to our Discontinued
    Operations which impacted net income by $449, or $0.24 per
    share, in the first quarter; by $57, or $0.03 per share, in the
    second quarter; by $(53), or $(0.03) per share, in the third
    quarter; and by $911, or $0.50 per share, in the fourth quarter.                                                                                                                                                                                                                                                                                                                                                                                                          

2005




| |   |                                                                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | First quarter included income of $381, or $0.21 per share,
    related to our Discontinued Operations.                                                                                                    
| |  | We recorded charges related to the early extinguishment of debt,
    which reduced net income by $14, or $0.01 per share, in the
    first quarter and $12, or $0.01 per share, in the second
    quarter.



81




---



##### Table of Contents

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTSCONTINUED

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

BELLSOUTH CORPORATION




    Third quarter included a gain related to the sale of our
    operations in Israel, which increased net income by $228, or
    $0.12 per share.
    We recorded losses related to asset impairments and service
    repairs in the wireline business due to Hurricane Katrina, which
    reduced net income by $177, or $0.10 per share, in the
    third quarter and by $145, or $0.08 per share, in the fourth
    quarter.
    Our equity in earnings from Cingular Wireless included losses
    related to wireless merger integration costs for the Cingular
    Wireless/ AT&T Wireless merger and hurricane costs, which
    reduced our net income by $21, or $0.01 per share, in the
    first quarter, $42, or $0.02 per share, in the second
    quarter, $79, or $0.04 per share, in the third quarter, and
    $82, or $0.05 per share, in the fourth quarter. In addition, our
    equity in earnings from Cingular Wireless included amortization
    of intangibles, primarily customer lists, that were acquired as
    part of Cingulars merger with AT&T Wireless. These
    charges reduced our net income by $100, or $0.05 per share, in
    the first quarter, $91, or $0.05 per share, in the second
    quarter, $94, or $0.05 per share, in the third quarter, and $90,
    or $0.05 per share, in the fourth quarter.
    Fourth quarter included a deferred revenue adjustment that
    corrected a system coding error that was resulting in
    underreporting revenues in prior periods. The adjustment
    increased net income by $29, or $0.02 per share.
    Fourth quarter also included charges related to severance, which
    reduced net income by $59, or $0.03 per share.

82BELLSOUTH 2005



---



##### Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

BELLSOUTH CORPORATION





To the Shareholders of BellSouth Corporation:

We have completed integrated audits of BellSouth
Corporations 2005 and 2004 consolidated financial
statements and of its internal control over financial reporting
as of December 31, 2005, and an audit of its 2003
consolidated financial statements in accordance with the
standards of the Public Company Accounting Oversight Board
(United States). Our opinions, based on our audits, are
presented below.

Consolidated financial statements

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
(BellSouth) at December 31, 2005 and 2004, and
the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2005 in
conformity with accounting principles generally accepted in the
United States 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 (Cingular), an
equity method investee. BellSouths consolidated financial
statements include an investment of $18,447 million and
$18,311 million as of December 31, 2005 and 2004,
respectively and equity method income of $135 million,
$24 million and $408 million, respectively, for each
of the three years in the period ended December 31, 2005.
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, is based solely on the report of the other auditors.
We conducted our audits of these statements in accordance with
the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit of financial statements 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 provide a reasonable basis for our opinion.

As discussed in Note C to the consolidated financial
statements, in 2003, BellSouth adopted Financial Accounting
Standards Board Statement No. 143, Accounting for
Asset Retirement Obligations, changing its method of
accounting for asset retirement costs. BellSouth also changed
its accounting for publication revenues from the publication and
delivery method to the deferral method as of January 1,
2003.

Internal control over financial reporting

Also, in our opinion, managements assessment, included in
the accompanying Report of Management on Internal Control
Over Financial Reporting, that the Company maintained
effective internal control over financial reporting as of
December 31, 2005 based on criteria established in
Internal Control  Integrated Frameworkissued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), is fairly stated, in all material respects,
based on those criteria. Furthermore, in our opinion, the
Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2005,
based on criteria established in Internal Control 
Integrated Frameworkissued by the COSO. The Companys
management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our
responsibility is to express opinions on managements
assessment and on the effectiveness of the Companys
internal control over financial reporting based on our audit. We
conducted our audit of internal control over financial reporting
in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over
financial reporting was maintained in all material respects. An
audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial
reporting, evaluating managements assessment, testing and
evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we consider
necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinions.

A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.

Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.

-s- PricewaterhouseCoopers

Atlanta, Georgia

February 27, 2006




BELLSOUTH 2005      83



---



##### Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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, 2004 and 2005, and the
related consolidated statements of income, changes in
members capital, comprehensive income and cash flows for
each of the three years in the period ended December 31,
2005 (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. The financial
statements of Omnipoint Facilities Network II, LLC (Omnipoint),
a wholly owned subsidiary of GSM Facilities, LLC (an equity
investee in which the Company had an approximate 60% interest at
December 31, 2004), have been audited by other auditors
whose report has been furnished to us; insofar as our opinion on
the consolidated financial statements relates to the 2003 and
2004 amounts included for Omnipoint, it is based solely on their
report. In the consolidated financial statements, the
Companys indirect investment in Omnipoint is stated at
$880 million at December 31, 2004, and the
Companys equity in net losses of Omnipoint is stated at
$100 million for the year ended December 31, 2003 and
$135 million for the year ended December 31, 2004.

We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (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 and the
report of other auditors for 2003 and 2004 provide a reasonable
basis for our opinion.

In our opinion, based on our audits and the report of other
auditors for 2003 and 2004, the consolidated financial
statements referred to above present fairly, in all material
respects, the consolidated financial position of Cingular
Wireless LLC at December 31, 2004 and 2005 and the
consolidated results of its operations and its cash flows for
each of the three years in the period ended December 31,
2005 in conformity with U.S. generally accepted accounting
principles.

-s- Ernst & Young

Atlanta, Georgia

February 24, 2006





REPORT OF MANAGEMENT ON INTERNAL CONTROL

OVER FINANCIAL REPORTING

BELLSOUTH CORPORATION

The management of BellSouth Corporation is responsible for
establishing and maintaining adequate internal control over
financial reporting and for its assessment of the effectiveness
of internal control over financial reporting. Internal control
over financial reporting is defined in
Rules 13a-15(f) or
15d-15(f) adopted under
the Securities Exchange Act of 1934.

