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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------
 
                                   FORM 10-K
 
 (Mark One)
     /X/                 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
                                THE SECURITIES EXCHANGE ACT OF 1934
                    FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
                                         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
 
<TABLE>
<S>                                      <C>
               A GEORGIA                             I.R.S. EMPLOYER
              CORPORATION                            NO. 58-1533433
            1155 Peachtree Street, N.E., Atlanta, Georgia 30309-3610
                         Telephone number 404 249-2000
          SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
 
                                                  NAME OF EACH EXCHANGE
          TITLE OF EACH CLASS                      ON WHICH REGISTERED
---------------------------------------  ---------------------------------------
             Common Stock                      New York, Boston, Chicago,
       (par value $1 per share)                 Pacific and Philadelphia
                  and                                Stock Exchanges
    Preferred Stock Purchase Rights
 
        Support Obligations for                  New York Stock Exchange
   7.12% Debentures due 7/15/2097 of
 BellSouth Capital Funding Corporation
</TABLE>
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
                                     None.
 
    At February 2, 1998, 991,356,878 shares of Common Stock and Preferred Stock
Purchase Rights were outstanding.
 
    At February 2, 1998, the aggregate market value of the voting stock held by
non-affiliates was $60,039,546,602.
 
    Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
 
    Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
    Portions of the registrant's definitive proxy statement dated March 10,
1998, issued in connection with the 1998 annual meeting of shareholders (Part
III).
 
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<PAGE>
                               TABLE OF CONTENTS
 
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  ITEM                                                                                                            PAGE
---------                                                                                                       ---------
<C>        <S>                                                                                                  <C>
                                                         PART I
 
Safe Harbor Statement.........................................................................................          1
 
       1.  Business...........................................................................................          1
           General............................................................................................          1
           Business Operations................................................................................          2
           Telephone Company Operations.......................................................................          2
           Other Telecommunications Business Operations.......................................................         10
           Competition........................................................................................         13
           Research and Development...........................................................................         19
           Licenses and Franchises............................................................................         19
           Employees..........................................................................................         20
       2.  Properties.........................................................................................         20
           General............................................................................................         20
           Capital Expenditures...............................................................................         21
           Environmental Matters..............................................................................         22
       3.  Legal Proceedings..................................................................................         22
       4.  Submission of Matters to a Vote of Shareholders....................................................         22
Additional Information -- Description of BellSouth Stock......................................................         22
Executive Officers............................................................................................         25
 
                                                         PART II
 
       5.  Market for Registrant's Common Equity and Related Stockholder Matters..............................         27
       6.  Selected Financial and Operating Data..............................................................         28
       7.  Management's Discussion and Analysis of Results of Operations and Financial Condition..............         29
           Results of Operations..............................................................................         29
           Volumes of Business................................................................................         31
           Operating Revenues.................................................................................         32
           Operating Expenses.................................................................................         35
           Other Income Statement Items.......................................................................         37
           Extraordinary Losses...............................................................................         38
           Financial Condition................................................................................         38
           Operating Environment and Trends of the Business...................................................         40
           Year 2000 Compliance...............................................................................         45
           New Accounting Pronouncements......................................................................         45
           Safe Harbor Statement..............................................................................         45
       8.  Consolidated Financial Statements and Supplementary Data...........................................         47
           Report of Management...............................................................................         47
           Audit Committee Chairman's Letter..................................................................         48
           Report of Independent Accountants..................................................................         48
           Consolidated Statements of Income..................................................................         49
           Consolidated Balance Sheets........................................................................         50
           Consolidated Statements of Shareholders' Equity....................................................         51
           Consolidated Statements of Cash Flows..............................................................         52
           Notes to Consolidated Financial Statements.........................................................         53
           Supplementary Data -- Domestic Cellular Proportionate Operating Data...............................         74
       9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...............         74
</TABLE>
<PAGE>
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  ITEM                                                                                                            PAGE
---------                                                                                                       ---------
                                                        PART III
<C>        <S>                                                                                                  <C>
 
     *10.  Directors and Executive Officers of the Registrant.................................................         75
     *11.  Executive Compensation.............................................................................         75
     *12.  Security Ownership of Certain Beneficial Owners and Management.....................................         75
     *13.  Certain Relationships and Related Transactions.....................................................         75
 
                                                         PART IV
 
      14.  Exhibits, Financial Statement Schedules and Reports on Form 8-K....................................         75
 
Signatures....................................................................................................         79
Consent of Independent Accountants............................................................................         80
</TABLE>
 
------------------------
 
*Included in BellSouth Corporation's definitive proxy statement dated March 10,
 1998 and incorporated herein by reference.
<PAGE>
                                     PART I
 
SAFE HARBOR STATEMENT
 
    CERTAIN OF THE INFORMATION CONTAINED IN THIS AND OTHER REPORTS ADDRESSES
KNOWN TRENDS AND UNCERTAINTIES AFFECTING BELLSOUTH CORPORATION'S BUSINESS AND
PROSPECTS AND MAY CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. BELLSOUTH CORPORATION'S
EXPECTATIONS CONTAINED IN OR UNDERLYING SUCH FORWARD-LOOKING STATEMENTS ARE
BASED ON A NUMBER OF ASSUMPTIONS, INCLUDING BUT NOT LIMITED TO: (1) ECONOMIC
GROWTH AND DEMAND FOR WIRELINE AND WIRELESS COMMUNICATIONS SERVICES CONTINUES IN
BELLSOUTH CORPORATION'S SERVICE TERRITORIES; (2) THE FINAL RESOLUTION OF THE
ACCESS REFORM AND UNIVERSAL SERVICE ORDERS OF THE FCC (AND THE RESULTANT
CUSTOMER IMPACTS) IS REASONABLY EARNINGS-NEUTRAL; (3) LOCAL WIRELINE AND
WIRELESS SERVICE COMPETITION DOES NOT HAVE SIGNIFICANTLY INCREASING ADVERSE
IMPACTS ON EARNINGS; (4) THE CONTINUING COSTS TO IMPLEMENT NETWORK CHANGES AND
OPERATING SYSTEMS NECESSARY TO SATISFY REGULATORY CONDITIONS FOR BELLSOUTH
CORPORATION'S PROVISION OF INTERLATA SERVICE ARE NOT MATERIALLY GREATER THAN
CURRENTLY PROJECTED; (5) BELLSOUTH CORPORATION'S EXPECTATIONS AS TO THE COST AND
SUCCESS OF ITS EFFORTS FOR YEAR 2000 COMPLIANCE, INCLUDING THE SUCCESS OF ITS
KEY SUPPLIERS AND CUSTOMERS, ARE REASONABLY ACCURATE; AND (6) THE CURRENT LEVEL
OF ECONOMIC, MONETARY AND POLITICAL STABILITY CONTINUES IN FOREIGN COUNTRIES IN
WHICH BELLSOUTH CORPORATION HAS SIGNIFICANT INVESTMENTS OR OPERATIONS. ANY
DEVELOPMENTS SIGNIFICANTLY DEVIATING FROM THESE ASSUMPTIONS COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THOSE FORECAST OR IMPLIED IN THE
AFOREMENTIONED FORWARD-LOOKING STATEMENTS.
 