BellSouths management assessed the effectiveness of the
Companys internal control over financial reporting as of
December 31, 2005. In making this assessment,
BellSouths management used the criteria set forth in
Internal Control  Integrated Frameworkissued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Based on its assessment, management concluded
that BellSouth maintained effective internal control over
financial reporting as of December 31, 2005.

PricewaterhouseCoopers LLP, BellSouths independent
registered public accounting firm, has audited our
managements assessment of the effectiveness of the
Companys internal control over financial reporting as of
December 31, 2005, as stated in their report which appears
on page 83.

February 27, 2006




84BELLSOUTH 2005



---



##### Table of Contents

Item 9.
    Changes in and Disagreements with Accountants on Accounting
    and Financial DisclosureNo change in accountants 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 as of December 31, 2005 are effective at
providing reasonable assurance that (i) all material
information required to be disclosed by us in our Exchange Act
reports is recorded, processed, summarized and reported, within
the time periods specified in the SECs rules and forms and
(ii) information required to be disclosed by us in our
Exchange Act reports is accumulated and communicated to
management, including our Chief Executive Officer and Chief
Financial Officer, or persons performing similar functions, as
appropriate to allow timely decisions regarding required
disclosure. In addition, based on the evaluation required by
Exchange Act
Rules 13a-15(d)
and 15d-15(d), we have
identified no change in our internal control over financial
reporting that occurred during the fourth quarter of 2005 that
has materially affected or is reasonably likely to materially
affect, our internal control over financial reporting.





Item 9B.      Other
Information



There is no information that was required to be disclosed in a
report on Form 8-K during the fourth quarter of 2005 but
was not reported.





PART III







Item 10.
    Directors and Executive Officers of the Registrant

Except for the information disclosed in Part I under the
headings Executive Officers and Website
Access, the information required by this item will be
contained in the Companys definitive proxy statement
issued in connection with the 2006 annual meeting of
shareholders filed with the SEC within 120 days after
December 31, 2005 and is incorporated herein by reference.







Item 11.
    Executive CompensationThe information required by this item will be contained in the
Companys definitive proxy statement issued in connection
with the 2006 annual meeting of shareholders filed with the SEC
within 120 days after December 31, 2005 and is
incorporated herein by reference.







Item 12.
    Security Ownership of Certain Beneficial Owners and
    Management and Related Shareholder MattersExcept for the information set forth below, the information
required by this item will be contained in the Companys
definitive proxy statement issued in connection with the 2006
annual meeting of shareholders filed with the SEC within
120 days after December 31, 2005 and is incorporated
herein by reference.




BELLSOUTH 2005      85



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##### Table of Contents

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION
PLANS

Equity compensation plan information

The following table provides information about shares of
BellSouth common stock that may be issued under our equity
compensation plans as of December 31, 2005.

|                                                           |  |               |            |     |             |            |           |                 |  |  |            |    
|---------------------------------------------------------- |  | ------------- | ---------- | --- | ----------- | ---------- | --------- | --------------- |  |  | ---------- | ---
|                                                           |  |               |            |     |             | (C)        |          
|                                                           |  |               |            |     |             | Number of  |          
|                                                           |  |               |            |     |             | securities |          
|                                                           |  | (A)           |            |     |             |            | remaining |                
|                                                           |  | Number of     |            |     | (B)         |            |           | available for   | 
|                                                           |  | securities to |            |     | Weighted-   |            |           | future issuance | 
|                                                           |  | be issued     |            |     | average     |            |           | under equity    | 
|                                                           |  | upon          |            |     | exercise    |            |           | compensation    | 
|                                                           |  | exercise of   |            |     | price of    |            |           | plans           | 
|                                                           |  | outstanding   |            |     | outstanding |            |           | (excluding      | 
|                                                           |  | options,      |            |     | options,    |            |           | securities      | 
|                                                           |  | warrants      |            |     | warrants    |            |           | reflected in    | 
|                                                           |  | and rights    |            |     | and rights  |            |           | column (A))     | 
|                                                           | 
|Equity compensation plans approved
    by shareholders     |  |               | 95,453,871 | (1) |             | $          | 36.05     |                 |  |  | 77,532,962 | (2)
|                                                          
|Equity compensation plans not
    approved by shareholders |  |               | 1,572,029  |     |             | $          | 41.00     | (3)             |  |  |           |    
|                                                          
|Totals                                                     |  |               | 97,025,900 |     |             | $          | 36.12     | (3)             |  |  | 77,532,962 |    
|                                                          

|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) |  | Consists of shares to be issued upon exercise of outstanding
    options granted under the BellSouth Corporation Stock and
    Incentive Compensation Plan, the BellSouth Corporation Stock
    Plan, the BellSouth Corporation Stock Option Plan, the BellSouth
    Corporation Non-Employee Director Stock Plan, and the BellSouth
    Corporation Non-Employee Director Stock Option Plan. Of these
    plans, the only plan under which options may be granted in the
    future is the BellSouth Corporation Stock and Incentive
    Compensation Plan.
|(2) |  | The number of shares available for future grant under the
    BellSouth Corporation Stock and Incentive Compensation Plan (as
    approved by shareholders in April 2004) is equal to eighty
    million (80,000,000) shares authorized for issuance under
    the plan, less the cumulative number of awards granted under the
    plan that will be settled by issuing shares.                                                                                                                                                                            
|(3) |  | The weighted average exercise prices in the table above
    exclude 223,111 shares payable under the Incentive Award
    Deferral Plan at December 31, 2005.                                                                                                                                                                                                                                                                                                                                                                                                

Equity compensation plans not approved by security
holders











|         |                                               
|-------- | ----------------------------------------------
|Item 13. | Certain Relationships and Related Transactions








|         |                                       
|-------- | --------------------------------------
|Item 14. | Principal Accountant Fees and Services