ITEM 1.  BUSINESS
 
                                    GENERAL
 
    BellSouth Corporation (BellSouth) is a holding company providing
telecommunications services, systems and products primarily through two
wholly-owned subsidiaries, BellSouth Telecommunications, Inc. (BellSouth
Telecommunications) and BellSouth Enterprises, Inc. (BellSouth Enterprises).
BellSouth Telecommunications provides predominantly tariffed wireline
telecommunications services to approximately two-thirds of the population and
one-half of the territory within Alabama, Florida, Georgia, Kentucky, Louisiana,
Mississippi, North Carolina, South Carolina and Tennessee. BellSouth's other
businesses (predominantly domestic and international wireless communications
services and advertising and publishing products) are conducted primarily
through subsidiaries of BellSouth Enterprises. BellSouth has its principal
executive offices at 1155 Peachtree Street, N.E., Atlanta, Georgia 30309-3610
(telephone number 404-249-2000).
 
    BellSouth was incorporated in 1983 under the laws of the State of Georgia.
On December 31, 1983, pursuant to a consent decree approved by the United States
District Court for the District of Columbia entitled "Modification of Final
Judgment" (the MFJ) settling antitrust litigation brought by the United States
Department of Justice (the Justice Department) in 1974 and the related Plan of
Reorganization, American Telephone and Telegraph Company, now AT&T Corp. (AT&T),
formed several holding companies including BellSouth (the Holding Companies),
and transferred to them one or more of the operating telephone companies (the
Operating Telephone Companies) that were formerly part of the Bell System. As a
result, AT&T transferred to BellSouth its 100% ownership of South Central Bell
Telephone Company (South Central Bell) and Southern Bell Telephone and Telegraph
Company (Southern Bell). On January 1, 1984, ownership of the Holding Companies
was transferred by AT&T to its shareholders. As a result, BellSouth became a
publicly traded company. BellSouth Telecommunications is the surviving
corporation from the merger of South Central Bell and Southern Bell, effective
at midnight, December 31, 1991.
 
    Under the MFJ, the Operating Telephone Companies could provide local
exchange, exchange access, information access and toll telecommunications
services within their assigned geographical territories, termed "Local Access
and Transport Areas" (LATAs). Although prohibited from providing
 
                                       1
<PAGE>
wireline service between LATAs, the Operating Telephone Companies provided
exchange access services that linked a subscriber's telephone or other equipment
in one of their LATAs to the transmission facilities of carriers (the
Interexchange Carriers), that provided toll telecommunications services between
different LATAs.
 
    The Telecommunications Act of 1996 (the 1996 Act) supercedes the MFJ,
providing for the development of competition in local telecommunications
markets; the conditions under which the Operating Telephone Companies can
provide interLATA wireline telecommunications and other services; and the
provision by the Operating Telephone Companies of video services within their
service areas. The ability of the Operating Telephone Companies to enter
businesses previously proscribed to them by the MFJ is, however, generally
subject to numerous and rigorous criteria and the development of and compliance
with newly mandated regulations of the Federal Communications Commission (FCC).
To date, the FCC has rejected all applications to provide interLATA wireline
service. (See "Telephone Company Operations -- InterLATA Toll Service.")
 
                              BUSINESS OPERATIONS
 
    Approximately 67%, 70% and 70% of BellSouth's total operating revenues for
the years ended December 31, 1997, 1996 and 1995, respectively, were from
wireline telecommunications services provided by BellSouth Telecommunications.
The remainder was derived principally from domestic and international wireless
operations, directory advertising and publishing, billing and collection and
other nonregulated services. Revenues from services (predominantly exchange
access services) provided to AT&T, BellSouth's largest customer, comprised
approximately 8%, 9% and 10% of 1997, 1996 and 1995 total operating revenues,
respectively.
 
                          TELEPHONE COMPANY OPERATIONS
 
    BellSouth Telecommunications provides, predominantly, local exchange,
exchange access and intraLATA toll services within each of the 38 LATAs in its
nine-state wireline service territory. BellSouth Telecommunications provided
approximately 23,201,000 customer access lines at December 31, 1997, an overall
increase of 4.8% since December 31, 1996. The increase was primarily
attributable to continued economic growth in BellSouth Telecommunications'
nine-state service region. Growth in additional residential lines ordered by
existing customers accounted for approximately 30.8% of the overall increase in
total access lines since December 31, 1996. (See "MD&A -- Results of Operations
-- Volumes of Business.")
 
    At December 31, 1997, approximately 81% of BellSouth Telecommunications'
access lines were in 44 metropolitan areas, each having a population of 125,000
or more. Many localities and some sizable areas in the states in which BellSouth
Telecommunications operates are served primarily by non-affiliated telephone
companies. BellSouth Telecommunications does not furnish, on a significant
scale, local exchange, exchange access or toll services in the areas served by
such companies. BellSouth Telecommunications is increasingly facing competition
for local and intraLATA customers within its wireline service territory. (See
"Competition -- Network and Related Services.")
 
LOCAL AND INTRALATA TOLL SERVICES
 
    Charges for local service for each of the years ended December 31, 1997,
1996 and 1995 accounted for approximately 41%, 42% and 41%, respectively, of
BellSouth's total operating revenues. Local service operations provide lines
from telephone exchange offices to subscribers' premises for the origination and
termination of telecommunications, including the following: basic local
telephone service provided through the regular switched network; dedicated
private line facilities for voice and special services, such as transport of
data, radio and video; switching services for customers' internal communications
through facilities owned by BellSouth Telecommunications; services for data
transport that include managing and configuring special service networks; and
dedicated low or high capacity public
 
                                       2
<PAGE>
or private digital networks. Other local service revenue is derived from
intercept and directory assistance, public telephones and various optional
central office features, such as Caller ID, Call Waiting, Call Return and 3-Way
Calling services. As other authorized telecommunications carriers compete in the
provision of local service, BellSouth Telecommunications will increasingly sell
to such carriers unbundled network elements and discounted local service for
resale.
 