86




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##### Table of Contents

PART IV







Item 15.
    Exhibits and Financial Statement Schedules

|                              |  |                                                                                                                                                                                                                                                                                                                                                                                                    |  |  |             | 
|----------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  | ----------- | 
|Page(s) in This
    Form 10-K
|                             
|a.                            |  | Documents filed as a part of the
    report:                                                                                                                                                                                                                                                                                                                                                       |  |  |             | 
|(1)                           |  | Financial Statements of
    BellSouth Corporation:                                                                                                                                                                                                                                                                                                                                                 |  |  |             | 
|                              |  | Consolidated Statements of Income                                                                                                                                                                                                                                                                                                                                                                  |  |  | 51          | 
|                              |  | Consolidated Balance Sheets                                                                                                                                                                                                                                                                                                                                                                        |  |  | 52          | 
|                              |  | Consolidated Statements of Cash
    Flows                                                                                                                                                                                                                                                                                                                                                          |  |  | 53          | 
|                              |  | Consolidated Statements of
    Shareholders Equity and Comprehensive Income                                                                                                                                                                                                                                                                                                                       |  |  | 54          | 
|                              |  | Notes to Consolidated Financial
    Statements                                                                                                                                                                                                                                                                                                                                                     |  |  | 55          | 
|                              |  | Reports of Independent Registered
    Public Accounting Firms                                                                                                                                                                                                                                                                                                                                      |  |  | 83          | 
|                              |  | Consolidated Financial
    Statements of Cingular Wireless LLC:                                                                                                                                                                                                                                                                                                                                    |  |  |             | 
|                              |  | Reports of Independent Registered
    Public Accounting Firms                                                                                                                                                                                                                                                                                                                                      |  |  | Exhibit 99b | 
|                              |  | Consolidated Balance Sheets                                                                                                                                                                                                                                                                                                                                                                        |  |  | Exhibit 99b | 
|                              |  | Consolidated Statements of Income                                                                                                                                                                                                                                                                                                                                                                  |  |  | Exhibit 99b | 
|                              |  | Consolidated Statements of Changes
    in Members Capital                                                                                                                                                                                                                                                                                                                                         |  |  | Exhibit 99b | 
|                              |  | Consolidated Statements of
    Comprehensive Income                                                                                                                                                                                                                                                                                                                                                |  |  | Exhibit 99b | 
|                              |  | Consolidated Statements of Cash
    Flows                                                                                                                                                                                                                                                                                                                                                          |  |  | Exhibit 99b | 
|                              |  | Notes to Consolidated Financial
    Statements                                                                                                                                                                                                                                                                                                                                                     |  |  | Exhibit 99b | 
|(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 pursuant to Item 15(c) are
    filed as Exhibits 10g through 10bbb inclusive.                                                 |  |  |             | 
|2a                            |  | Stock Purchase Agreement, dated as
    of March 5, 2004, by and among Telefónica
    Móviles, S.A., each of the entities listed on
    Schedule I to the Agreement, and BellSouth Corporation (for
    purposed of the Sections and Articles identified in the Preamble
    only) (incorporated by reference to Exhibit 2-a to
    BellSouths Form 8-K dated March 5, 2004, File
    No. 1-8607.) |  |  |             | 
|2a-1                          |  | Amendment No. 1 to Stock
    Purchase Agreement, dated as of July 8, 2004, by and among
    Telefónica Móviles, S.A. and the entities listed on
    the signature pages thereto (incorporated by reference to
    Exhibit 2a-1 to Form 10-Q for the quarter ended
    September 30, 2004, File No. 1-8607.)                                                                                        |  |  |             | 
|2a-2                          |  | Amendment No. 2 to Stock
    Purchase Agreement, dated as of October 4, 2004, by and
    among Telefónica Móviles, S.A. and the entities listed
    on the signature pages thereto (incorporated by reference to
    Exhibit 2a-2 to Form 10-Q for the quarter ended
    September 30, 2004, File No. 1-8607.)                                                                                     |  |  |             | 
|2a-3                          |  | Amendment No. 3 to Stock
    Purchase Agreement, dated as of October 14, 2004, by and
    among Telefónica Móviles, S.A. and the entities listed
    on the signature pages thereto (incorporated by reference to
    Exhibit 2a-3 to Form 10-Q for the quarter ended
    September 30, 2004, File No. 1-8607.)                                                                                    |  |  |             | 
|2a-4                          |  | Amendment No. 4 to Stock
    Purchase Agreement, dated as of October 27, 2004, by and
    among Telefónica Móviles, S.A. and the entities listed
    on the signature pages thereto (incorporated by reference to
    Exhibit 2a-4 to Form 10-Q for the quarter ended
    September 30, 2004, File No. 1-8607.)                                                                                    |  |  |             | 