    BellSouth Telecommunications offers certain enhanced services, such as
MemoryCallSM voice messaging service, through its network. These services differ
from basic services in that they employ computer processing applications to
alter the subscriber's transmitted information; provide the subscriber
additional, different or restructured information; or involve subscriber
interaction with stored information. The terms of many of these service
offerings are not regulated under the rules of the FCC, but the FCC prescribes
the method by which such services may be provided (for example, through
structurally separated subsidiaries or arrangements providing access to
competitive providers). Total revenue from enhanced and other optional services
was approximately $1.31 billion, $1.06 billion and $794 million for the years
ended December 31, 1997, 1996 and 1995, respectively.
 
    BellSouth Telecommunications provides intraLATA toll services within (but
not between) its 38 LATAs. Such toll services provided approximately 4%, 4% and
6% of BellSouth's total operating revenues for the years ended December 31,
1997, 1996 and 1995, respectively. These services include the following:
intraLATA service beyond the local calling area; Wide Area Telecommunications
Service (WATS or 800 services) for customers with highly concentrated demand;
and special services, such as transport of data, radio and video. In recent
years, these toll revenues have decreased as competition for toll customers has
intensified and as local area calling plans have been expanded. Toll revenues
are expected to continue to be negatively impacted by competition.
 
REGULATION OF LOCAL AND TOLL SERVICES
 
    BellSouth Telecommunications is subject to regulation of its intrastate
services by a state authority in each state where it provides intrastate
telecommunications services; such regulation covers rates, services, competition
and other issues.
 
    RATE REGULATION
 
    Traditionally, BellSouth Telecommunications' rates were set in each state in
its wireline service territory at levels that were anticipated to generate
revenues sufficient to cover its allowed expenses and to provide an opportunity
to earn a fair rate of return on its capital investment. Such a regulatory
structure, generally known as rate of return regulation, was acceptable in a
less competitive era; however, as discussed below, the regulatory processes have
changed in response to the increasingly competitive telecommunications
environment.
 
    Under the first generation of alternative regulation, generally known as
incentive regulation, economic incentives were provided to lower costs and
increase productivity through the potential availability of "shared" earnings
over a benchmark rate of return. Generally, when levels above targeted returns
were reached, earnings were "shared" by providing refunds or price reductions to
customers.
 
    Under the next generation of alternative regulation, generally known as
price regulation, the state authorities establish maximum prices that can be
charged for certain telecommunications services. While such plans limit the
amount of increases in prices for specified services, they enhance BellSouth
Telecommunications' ability to adjust prices and service options to respond more
effectively to changing market conditions and competition and provide an
opportunity to benefit more fully from productivity enhancements. For these
reasons, BellSouth Telecommunications has focused its regulatory and legislative
efforts on establishing price regulation, and such plans are now operational
throughout BellSouth Telecommunications' wireline service territory, except in
Tennessee where a court order to implement price regulation has been appealed.
While some state price regulation plans are not subject to either review or
renewal, other state plans contain specified termination dates and/or review
periods. No
 
                                       3
<PAGE>
assurance can be given that plans subject to review or renewal will retain
prices or other terms currently applicable.
 
    The following section contains a brief description of certain regulatory
proceedings in BellSouth Telecommunications' nine-state wireline service
territory.
 
ALABAMA
 
    BellSouth Telecommunications' rates were subject to an incentive regulation
plan from 1988 to September 1995 and to a price regulation plan thereafter.
Under the price regulation plan, prices for basic services, including local
exchange services for residence and business customers, are capped until 2000,
after which prices may be changed in accordance with an inflation-based formula.
Aggregate price increases for non-basic services are limited to 10% annually.
Intrastate switched access rates must be reduced below interstate switched
access rates. Reductions related to intrastate switched access are estimated to
be $25 million through 1999. Additional terms of the price regulation plan
require annual price reductions aggregating $57 million through 1999, excluding
intrastate switched access reductions.
 
FLORIDA
 
    From 1988 through 1992, an incentive regulation plan was in effect in
Florida. In 1994, the Florida Public Service Commission extended the plan
retroactively from 1993 to 1997, with required price reductions aggregating
approximately $300 million over a three-year period. Effective January 1996,
BellSouth Telecommunications elected to be regulated under price regulation;
however, it was still required to comply with the sharing provisions of the
previous incentive plan through 1997.
 
    Under the price regulation plan, prices for basic services, which include
flat-rate residential and single-line business local exchange services, are
capped until 2001, after which prices may be changed in accordance with an
inflation-based formula. Prices for certain non-basic services, including
multi-line business service, are capped until 1999 at the rates in effect in
July 1995. Prices for other non-basic services may be adjusted annually subject
to defined limitations.
 
GEORGIA
 
    From 1990 to August 1995, BellSouth Telecommunications operated under an
incentive regulation plan in Georgia. Thereafter, it has operated under a price
regulation plan. Under the price regulation plan, basic residence and
single-line business rates are capped until 2000, after which prices may be
changed in accordance with an inflation-based formula. Rates for intrastate
switched access services may be no higher than the rates charged for interstate
switched access services.
 
KENTUCKY
 
    From 1988 to July 1995, an incentive regulation plan was in effect in
Kentucky. BellSouth Telecommunications' rates are now regulated under a price
regulation plan. Under the price regulation plan, basic residential rates are
capped until 1998, after which prices may be changed in accordance with an
inflation-based formula. Intrastate switched access rates are limited to rates
in effect for interstate switched access. Prices for services deemed competitive
under the plan can be set by BellSouth Telecommunications in response to market
conditions.
 
LOUISIANA
 
    From February 1992 to April 1996, an incentive regulation plan was in effect
in Louisiana. Effective April 1996, the Louisiana Public Service Commission
approved a price regulation plan that will remain in effect for a six-year term.
Under the provisions of the price regulation plan, prices for basic services,
which include the provision of local exchange service, are capped until 2001,
after which prices may be changed in accordance with an inflation-based formula.
After 2001, no individual basic service price can be increased by more than 10%
in any twelve-month period. Prices for interconnection services are
 
                                       4
<PAGE>
capped until 1999, after which no individual service can be increased more than
10% in any twelve-month period. For non-basic services, price increases may not
exceed 20% in any twelve-month period.
 
    Concurrently with the approval of price regulation, the Louisiana Commission
concluded its review of BellSouth Telecommunications' earnings by requiring an
aggregate $70 million price reduction, to be apportioned over a three-year
period beginning April 1, 1996.
 
MISSISSIPPI
 
    From June 1990 through December 1995, an incentive regulation plan was in
effect in Mississippi. Effective January 1996, the Mississippi Public Service
Commission approved a six-year price regulation plan. Under the provisions of
the plan, prices for basic services, which include the provision of basic local
telephone service, are capped until 1999, after which the basic service category
rates will be revised annually to effect an annual reduction in revenues of 1%
or $3.75 million, whichever is greater, for the last three years of the plan. In
addition, intrastate switched access rates are capped at the same level as
interstate switched access rates over the life of the plan.
 
NORTH CAROLINA
 
    Prior to June 1996, traditional rate of return regulation was in effect in
North Carolina. Since then, BellSouth Telecommunications has been subject to a
price regulation plan under which prices for residence basic local exchange
service are capped until 1999, after which time any price increases are limited
by an inflation-based formula. For business basic local exchange,
interconnection and certain non-basic services, any increases in current prices
are also subject to inflation-based formulas. Prices for toll switched access
services were capped at the June 1996 prices, after giving effect to specified
price reductions ordered in conjunction with approval of the price regulation
plan.
 
SOUTH CAROLINA
 
    Prior to 1996, BellSouth Telecommunications' rates were regulated on a
traditional rate of return basis. In January 1996, the South Carolina Public
Service Commission approved a price regulation plan which includes provisions
that basic local exchange residence and business service flat rates will not
increase until 2001, after which prices may be changed in accordance with an
inflation-based formula. Intrastate switched access rates will be capped until
1999, after which prices may be changed in accordance with an inflation-based
formula. The rates for non-basic services will be set by BellSouth
Telecommunications, subject only to the limitation that the price for any
individual service may not be increased more than 20% in a twelve-month period.
 
    In April 1997, BellSouth Telecommunications, the South Carolina Public
Service Commission and other parties agreed on a settlement to claims of alleged
overearnings for the years 1992 through 1994. Under the terms of the settlement,
BellSouth Telecommunications paid $72 million to its customers in 1997.
 
TENNESSEE
 
    An incentive regulation plan, which had been in effect since August 1990,
ended in 1995. In June 1995, a law was enacted in Tennessee that allowed
qualified service providers to elect price regulation. BellSouth
Telecommunications elected price regulation under which the prices for basic
services and Call Waiting services are to be capped for four years, after which
prices may be changed in accordance with an inflation-based formula. Prices for
services other than basic services are to be adjusted based on an
inflation-based formula.
 
    In order to implement the price regulation election, the Tennessee Public
Service Commission required BellSouth Telecommunications to reduce prices by
approximately $56 million on an annual basis. BellSouth Telecommunications
appealed to the Tennessee Court of Appeals. The court stayed implementation of
both the rate reduction and price regulation plan pending further consideration
of the
 
                                       5
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issues. In October 1997, the court vacated the order requiring the rate
reduction and remanded the case to the Tennessee Regulatory Authority (successor
to the Tennessee Public Service Commission) with instructions to approve the
price regulation plan. In January 1998, the Tennessee Regulatory Authority and
the Consumer Advocate filed an application for permission to appeal to the
Tennessee Supreme Court.
 
    A bill has been introduced in the Tennessee legislature that would impose
significant new restrictions on companies electing price regulation.
Specifically, the bill would require BellSouth Telecommunications to agree to
make substantial refunds to customers and to have its initial rates for price
regulation purposes established by means of a traditional rate of return
earnings investigation. It is too early to assess the degree of support that
this proposal might receive in the legislature.
 
    REGULATION OF LOCAL SERVICE COMPETITION
 
    The 1996 Act requires the elimination of state legislative and regulatory
barriers to competition for local telephone service, subject only to
competitively neutral requirements to preserve and advance universal service,
protect the public safety and welfare, maintain the quality of
telecommunications services and safeguard the rights of customers. The 1996 Act
also includes requirements that incumbent local exchange carriers (ILECs), such
as BellSouth Telecommunications, negotiate with other carriers for
interconnection, use of network elements on an unbundled basis and resale of
local services. If a negotiated agreement cannot be reached, either party may
seek arbitration with the state regulatory authority, or the FCC if the state
fails to act. If rates are disputed, the arbitrator must set rates for access to
network elements on an unbundled basis, based on cost, which may include a
reasonable profit. ILECs are also required to negotiate to provide their retail
services at wholesale rates for the purpose of resale by competing carriers. If
agreement cannot be reached, the arbitrator shall set the wholesale rates at the
ILEC's retail rates less costs to be avoided. BellSouth Telecommunications has
executed over 300 interconnection or resale agreements with such carriers.
 
    In connection with the requirements of the 1996 Act, in August 1996, the FCC
released an order adopting rules governing interconnection and open competition
in the local telephone service industry. Among the issues specifically addressed
by the order were the network elements that ILECs must make available; pricing
standards to be followed by states in setting rates for interconnection; access
to network elements on an unbundled basis; and resold services. BellSouth,
several other ILECs and several state regulatory bodies appealed the order to
the United States Court of Appeals for the Eighth Circuit, and in July 1997, the
court ruled that state commissions, not the FCC, have exclusive jurisdiction to
set prices for local service interconnection, unbundled network elements and
local service resale. In addition, the court vacated other aspects of the order
including the FCC's "pick and choose" rule, which allowed competing local
carriers to select terms from different interconnection agreements in
negotiating their own interconnection agreements. The court also rejected the
FCC's requirement that ILECs submit pre-1996 interconnection agreements to the
state commissions for approval and the presumption that any network element that
can be technically unbundled must be unbundled. Finally, the court rejected the
FCC's requirement that ILECs physically recombine unbundled network elements for
competing local carriers and only required that such elements be made available
for rebundling.
 