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EXHIBITS AND FINANCIAL STATEMENT
SCHEDULESCONTINUED

BELLSOUTH CORPORATION

|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  |  |  | 
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  |  |  | 
|3a   |  | Amended Articles of Incorporation
    of BellSouth Corporation adopted December 5, 2000
    (incorporated by reference to Exhibit 3a to Form 10-K
    for the year ended December 31, 2000, File No. 1-8607.)                                                                                                                                                                                                                                                                                                                                                                                          |  |  |  | 
|3b   |  | By-laws of BellSouth Corporation
    adopted April 26, 2004 (incorporated by reference to
    Exhibit 3b to Form 10-Q for the quarter ended
    March 31, 2004, File No. 1-8607.)                                                                                                                                                                                                                                                                                                                                                                                                                      |  |  |  | 
|4a   |  | BellSouth Corporation Shareholder
    Rights Agreement dated November 22, 1999 (incorporated by
    reference to Exhibit 1 to Report on Form 8-A dated
    November 23, 1999, File No. 1-8607.)                                                                                                                                                                                                                                                                                                                                                                                                        |  |  |  | 
|4a-1 |  | Amendment No. 1 to BellSouth
    Corporation Shareholder Rights Agreement, dated as of
    March 2, 2005 (incorporated by reference to Exhibit 4a
    to Current Report on Form 8-K dated February 28, 2005,
    File No. 1-8607.)                                                                                                                                                                                                                                                                                                                                                                     |  |  |  | 
|4b   |  | 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  |  | Agreement and Plan of Merger by and
    among AT&T Wireless, 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.)                                   |  |  |  | 
|10b  |  | Investment Agreement dated
    February 17, 2004 between BellSouth Corporation and SBC
    Communications Inc. (incorporated by reference to
    Exhibit 10nn to Form 10-K for the year ended
    December 31, 2003, File No. 1-8607.)                                                                                                                                                                                                                                                                                                                                                                 |  |  |  | 
|10c  |  | Investment and Reorganization
    Agreement, dated as of October 25, 2004, by and among
    BellSouth Corporation, SBC Communications Inc., Cingular
    Wireless Corporation, Cingular Wireless LLC, Links I
    Corporation, Cingular Wireless II, Inc., BLS Cingular Wireless
    Holding, LLC, SBC Alloy Holdings, Inc., BellSouth Enterprises,
    Inc., BellSouth Mobile Systems, Inc., BellSouth Mobile Data,
    Inc. and SBC Long Distance, Inc. (incorporated by reference to
    Exhibit 99.01 of the Form 8-K of Cingular Wireless LLC
    filed on October 28, 2004, File No. 001-31673.) |  |  |  | 
|10d  |  | Amended and Restated Revolving
    Credit Agreement by and among BellSouth Corporation, SBC
    Communications, Inc. and Cingular Wireless LLC, dated as of
    June 28, 2005 (incorporated by reference to
    Exhibit 10fff to the Form 8-K dated June 27,
    2005, File No. 1-8607.)                                                                                                                                                                                                                                                                                                               |  |  |  | 
|10e  |  | Share Purchase Agreement dated as
    of May 13, 2005 among Discount Investment Communications
    B.V., Discount Investment Corporation Ltd., BellSouth Holdings
    B.V. and for purposes of Article XII only, BellSouth
    Corporation (incorporated by reference to Exhibit 10ddd to
    Form 8-K dated May 13, 2005, File No. 1-8607.)                                                                                                                                                                                                                                                           |  |  |  | 
|10f  |  | Credit Agreement dated as of
    April 29, 2005 among BellSouth Corporation, the Lenders
    Party Thereto and JPMorgan Securities, Inc., as Administrative
    Agent (incorporated by reference to Exhibit 10ccc to
    BellSouths Form 8-K dated April 29, 2005, File
    No. 1-8607.)                                                                                                                                                                                                                                                                                                              |  |  |  | 
|10g  |  | BellSouth Corporation Executive
    Long Term Disability and Survivor Protection Plan as amended and
    restated effective January 1, 1994 (incorporated by
    reference to Exhibit 10c-1 to Form 10-K for the year
    ended December 31, 1993, File No. 1-8607.)                                                                                                                                                                                                                                                                                                                                   |  |  |  | 
|10h  |  | BellSouth Corporation Executive
    Transfer Plan (incorporated by reference Exhibit 10ee to
    Registration Statement No. 2-87846.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |  |  | 
|10i  |  | BellSouth Corporation Death Benefit
    Program (incorporated by reference to Exhibit 10ff to
    Form 10-K for the year ended December 31, 1989, File
    No. 1-8607.)                                                                                                                                                                                                                                                                                                                                                                                                                                |  |  |  | 
|10j  |  | BellSouth Corporation Executive
    Incentive Award Deferral Plan as amended and restated effective
    September 23, 1996 (incorporated by reference to
    Exhibit 10g to Form 10-K for the year ended
    December 31, 1996, File No. 1-8607.)                                                                                                                                                                                                                                                                                                                                                      |  |  |  | 



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|      |  |                                                                                                                                                                                                                                                                                 |  |  |  | 
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|10k   |  | BellSouth Corporation Nonqualified
    Deferred Compensation Plan as amended and restated effective
    November 25, 1996 (incorporated by reference to
    Exhibit 10h to Form 10-K for the year ended
    December 31, 1996, File No. 1-8607.)                                |  |  |  | 
|10l   |  | BellSouth Corporation Supplemental
    Executive Retirement Plan as amended on March 23, 1998
    (incorporated by reference to Exhibit 10i to Form 10-Q
    for the quarter ended March 31, 1998, File No. 1-8607.)                                                            |  |  |  | 
|10l-1 |  | Amendment to BellSouth Corporation
    Supplemental Executive Retirement Plan, as amended on
    March 23, 1998, dated as of December 23, 2004
    (incorporated by reference to Exhibit 10k-1 to the
    Form 10-K for the year ended December 31, 2004, File
    No. 1-8607.) |  |  |  | 
|10l-2 |  | Amendment to BellSouth Corporation
    Supplemental Executive Retirement Plan, as amended on
    March 23, 1998, dated as of January 19, 2006.                                                                                                                                  |  |  |  | 
|10m   |  | BellSouth Corporation Executive
    Financial Services Plan, effective January 1, 2004
    (incorporated by reference to Exhibit 10l to the
    Form 10-K for the year ended December 31, 2004, File
    No. 1-8607.)                                                           |  |  |  | 
|10n   |  | BellSouth Split-Dollar Life
    Insurance Plan, as amended and restated and effective as of
    November 24, 2003 (incorporated by reference to
    Exhibit 10m to the Form 10-K for the year ended
    December 31, 2004, File No. 1-8607.)                                    |  |  |  | 
|10o   |  | BellSouth Officer Personal Vehicle
    Perquisite Plan, effective January 1, 2004 (incorporated by
    reference to Exhibit 10o to the Form 10-K for the year
    ended December 31, 2004, File No. 1-8607.)                                                                    |  |  |  | 
|10p   |  | BellSouth Supplemental Life
    Insurance Plan, as amended and restated effective April 1,
    2004 (incorporated by reference to Exhibit 10p to the
    Form 10-K for the year ended December 31, 2004, File
    No. 1-8607.)                                                  |  |  |  | 
|10q   |  | BellSouth Officer Compensation
    Deferral Plan, as Amended and Restated Effective January 1,
    2005 (incorporated by reference to Exhibit 10q to the
    Form 10-K for the year ended December 31, 2004, File
    No. 1-8607.)                                              |  |  |  | 
|10r   |  | BellSouth Executive Stock Ownership
    Program, as revised September 27, 2004 (incorporated by
    reference to Exhibit 10r to the Form 10-K for the year
    ended December 31, 2004, File No. 1-8607.)                                                                       |  |  |  | 
|10t   |  | BellSouth Corporation Plan For
    Non-Employee Directors Travel Accident Insurance
    (incorporated by reference to Exhibit 10ii to Registration
    Statement No. 2-87846, File No. 1-8607.)                                                                                |  |  |  | 
|10u   |  | BellSouth Corporation Deferred
    Compensation Plan for Non-Employee Directors, as amended and
    restated effective March 9, 1984 (incorporated by reference
    to Exhibit 10gg to Registration Statement No. 2-87846,
    File No. 1-8607.)                                |  |  |  | 
|10v   |  | BellSouth Corporation
    Directors Compensation Deferral Plan as Amended and
    Restated effective May 1, 2001 (incorporated by reference
    from Exhibit 101-1 to Form 10-Q for the quarter ended
    March 31, 2001, File No. 1-8607.)                                    |  |  |  | 
|10v-1 |  | First Amendment to BellSouth
    Corporation Directors Compensation Deferral Plan dated as
    of February 6, 2004 (incorporated by reference to
    Exhibit 10w-1 to the Form 10-K for the year ended
    December 31, 2004, File No. 1-8607.)                                |  |  |  | 
|10w   |  | BellSouth Non-Employee Directors
    Charitable Contribution Program (incorporated by reference to
    Exhibit 10z to Form 10-K for the year ended
    December 31, 1992, File No. 1-8607.)                                                                                     |  |  |  | 
|10x   |  | BellSouth Personal Retirement
    Account Pension Plan, as amended and restated effective
    January 1, 1998 (incorporated by reference to
    Exhibit 10q to Form 10-K for the year ended
    December 31, 1998, File No. 1-8607.)                                            |  |  |  | 
|10x-1 |  | Amendment dated December 22,
    1998 to the BellSouth Personal Retirement Account Pension Plan
    (incorporated by reference to Exhibit 10q-1 to
    Form 10-K for the year ended December 31, 1998, File
    No. 1-8607.)                                                    |  |  |  | 
|10x-2 |  | Amendment dated March 22, 1999
    to the BellSouth Personal Retirement Account Pension Plan
    (incorporated by reference to Exhibit 10q-2 to
    Form 10-Q for the quarter ended March 31, 1999, File
    No. 1-8607.)                                                       |  |  |  | 



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EXHIBITS AND FINANCIAL STATEMENT
SCHEDULESCONTINUED

BELLSOUTH CORPORATION

|       |  |                                                                                                                                                                                                                                             |  |  |  | 
|------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|10x-3  |  | Amendment dated April 7, 1999
    to the BellSouth Personal Retirement Account Pension Plan
    (incorporated by reference to Exhibit 10q-3 to
    Form 10-Q for the quarter ended March 31, 1999, File
    No. I-8607.)                    |  |  |  | 
|10x-4  |  | Amendment dated May 6, 1999 to
    the BellSouth Personal Retirement Account Pension Plan
    (incorporated by reference to Exhibit 10q-4 to
    Form 10-Q for the quarter ended June 30, 1999, File
    No. 1-8607.)                       |  |  |  | 
|10x-5  |  | Amendment dated May 6, 1999 to
    the BellSouth Personal Retirement Account Pension Plan
    (incorporated by reference to Exhibit 10q-5 to
    Form 10-Q for the quarter ended June 30, 1999, File
    No. 1-8607.)                       |  |  |  | 
|10x-6  |  | Amendment dated May 7, 1999 to
    the BellSouth Personal Retirement Account Pension Plan
    (incorporated by reference to Exhibit 10q-6 to
    Form 10-Q for the quarter ended June 30, 1999, File
    No. 1-8607.)                       |  |  |  | 
|10x-7  |  | Amendment dated September 13,
    1999 to the BellSouth Personal Retirement Account Pension Plan
    (incorporated by reference to Exhibit 10q-7 to Form 10-Q for the
    quarter ended September 30, 1999, File No. 1-8607.)               |  |  |  | 
|10x-8  |  | Amendment dated December 22,
    1999 to the BellSouth Personal Retirement Account Pension Plan
    (incorporated by reference to Exhibit 10q-8 to Form 10-K for the
    year ended December 31, 1999, File No. 1-8607.)                    |  |  |  | 
|10x-9  |  | Amendment dated December 15,
    2000 to the BellSouth Personal Retirement Account Pension Plan
    (incorporated by reference Exhibit 10q-9 to Form 10-K
    for the year ended December 31, 2000, File No. 1-8607.)                       |  |  |  | 
|10x-10 |  | Amendment dated December 15,
    2000 to the BellSouth Personal Retirement Account Pension Plan
    (incorporated by reference to Exhibit 10q-10 to
    Form 10-K for the year ended December 31, 2000, File
    No. 1-8607.)               |  |  |  | 
|10x-11 |  | Amendment dated December 15,
    2000 to the BellSouth Personal Retirement Account Pension Plan
    (incorporated by reference to Exhibit 10q-11 to
    Form 10-K for the year ended December 31, 2000, File
    No. 1-8607.)               |  |  |  | 
|10x-12 |  | Amendment dated December 15,
    2000 to the BellSouth Personal Retirement Account Pension Plan
    (incorporated by reference to Exhibit 10q-12 to
    Form 10-Q for the quarter ended September 30, 2001,
    File No. 1-8607.)           |  |  |  | 
|10x-13 |  | Amendment dated December 18,
    2001 to the BellSouth Personal Retirement Account Pension Plan
    (incorporated by reference to Exhibit 10q-13 to
    Form 10-K for the year ended December 31, 2001, File
    No. 1-8607.)               |  |  |  | 
|10x-14 |  | Amendment dated December 17,
    2002 to the BellSouth Personal Retirement Account Pension Plan
    (incorporated by reference to Exhibit 10q-14 to
    Form 10-K for the year ended December 31, 2002, File
    No. 1-8607.)               |  |  |  | 
|10x-15 |  | Amendment dated December 23,
    2003 to the BellSouth Personal Retirement Account Pension Plan
    (incorporated by reference to Exhibit 10q-15 to
    Form 10-K for the year ended December 31, 2003, File
    No. 1-8607.)               |  |  |  | 
|10x-16 |  | Amendment dated December 22,
    2004 to the BellSouth Personal Retirement Account Pension Plan
    (incorporated by reference to Exhibit 10y-16 to
    Form 10-K for the year ended December 31, 2004, File
    No. 1-8607.)               |  |  |  | 
|10x-17 |  | Amendment dated December 22,
    2005 to the BellSouth Personal Retirement Account Pension Plan.                                                                                                                                            |  |  |  | 
|10y    |  | BellSouth Corporation Trust Under
    Executive Benefit Plan(s) as amended April 28, 1995
    (incorporated by reference to Exhibit 10u-1 to
    Form 10-Q for the quarter ended June 30, 1995, File
    No. 1-8607.)                       |  |  |  | 
|10y-1  |  | Amendment dated May 23, 1996
    to the BellSouth Corporation Trust Under Executive Benefit
    Plan(s) (incorporated by reference to Exhibit 10s-1 to
    Form 10-Q for the quarter ended June 30, 1996, File
    No. 1-8607.)             |  |  |  | 
|10y-2  |  | Second Amendment dated July 8,
    2002 to the BellSouth Corporation Trust Under Executive Benefit
    Plan(s) (incorporated by reference to Exhibit 10r-2 to
    Form 10-Q for the quarter ended September 30, 2002,
    File No. 1-8607.) |  |  |  | 