    Certain aspects of the order were upheld by the court, including the ability
of the competing local carriers to recombine network elements to produce
complete telecommunications services without providing any of their own
facilities. The court also affirmed the FCC's classification of operations
support systems, operator services, directory assistance and vertical switching
features as unbundled network elements. In addition, the court also upheld the
FCC's definition of "technically feasible" interconnection to exclude all
economic considerations. Finally, the court declined to rule on whether or not
the Total Element Long Run Incremental Cost (TELRIC) pricing methodology was
inconsistent with the 1996 Act, leaving the state commissions to make that
decision. On reconsideration, the court further clarified that the 1996 Act does
not require ILECs to provide recombined unbundled network elements. The United
States Supreme Court has agreed to review the court's decision, and a ruling is
expected by
 
                                       6
<PAGE>
mid-1999. In a subsequent order, the Eighth Circuit held that the FCC may not
impose its pricing standards as a condition to granting permission for the
Operating Telephone Companies to provide interLATA communications.
 
    Notwithstanding these developments, however, BellSouth Telecommunications
and a number of carriers have negotiated interconnection agreements, and state
regulatory commissions have arbitrated and approved various terms of
interconnection between BellSouth Telecommunications and other carriers. Some
changes may be made to these agreements when the judicial appeals are concluded.
The arbitration results for the wholesale discount rates vary by state from
approximately 14.8% to 21.8% for both business and residential service.
 
    In attempting to comply with the technical requirements of interconnection,
BellSouth is incurring, and expects to continue to incur, significant costs
associated with the facilitation of interconnection. BellSouth incurred
approximately $400 million of costs associated with these efforts in the year
ended December 31, 1997. Of this amount, approximately $230 million was expensed
as incurred, and the remainder was capitalized. It remains unclear to what
degree, if any, BellSouth will be compensated for these costs.
 
REGULATION OF ACCESS SERVICES
 
    BellSouth Telecommunications provides access services by connecting the
equipment and facilities of its subscribers with the communications networks of
Interexchange Carriers. These connections are provided by linking these carriers
and subscribers through the public switched network of BellSouth
Telecommunications or through dedicated private lines furnished by BellSouth
Telecommunications. The FCC regulates rates and other aspects of interstate
access services. State regulatory commissions have jurisdiction over the
provision of access to the Interexchange Carriers to complete intrastate
telecommunications.
 
    Interstate and intrastate access charges, which are payable both by
Interexchange Carriers and subscribers, provided approximately 22%, 23% and 23%
of BellSouth's total operating revenues for the years ended December 31, 1997,
1996 and 1995, respectively. These charges are designed to recover the costs of
the common and dedicated facilities and switching equipment used to connect
networks of Interexchange Carriers with the telephone company's local network
and to subsidize the cost of providing local service to rural and other
high-cost areas. The FCC regulates interstate access charges through its price
cap and access charge rules. The state commissions have authorized BellSouth
Telecommunications to collect from the Interexchange Carriers and, in several
states, from customers, fees for providing intrastate access services. In
connection with the approval of price regulation plans, many states have
required BellSouth Telecommunications to reduce intrastate access rates to bring
them to parity with interstate access rates.
 
    Historically, access charges have been set at levels that subsidize the cost
of providing local residential service. The 1996 Act requires that the FCC
identify the local service subsidy implicitly provided by access charges; to
provide for the removal of such subsidy from access rates in order that access
charges reflect underlying costs; to arrange for a universal service fund to
ensure the continuation of universal service; and to develop the arrangements
for payments into that fund by all carriers.
 
    The FCC's price cap plan limits aggregate price changes to the rate of
inflation minus a productivity offset, plus or minus exogenous cost changes
recognized by the FCC. BellSouth Telecommunications had been pricing its
services based on a 5.3% productivity factor, which meant that price increases
would only occur to the extent that the Gross Domestic Product Price Index of
the United States (the Index) increased by greater than 5.3% over an annual
period. If the Index increased by less than 5.3%, price reductions would occur.
In May 1997, the FCC adopted orders regarding revisions to the price cap plan,
access charge reform and the establishment of a universal service fund. The
orders on the price cap plan and access charge reform resulted in access rate
reductions related to per-minute-of-use charges and increases to per-line
charges. The net access charge reductions resulted primarily from an
 
                                       7
<PAGE>
FCC-mandated increase in the price cap productivity factor from 5.3% to 6.5%.
The new rates went into effect beginning July 1, 1997 and were computed as if
the 6.5% productivity factor had been in effect since July 1, 1996.
 
    In addition, the access charge reform order resulted in several changes to
the existing interstate access rate structure designed to move access charges,
over time, to more economically efficient levels and to create more efficient
rate structures. Non-traffic-sensitive costs, that were previously recovered on
a per-minute-of-use basis, were changed to be recovered on a flat-rate, per-line
basis. As part of this plan, subscriber line charges (SLCs) were increased and a
new presubscribed interexchange carrier charge (PICC) was established. As SLC
and PICC charges are increased over time, usage charges are reduced. SLCs for
primary residential and single-line business access lines remained unchanged at
$3.50 per line, per month. SLCs for non-primary (or "additional") residential
access lines increased from $3.50 to $5.00 per line, per month, and SLCs for
multi-line business customers increased from $6.97 to $8.17 per line, per month
beginning in January 1998. PICCs were established on January 1, 1998 and are
charged to Interexchange Carriers for recovery of non-traffic-sensitive costs
not recovered through SLCs. These charges were established for primary
residential and single-line business access lines, non-primary residential
access lines and multi-line business access lines and were initially set at
$.53, $1.50 and $2.75, respectively, per line, per month, beginning January
1998. BellSouth believes that the net effect of these changes will be
substantially revenue-neutral.
 
    The universal service order established new funding mechanisms for
high-cost, low-income service areas. BellSouth Telecommunications began
contributing to the new funds on January 1, 1998 and is allowed recovery of its
contributions through increased interstate access charges. Major changes to the
support mechanism to subsidize the provision of services to high-cost areas will
occur January 1, 1999. The new support mechanism, when implemented in 1999, will
be based on forward-looking economic costs; however, a cost model has yet to be
adopted. A new proceeding was initiated in June 1997 to select a cost model with
final FCC action expected in 1998.
 
    The order also established significant discounts to be provided to eligible
schools and libraries for all telecommunications services, internal connections
and Internet access. It also established support for rural health care providers
so that they may pay rates comparable to those that urban health care providers
pay for similar services. Industry-wide annual costs of the program are to be
capped at approximately $2.7 billion and are to be funded out of the universal
service fund. Local and Interexchange Carriers' contributions to the education
and health care funds would be assessed by the fund administrator on the basis
of their interstate and intrastate end-user revenues.
 
    All of the foregoing orders have been appealed to United States Courts of
Appeal in several different Circuits.
 