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|       |  |                                                                                                                                                                                                                                                                        |  |  |  | 
|------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|10y-3  |  | First Amendment dated
    November 1, 2003 to the BellSouth Corporation Trust Under
    Executive Benefit Plan(s) (incorporated by reference to Exhibit
    10r-3 to Form 10-K for the year ended December 31, 2003,
    File No. 1-8607.)                             |  |  |  | 
|10y-4  |  | Second Amendment dated
    December 17, 2003 to the BellSouth Corporation Trust Under
    Executive Benefit Plan(s) (incorporated by reference to
    Exhibit 10r-4 to Form 10-K for the year ended
    December 31, 2003, File No. 1-8607.)                           |  |  |  | 
|10y-5  |  | Third Amendment dated
    March 15, 2004 to the BellSouth Corporation Trust Under
    Executive Benefit Plan(s) (incorporated by reference to
    Exhibit 10r-5 to the Form 10-Q for the quarter ended
    March 31, 2004, File No. 1-8607.)                           |  |  |  | 
|10z    |  | BellSouth Telecommunications, Inc.
    Trust Under Executive Benefit Plan(s) as amended April 28,
    1995 (incorporated by reference to Exhibit 10v-1 to
    Form 10-Q for the quarter ended June 30, 1995, File
    No. 1-8607.)                                     |  |  |  | 
|10z-1  |  | Amendment dated May 23, 1996
    to the BellSouth Telecommunications, Inc. Trust Under Executive
    Benefit Plan(s) (incorporated by reference to Exhibit 10t-1
    to Form 10-Q for the quarter ended June 30, 1996, File
    No. 1-8607.)                           |  |  |  | 
|10z-2  |  | Second Amendment dated July 8,
    2002 to the BellSouth Telecommunications, Inc. Trust Under
    Executive Benefit Plan(s) (incorporated by reference to
    Exhibit 10s-2 to Form 10-Q for the quarter ended
    September 30, 2002, File No. 1-8607.)               |  |  |  | 
|10z-3  |  | First Amendment dated
    November 1, 2003 to the BellSouth Telecommunications, Inc.
    Trust Under Executive Benefit Plan(s) (incorporated by reference
    to Exhibit 10s-3 to Form 10-K for the year ended
    December 31, 2003, File No. I-8607.)                |  |  |  | 
|10z-4  |  | Second Amendment dated
    December 17, 2003 to the BellSouth Telecommunications, Inc.
    Trust Under Executive Benefit Plan(s) (incorporated by reference
    to Exhibit 10s-4 to Form 10-K for the year ended
    December 31, 2003, File No. 1-8607.)              |  |  |  | 
|10z-5  |  | Third Amendment dated
    March 15, 2004 to the BellSouth Telecommunications, Inc.
    Trust Under Executive Benefit Plan(s) (incorporated by reference
    to Exhibit 10s-5 to the Form 10-Q for the quarter
    ended March 31, 2004, File No. 1-8607.)              |  |  |  | 
|10aa   |  | BellSouth Corporation Trust Under
    Board of Directors Benefit Plan(s) as amended April 28,
    1995 (incorporated by reference to Exhibit 10w-1 to
    Form 10-Q for the quarter ended June 30, 1995, File
    No. 1-8607.)                                         |  |  |  | 
|10aa-1 |  | Amendment dated May 23, 1996
    to the BellSouth Corporation Trust Under Board Directors Benefit
    Plan(s) (incorporated by reference to Exhibit 10u-1 to Form 10-Q
    for the quarter ended June 30, 1996, File No. 1-8607.)                                      |  |  |  | 
|10aa-2 |  | First Amendment dated
    November 1, 2003 to the BellSouth Corporation Trust Under
    Board of Directors Benefit Plan(s) (incorporated by reference to
    Exhibit 10t-2 to Form 10-K for the year ended
    December 31, 2003, File No. 1-8607.)                    |  |  |  | 
|10aa-3 |  | Second Amendment dated
    December 17, 2003 to the BellSouth Corporation Trust Under
    Board of Directors Benefit Plan(s) (incorporated by reference to
    Exhibit 10t-3 to Form 10-K for the year ended
    December 31, 2003, File No. 1-8607.)                  |  |  |  | 
|10aa-4 |  | Third Amendment dated
    March 15, 2004 to the BellSouth Corporation Trust Under
    Board of Directors Benefit Plan(s) (incorporated by reference to
    Exhibit 10t-4 to the Form 10-Q for the quarter ended
    March 31, 2004, File No. 1-8607.)                  |  |  |  | 
|10bb   |  | BellSouth Telecommunications, Inc.
    Trust Under Board of Directors Benefit Plan(s) as amended
    April 28, 1995 (incorporated by reference to
    Exhibit 10x-1 to Form 10-Q for the quarter ended
    June 30, 1995, File No. 1-8607.)                            |  |  |  | 
|10bb-1 |  | Amendment dated May 23, 1996
    to the BellSouth Telecommunications, Inc. Trust Under Board of
    Directors Benefit Plan(s) (incorporated by reference to
    Exhibit 10v-1 to Form 10-Q for the quarter ended
    June 30, 1996, File No. 1-8607.)                  |  |  |  | 
|10bb-2 |  | First Amendment dated
    November 1, 2003 to the BellSouth Telecommunications, Inc.
    Trust Under Board of Directors Benefit Plan(s) (incorporated by
    reference to Exhibit 10u-2 to the Form 10-K for the
    year ended December 31, 2003, File No. 1-8607.)   |  |  |  | 
|10bb-3 |  | Second Amendment dated
    December 17, 2003 to the BellSouth Telecommunications, Inc.
    Trust Under Board of Directors Benefit Plan(s) (incorporated by
    reference to Exhibit 10u-3 to the Form 10-K for the
    year ended December 31, 2003, File No. 1-8607.) |  |  |  | 



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EXHIBITS AND FINANCIAL STATEMENT
SCHEDULESCONTINUED

BELLSOUTH CORPORATION

|       |  |                                                                                                                                                                                                                                                                    |  |  |  | 
|------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  |  |  | 
|10bb-4 |  | Third Amendment dated
    March 15, 2004 to the BellSouth Telecommunications, Inc.
    Trust Under Board of Directors Benefit Plan(s) (incorporated by
    reference to Exhibit 10u-4 to the Form 10-Q for the
    quarter ended March 31, 2004, File No. 1-8607.) |  |  |  | 
|10cc   |  | Amended and Restated BellSouth
    Corporation Stock Plan Effective April 24, 1995
    (incorporated by reference to Exhibit 10v-1 to
    Form 10-K for the year ended December 31, 2000, File
    No. 1-8607.)                                                    |  |  |  | 
|10dd   |  | BellSouth Corporation Stock and
    Incentive Compensation Plan as amended June 28, 2004
    (incorporated by reference to Exhibit 10v-3 to the
    Form 10-Q for the quarter ended June 30, 2004, File
    No. 1-8607.)                                           |  |  |  | 
|10dd-1 |  | First Amendment to the BellSouth
    Corporation Stock and Incentive Compensation Plan dated as of
    September 26, 2005 (incorporated by reference to
    Exhibit 10ii to Form 10-Q for the quarter ended
    September 30, 2005, File No. 1-8607.)              |  |  |  | 
|10ee   |  | Non-Employee Director Non-Qualified
    Stock Option Terms and Conditions (incorporated by reference to
    Exhibit 10-qq to BellSouths Form 8-K dated
    September 30, 2004, File No. 1-8607.)                                                                  |  |  |  | 
|10ff   |  | 2004 Non-Qualified Stock Option
    Terms and Conditions (incorporated by reference to
    Exhibit 10-rr to BellSouths Form 8-K dated
    September 30, 2004, File No. 1-8607.)                                                                                   |  |  |  | 
|10gg   |  | BellSouth Retirement Savings Plan
    as amended and restated effective July 1, 2001
    (incorporated by reference to Exhibit 10w to Form 10-K
    for the year ended December 31, 2001, File No. 1-8607.)                                                        |  |  |  | 
|10gg-1 |  | First Amendment dated
    December 18, 2001 to the BellSouth Retirement Savings Plan
    (incorporated by reference to Exhibit 10w-1 to
    Form 10-K for the year ended December 31, 2001, File
    No. 1-8607.)                                                  |  |  |  | 
|10gg-2 |  | Second Amendment dated
    March 14, 2002 to the BellSouth Retirement Savings Plan
    (incorporated by reference to Exhibit 10w-2 to
    Form 10-Q for the quarter ended September 30, 2002,
    File No. 1-8607.)                                                |  |  |  | 
|10gg-3 |  | Third Amendment to the BellSouth
    Retirement Savings Plan effective as of May 1, 2002 and
    December 10, 2002 (incorporated by reference to
    Exhibit 10w-3 to Form 10-K for the year ended
    December 31, 2002, File No. 1-8607.)                        |  |  |  | 
|10gg-4 |  | Fourth Amendment dated
    December 23, 2003 to the BellSouth Retirement Savings Plan
    (incorporated by reference to Exhibit 10w-4 to
    Form 10-K for the year ended December 31, 2003, File
    No. 1-8607.)                                                 |  |  |  | 
|10gg-5 |  | Fifth Amendment dated
    December 22, 2004 to the BellSouth Retirement Savings Plan
    (incorporated by reference to Exhibit 10hh-5 to
    Form 10-K for the year ended December 31, 2004, File
    No. 1-8607.)                                                 |  |  |  | 
|10gg-6 |  | Sixth Amendment dated
    December 22, 2005 to the BellSouth Retirement Savings Plan.                                                                                                                                                                              |  |  |  | 
|10hh   |  | Agreement with Chief Executive
    Officer (incorporated by reference to Exhibit 10dd to
    Form 10-K for the year ended December 31, 1998, File
    No. 1-8607.)                                                                                                 |  |  |  | 
|10ii   |  | Agreement dated June 6, 2005
    with Francis A. Dramis (incorporated by reference to
    Exhibit 10eee to Form 8-K dated June 14, 2005,
    File No. 1-8607.)                                                                                                     |  |  |  | 
|10jj   |  | Agreement dated February 24,
    2004, between BellSouth Corporation and Mark L. Feidler
    (incorporated by reference to Exhibit 10kk to
    Form 10-K for the year ended December 31, 2003, File
    No. 1-8607.)                                               |  |  |  | 
|10kk   |  | Agreement dated as of July 29,
    2005 by and between BellSouth Corporation and Richard A.
    Anderson (incorporated by reference to Exhibit 10hhh to
    Form 8-K dated August 6, 2005, File No. 1-8607.)                                                       |  |  |  | 
|10ll   |  | Form of Director Indemnity
    Agreement (incorporated by reference to Exhibit 10ll to
    Form 10-K for the year ended December 31, 2003, File
    No. 1-8607.)                                                                                                   |  |  |  | 
|10mm   |  | Form of BellSouth Corporation Stock
    and Incentive Compensation Plan Restricted Stock Award Agreement
    (incorporated by reference to Exhibit 10-ss to
    BellSouths Form 8-K dated September 30, 2004,
    File No. 1-8607.)                               |  |  |  | 