INTERLATA TOLL SERVICE
 
    As a result of the 1996 Act, BellSouth and the other Holding Companies and
their affiliates are freed from the judicial restrictions of the MFJ that
generally prohibited the provision of interLATA communications throughout their
wireline service territories and elsewhere. The 1996 Act establishes in its
place a new restriction and a procedure for its removal. These companies may
apply to the FCC on a state-by-state basis to offer in-region interLATA wireline
services, and the FCC must act on each such application within 90 days. The FCC
must grant such application if it determines that the applicant (a) has met a
competitive checklist; (b) has shown (i) the presence of a facilities-based
provider offering both residential and business local services (Track A) or (ii)
if there is no such provider, a statement that has been approved or permitted to
take effect by state regulatory authorities of the terms under which it would be
willing to interconnect with a competitive local carrier (Track B); (c) will
operate in accordance with the separate subsidiary requirement; and (d) has
presented an application consistent with the public interest. The FCC is
required to consult with state regulatory authorities and the Justice Department
when reviewing the application.
 
                                       8
<PAGE>
    BellSouth plans to begin offering interLATA wireline service in each of its
in-region states as soon as the FCC approves its application for each state.
BellSouth has received favorable determinations from the regulatory commissions
in several states in its wireline service territory, but the FCC has rejected
all applications to provide in-region interLATA service on which it has ruled.
The applicants have appealed such denials to the United States Court of Appeals
for the District of Columbia Circuit. In addition, the United States District
Court for the Northern District of Texas has ruled that the provisions of the
1996 Act prohibiting the Operating Telephone Companies from providing interLATA
service are, in effect, an unconstitutional bill of attainder and are
unenforceable. The ruling has been stayed pending appeal. BellSouth will
continue to seek approvals from the FCC and other state commissions and judicial
review of adverse decisions which it believes to be erroneous. However, because
of the scrutiny of such applications by the FCC and the Justice Department, the
time required to obtain judicial review of adverse decisions and the possible
challenges by the Interexchange Carriers of any approved applications, it is
uncertain when BellSouth will be authorized to commence interLATA service in any
of its in-region states.
 
                            ------------------------
 
    In addition to the above matters, BellSouth and BellSouth Telecommunications
are parties to or subject to numerous other proceedings pending before federal
and state regulatory and judicial bodies. These matters involve, among other
things, terms and conditions of services provided by BellSouth
Telecommunications and its affiliates, rates charged for such services, access
reform, universal service, number portability and relationships with competitive
service providers and their affiliates. No assurance can be given as to the
outcome of any such proceedings.
 
PUBLIC TELEPHONES
 
    In April 1997, BellSouth Telecommunications transferred its payphone
business assets to a separate subsidiary, BellSouth Public Communications, Inc.
(BPC), in order to satisfy an FCC order which required ILECs to reassign their
payphone business assets from regulated telephone company accounts to separate
unregulated accounts or to transfer assets to a separate subsidiary. BPC has
received certification as an independent payphone provider in each of the nine
states where BellSouth Telecommunications provides wireline telephone service.
BPC plans to continue to provide independent payphone services throughout
BellSouth Telecommunications' territory and will selectively provide payphone
services in areas served by unaffiliated telephone companies. Also beginning in
April, BPC is authorized to begin receiving per-call compensation from
Interexchange Carriers for calls originating on its payphone equipment.
 
BILLING AND COLLECTION SERVICES
 
    BellSouth Telecommunications provides, under contract and/or tariff, billing
and collection services for certain long distance services of AT&T and several
other Interexchange Carriers. The agreement with AT&T extends through the year
2000, subject to the right of AT&T to assume billing and collection for certain
of its services prior to the expiration of the agreement. BellSouth Enterprises
also provides limited billing and collection services in foreign countries.
 
OPERATOR SERVICES
 
    Directory assistance and local and toll operator services are provided by
BellSouth Telecommunications in its service areas. Toll operator services
include alternate billing arrangements, such as collect calls, third number
billing, person-to-person and calling card calls; dialing instructions;
pre-billed credit; and rate information. In addition, directory assistance is
provided for some other carriers which do not directly provide such services for
their own customers.
 
                                       9
<PAGE>
INTERNET ACCESS
 
    In 1996, BellSouth Telecommunications began providing Internet access, a
customized version of Netscape Navigator-TM-, electronic mail and a gateway to
local and national information. Internet access is provided as BellSouth.net-SM-
service to over 182,000 customers at December 31, 1997.
 
SELLING AND MAINTAINING EQUIPMENT
 
    To a limited extent, BellSouth sells and maintains telecommunications
equipment in the nine states where BellSouth Telecommunications provides
wireline telephone service. The Holding Companies, Lucent Technologies, Inc. and
other substantial enterprises compete in the provision of these services and
products.
 
                  OTHER TELECOMMUNICATIONS BUSINESS OPERATIONS
 
DIRECTORY ADVERTISING AND PUBLISHING
 
    BellSouth Enterprises owns a group of companies which publish, print and
sell advertising in, and perform related services concerning, alphabetical and
classified telephone directories. Increasingly, such companies provide
directories in electronic form over the Internet and CD-ROM media. Directory
advertising and publishing revenues represented approximately 9% of BellSouth's
total operating revenues for each of the last three years. Two of BellSouth's
advertising and publishing companies also provide publishing and related
products and services to other directory publishers. During 1997, such BellSouth
companies published approximately 485 directories for BellSouth
Telecommunications and contracted with approximately 125 non-affiliated
companies to sell advertising space in approximately 500 of their publications.
 
WIRELESS COMMUNICATIONS
 
    BellSouth Enterprises provides wireless communications services, which
consist mainly of cellular telephone services. Revenues from wireless
communications comprised approximately 17%, 15% and 14% of BellSouth's total
operating revenues for the years ended December 31, 1997, 1996 and 1995,
respectively. In addition, BellSouth Enterprises has non-controlling financial
interests in a number of wireless businesses whose revenues are not reflected in
operating revenues because of the method of accounting for such investments.
 
    Under the MFJ, the Holding Companies generally were prohibited from
providing interLATA wireless communications. The 1996 Act lifted this
prohibition, and in February 1996, BellSouth began offering the interLATA
component of its wireless communications in conjunction with its wireless
offerings. Approximately 2.4 million customers subscribe to such interLATA
service. In areas where it does not have long distance telephone facilities,
BellSouth connects with the networks of the Interexchange Carriers.
 