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|      |  |                                                                                                                                                                                                                                                                                       |  |  |  | 
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|10nn  |  | Form of BellSouth Corporation Stock
    and Incentive Compensation Plan Restricted Stock Award Agreement
    (Non-Retirement Eligible, Change in Control) (incorporated by
    reference to Exhibit 10-tt to BellSouths
    Form 8-K dated September 30, 2004, File
    No. 1-8607.) |  |  |  | 
|10oo  |  | Form of BellSouth Corporation Stock
    and Incentive Compensation Plan Restricted Stock Award Agreement
    (Retirement Eligible, No Change in Control) (incorporated by
    reference to Exhibit 10-uu to BellSouths Form 8-K dated
    September 30, 2004, File No. 1-8607.)      |  |  |  | 
|10pp  |  | Form of BellSouth Corporation Stock
    and Incentive Compensation Plan Restricted Stock Award Agreement
    (Non-Retirement Eligible) (incorporated by reference to
    Exhibit 10-vv to BellSouths Form 8-K dated
    September 30, 2004, File No. 1-8607.)                        |  |  |  | 
|10qq  |  | Form of BellSouth Corporation Stock
    and Incentive Compensation Plan 2006 Restricted Stock Unit Award
    Terms and Conditions.                                                                                                                                                    |  |  |  | 
|10rr  |  | Form of 2005 Ownership Restricted
    Stock Award Agreement pursuant to the BellSouth Executive Stock
    Ownership Program (incorporated by reference to
    Exhibit 10bbb to Form 10-Q for the quarter ended
    March 31, 2005, File No. 1-8607.)                                  |  |  |  | 
|10ss  |  | Form of BellSouth Change in Control
    Executive Severance Agreements (incorporated by reference to
    Exhibit 10ggg to Form 8-K dated June 27, 2005,
    File No. 1-8607.)                                                                                                         |  |  |  | 
|10tt  |  | Form of BellSouth Corporation Stock
    and Incentive Compensation Plan Annual Incentive Award Agreement
    for Executive Officers (2005 Awards) (incorporated by reference
    to Exhibit 10ss to Form 8-K dated January 24, 2005, File
    No 1-8607.)                             |  |  |  | 
|10uu  |  | Form of BellSouth Corporation Stock
    and Incentive Compensation Plan Annual Incentive Award Agreement
    for Officers (2006 Awards) (incorporated by reference to
    Exhibit 10a to Form 8-K dated January 23, 2006,
    File No. 1-8607.)                                       |  |  |  | 
|10vv  |  | Form of BellSouth Corporation Stock
    and Incentive Compensation Plan Performance Shares Award
    Agreement (2004 Awards) (incorporated by reference to
    Exhibit 10-ww to BellSouths Form 8-K dated
    September 30, 2004, File No. 1-8607.)                                  |  |  |  | 
|10ww  |  | Form of BellSouth Corporation Stock
    Plan Performance Shares Award Agreement (2005 Awards 
    total shareholder return) (incorporated by reference to
    Exhibit 10yy to BellSouths Form 8-K dated
    February 28, 2005, File No. 1-8607.)                                    |  |  |  | 
|10xx  |  | Form of BellSouth Corporation Stock
    Plan Performance Shares Award Agreement (2005 Awards 
    internal performance metrics) (incorporated by reference to
    Exhibit 10zz to BellSouths Form 8-K dated
    February 28, 2005, File No. 1-8607.)                                |  |  |  | 
|10yy  |  | Form of BellSouth Corporation Stock
    Plan Performance Shares Award Agreement (2005 Awards 
    non-162(m) officers) (incorporated by reference to
    Exhibit 10aaa to BellSouths Form 8-K dated
    February 28, 2005, File No. 1-8607.)                                        |  |  |  | 
|10zz  |  | Form of BellSouth Corporation Stock
    and Incentive Compensation Plan 2006 Performance Shares Award
    Terms and Conditions (total shareholder return).                                                                                                                            |  |  |  | 
|10aaa |  | Form of BellSouth Corporation Stock
    and Incentive Compensation Plan 2006 Performance Shares Award
    Terms and Conditions (internal performance metrics).                                                                                                                        |  |  |  | 
|10bbb |  | Form of BellSouth Corporation Stock
    and Incentive Compensation Plan 2006 Performance Shares Award
    Terms and Conditions (non-162(m) officers).                                                                                                                                 |  |  |  | 
|11    |  | Computation of Earnings Per Share.                                                                                                                                                                                                                                                    |  |  |  | 
|12    |  | Computation of Ratio of Earnings to
    Fixed Charges.                                                                                                                                                                                                                                |  |  |  | 
|21    |  | Subsidiaries of BellSouth.                                                                                                                                                                                                                                                            |  |  |  | 
|23a   |  | Consent of Independent Registered
    Public Accounting Firm.                                                                                                                                                                                                                         |  |  |  | 
|23b   |  | Consent of Independent Registered
    Public Accounting Firm.                                                                                                                                                                                                                         |  |  |  | 
|23c   |  | Consent of Independent Registered
    Public Accounting Firm.                                                                                                                                                                                                                         |  |  |  | 
|24    |  | Powers of Attorney.                                                                                                                                                                                                                                                                   |  |  |  | 
|31-a  |  | Section 302 certification of
    F. Duane Ackerman.                                                                                                                                                                                                                                   |  |  |  | 
|31-b  |  | Section 302 certification of
    W. Patrick Shannon.                                                                                                                                                                                                                                  |  |  |  | 



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EXHIBITS AND FINANCIAL STATEMENT
SCHEDULESCONTINUED

BELLSOUTH CORPORATION

|    |  |                                                                                                                                                                                                                                    |  |  |  | 
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|32  |  | Statement Required by 18 U.S.C.
    Section 1350, as adopted pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002.                                                                                                        |  |  |  | 
|99a |  | Risk Factors section of the
    Form 10-K for Cingular Wireless LLC for the fiscal year
    ended December 31, 2005.                                                                                                               |  |  |  | 
|99b |  | Consolidated Financial Statements
    of Cingular Wireless LLC as of and for the three years ended
    December 31, 2003, 2004 and 2005 with the Report of Independent
    Registered Public Accounting Firm.                      |  |  |  | 
|99c |  | Annual report on Form 11-K for
    BellSouth Retirement Savings Plan for the fiscal year ended
    December 31, 2005 (to be filed under Form 11-K within
    180 days of the end of the period covered by this report).            |  |  |  | 
|99d |  | Annual report on Form 11-K for
    BellSouth Savings and Security ESOP Plan for the fiscal year
    ended December 31, 2005 (to be filed under Form 11-K
    within 180 days of the end of the period covered by this
    report). |  |  |  | 



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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/ Raymond E. Winborne, Jr.



Raymond E. Winborne, Jr.

Controller

February 28, 2006

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

AND CHIEF EXECUTIVE OFFICER

PRINCIPAL FINANCIAL OFFICER:

W. Patrick Shannon*.

CHIEF FINANCIAL OFFICER

PRINCIPAL ACCOUNTING OFFICER:

Raymond E. Winborne, Jr.*

CONTROLLER

DIRECTORS:

F. Duane Ackerman*

Reuben V. Anderson*

James H. Blanchard*

J. Hyatt Brown*

Armando M. Codina*

Mark L. Feidler*

Kathleen F. Feldstein*

James P. Kelly*

Leo F. Mullin*

Robin B. Smith*

William S. Stavropoulos*



*By:
    /s/ Raymond E. Winborne, Jr.

Raymond E. Winborne, Jr.

(INDIVIDUALLY AND AS ATTORNEY-IN-FACT)

February 28, 2006




BELLSOUTH 2005      95