    The 1996 Act allows BellSouth to market wireless services jointly with local
wireline services; previously, separate marketing was required. This change has
enabled BellSouth to more efficiently offer and provide integrated
telecommunications services. In March 1996, BellSouth began joint marketing of
wireless and wireline services in selected markets.
 
    DOMESTIC CELLULAR OPERATIONS
 
    The predominant part of BellSouth's wireless communications operations is
cellular radio telephone service. Cellular radio telephone systems provide
customers with high-quality and readily available two-way communications
services that interconnect with wireline and other cellular telephone networks.
The cellular networks of BellSouth and other carriers utilize analog technology,
which offers
 
                                       10
<PAGE>
seamless roaming across systems. Many carriers are also adding TDMA (Time
Division Multiple Access) or CDMA (Code Division Multiple Access) digital
technology to their systems which will enable greater capacity, technically
superior service quality and new features. BellSouth is utilizing TDMA digital
technology in adding digital capabilities to its cellular systems. Unlike
separate analog systems, TDMA systems are incompatible with CDMA networks,
thereby precluding customers from roaming from a TDMA system to a CDMA system,
or vice-versa. However, all digital cellular telephones are dual-mode,
containing analog technology as well as a particular digital technology. This
enables digital customers to roam using the analog mode if they enter a digital
system utilizing an incompatible technology.
 
    The domestic cellular telephone business has become a significant
contributor to BellSouth's operations, primarily due to the continued expansion
of the customer base for mobile communications services. BellSouth maintains and
operates cellular systems through wholly-owned subsidiaries and partnerships
with other entities. Cellular service and related equipment are marketed to
consumers, directly and through authorized agents, and to businesses that resell
the service.
 
    The rates charged by cellular carriers are not regulated by the FCC or the
states in which BellSouth's cellular operations are located. State governments
are generally preempted by federal law from regulating the rates charged by
cellular carriers.
 
    At December 31, 1997, businesses in which BellSouth had an equity interest
provided cellular service to a total of approximately 5,294,000 domestic
customers in 15 states. BellSouth's proportionate share of such total customers,
based on its percentage ownership interests of such businesses, was
approximately 4,105,000 customers. (See "Consolidated Financial Statements and
Supplementary Data -- Domestic Cellular Proportionate Operating Data.")
BellSouth's proportionate interest in the aggregate population (POPs) served by
its domestic cellular systems was approximately 40,235,000 persons at December
31, 1997, and its penetration rate was approximately 10.2%. Within its
nine-state wireline service territory, BellSouth and its partners offer cellular
service in cities including Atlanta, Miami, New Orleans, Memphis, Louisville,
Birmingham and Orlando, while outside its wireline service territory BellSouth
and its partners offer cellular service in cities including Los Angeles,
Houston, Indianapolis and Honolulu.
 
    The number of BellSouth's proportional domestic cellular customers has grown
by 13.6%, 26.9% and 32.1%, and its proportional domestic cellular revenues have
grown by 9.0%, 22.5% and 28.9% for the years ended December 31, 1997, 1996 and
1995, respectively. Its penetration rate has grown to 10.2% at December 31, 1997
from 8.9% and 7.1% at December 31, 1996 and 1995, respectively. Such growth is
likely to continue declining, reflecting increasing penetration rates and
competition for wireless customers by additional personal communications service
(PCS) carriers. (See "Personal Communications Service.")
 
    In November 1997, BellSouth completed an exchange with United States
Cellular Corporation of certain cellular properties. Under the agreement,
BellSouth traded its ownership interests in cellular properties in Wisconsin and
Illinois for new or increased equity ownership of cellular properties located in
or adjacent to BellSouth Telecommunications' nine-state wireline service
territory.
 
    PERSONAL COMMUNICATIONS SERVICE
 
    In 1995, the FCC began auctioning radio spectrum for providing digital
mobile communications service, commonly referred to as personal communications
service, or PCS. PCS utilizes only digital technology, which provides greater
security and clarity than the analog technology used on existing cellular
systems. The three most commonly deployed technologies in the United States are
GSM (Global System for Mobile Communications), TDMA and CDMA. GSM is also widely
used by international cellular and PCS systems. Within the domestic PCS markets,
however, none of the existing technologies has become dominant. Because these
competing digital technologies are not compatible with each other, PCS currently
does not offer the seamless roaming characteristics that are offered by analog
 
                                       11
<PAGE>
cellular services. In addition, PCS networks currently are largely concentrated
in more densely populated areas and are significantly more limited than cellular
networks in their service coverage.
 
    BellSouth, through its BellSouth Mobility DCS subsidiary, owns interests in
PCS licenses covering most of North Carolina, South Carolina and eastern
Tennessee. A BellSouth consortium is building and operating the network in the
Carolinas while BellSouth alone is building and operating the network in eastern
Tennessee. BellSouth's proportionate POPs covered by these licensed territories
is 7,700,000. Both of these systems, which utilize the GSM technology, have been
operational since the summer of 1996 and continue to expand their coverage
footprint within their given licensed areas.
 
    In January 1997, BellSouth won additional licenses in 37 Basic Trading Areas
(BTAs) in the FCC's D-and E-block auctions. These markets cover 12,700,000 POPs
in smaller areas within or adjacent to BellSouth's wireline service territory.
Currently, BellSouth, through its BellSouth Mobility subsidiary, plans to deploy
TDMA in thirty-four of these BTAs and BellSouth Mobility DCS is building and
operating GSM-based networks in the three remaining BTAs.
 
    At the present time, it is unclear which digital technology, if any, will
become the generally accepted standard in the United States. To overcome the
incompatibility of the existing technologies, PCS equipment manufacturers are
developing PCS handsets that operate within multiple technologies and
bandwidths. Presently, dual-band/dual-mode handsets are available that can
process both analog cellular and digital calls. These handsets enable roaming
from PCS systems to analog cellular systems. In addition, BellSouth has begun
investigating third generation technologies in data, voice and video that may
provide for a more standard platform for PCS transmission.
 
    INTERNATIONAL WIRELESS OPERATIONS
 
    Outside the United States, BellSouth owns interests in consortia that hold
licenses for, and are building and/or operating, wireless telephone systems in
Argentina, Brazil, Denmark, Ecuador, Germany, India, Israel, New Zealand,
Nicaragua, Panama, Peru, Uruguay and Venezuela. Through a wholly-owned
subsidiary, BellSouth holds a regional concession for a wireless telephone
system in Chile. At December 31, 1997, these systems provided cellular or PCS
service to a total of approximately 4,072,000 international customers.
BellSouth's proportionate share of such customers, based on its percentage
ownership interests in such systems, was approximately 1,882,000 customers.
BellSouth's proportionate interest in the aggregate population covered by its
international wireless systems was approximately 88,878,000 persons at December
31, 1997, and its penetration rate was approximately 2.7%. BellSouth's wireless
services are provided under regional licenses to areas within Argentina, India,
Nicaragua, Peru, Uruguay and Chile and under nationwide licenses in Denmark,
Ecuador, Germany, Israel, New Zealand, Panama and Venezuela. Upon completion of
networks currently being developed, services will be provided to certain areas
in Brazil under regional licenses beginning in the first half of 1998.
 
    MOBILE DATA
 
    BellSouth owns interests in five wireless data communications networks
worldwide utilizing L.M. Ericsson's Mobitex technology. These networks provide
services in the United States, the United Kingdom, the Netherlands, Belgium and
Singapore, enabling wireless data applications such as computer-aided dispatch,
electronic mail, transaction processing and remote data entry, paging and
message retrieval. They are also well-suited for fixed applications such as
credit card validation and telemetry.
 
OTHER INTERNATIONAL OPERATIONS
 
    In August 1997, BellSouth sold its 24.5% interest in Optus Communications
Pty. Ltd (Optus) to Cable and Wireless, a U.K. telecommunications company. Under
the agreement, BellSouth received approximately $735 million in cash for its 490
million shares in Optus. In addition, BellSouth will receive
 
                                       12
<PAGE>
either a 22.3% interest in Occidente y Caribe Celular S.A. (Occel), a cellular
communications company located in Colombia, or the equivalent value of that
interest in cash, at BellSouth's option, or if Cable and Wireless is not able to
transfer its interest in Occel to BellSouth within two years from the sale of
BellSouth's interest in Optus.
 
    BellSouth operates a competing domestic and international wireline long
distance business in Chile under a nationwide concession. In addition, in
January 1997, BellSouth purchased an interest in a company that offers wireline
and wireless cable television and paging services in Peru.
 
DOMESTIC BROADBAND SERVICES
 
    The 1996 Act eliminated prohibitions on telephone companies' provision of
cable television services in their service territories, although many federal
courts had already held such prohibitions unconstitutional. Although ILECs may
not acquire or joint venture with established cable television providers in
their wireline territories, they may provide cable television services over
their own facilities.
 
    BellSouth has constructed several networks, and provided cable television
services to a limited degree, in several areas within its wireline service
territory to assess the extent to which it wishes to enter this business. It has
also obtained licenses to provide wireless cable services in various
metropolitan areas including New Orleans, Atlanta and Louisville, as well as
several markets in the state of Florida (including Miami) and is currently
providing services in limited areas under these licenses.
 
    BellSouth, Ameritech Corporation, GTE Corporation, Southern New England
Telecommunications Corporation and The Walt Disney Company have formed a
business to acquire, develop, market and deliver traditional and interactive
video programming services to consumers. BellSouth intends to offer such
services to its cable television customers.
 
                                  COMPETITION
 
GENERAL
 
    BellSouth is subject to increasing competition in all areas of its business.
Regulatory, legislative and judicial actions and technological developments have
expanded the types of available services and products and the number of
companies that may offer them. Increasingly, this competition is from large
companies and joint ventures that have substantial capital, technological and
marketing resources.
 
NETWORK AND RELATED SERVICES
 
    LOCAL SERVICE
 
    Federal and state law provide for local service competition throughout
BellSouth Telecommunications' wireline service territory, and the state public
service commissions have granted numerous carrier applications for authority to
offer local telephone service. As a result, substantial competition has
developed for BellSouth Telecommunications' business customers which provide a
greater concentration of higher margin revenues than do its residential
customers. Competitors include the Interexchange Carriers, such as AT&T and MCI,
and smaller competitive local exchange carriers (CLECs), which resell local
services of BellSouth Telecommunications and other ILECs or provide service over
their own facilities. Because of the fact that significant residential local
service competition would improve BellSouth's prospects for obtaining regulatory
authority to offer interLATA long distance service, BellSouth believes that the
Interexchange Carriers have been slow to enter the local residential market and,
therefore, the development of competition for residential local service
customers will continue to be much slower than for business local service
customers.
 
                                       13
<PAGE>
    An increasing number of voice and data communications networks utilizing
fiber optic lines have been and are being constructed by telecommunications
providers in all major metropolitan areas throughout BellSouth
Telecommunications' wireline service territory. These networks offer certain
high-volume users a competitive alternative to the public and private line
offerings of BellSouth Telecommunications. Furthermore, wireless services, such
as cellular, PCS and paging services, and Internet services increasingly compete
with wireline communications services. PCS service is digital, which provides
greater security and clarity than analog cellular service. Such services are
provided by, among others, a number of well-capitalized entities, including AT&T
and other Holding Companies, in most of BellSouth's markets.
 
    As technological and regulatory developments make it more feasible for cable
television to carry data and voice communications, BellSouth Telecommunications
will face increased competition within its region from cable television
ventures. For example, MediaOne, an affiliate of USWest Media Group, has begun
offering local wireline service in Atlanta in 1998 over its enhanced cable
television network.
 
    Joint ventures and mergers between major telecommunications companies (e.g.,
the proposed mergers of MCI/WorldCom, Inc. and AT&T/Teleport Communications
Group) will result in large, well-capitalized carriers that will provide
formidable competition to BellSouth across a number of markets, including local
and long distance telephone and Internet services.
 
    Competition for local service revenues could adversely affect BellSouth's
results of operations. However, the opening of local markets to competition,
among other things, can allow BellSouth to qualify to offer in-region interLATA
service as contemplated in the 1996 Act. (See "BellSouth Competitive Strategy.")
 
    ACCESS SERVICE
 
    FCC rules require BellSouth Telecommunications to offer expanded
interconnection for interstate special and switched access transport. As a
result, BellSouth Telecommunications must permit competitive carriers and
customers to terminate their transmission lines on BellSouth Telecommunications'
facilities in its central office buildings through collocation arrangements. The
effects of the rules are to increase competition for access transport.
Furthermore, Interexchange Carriers are increasingly connecting their lines
directly to their customers' facilities, bypassing the networks of BellSouth
Telecommunications and thereby avoiding access charges entirely. In addition,
commercial applications of Internet telephony are being developed. This medium
could attract substantial interLATA traffic because of its lower cost structure,
because FCC rules do not currently impose access charges on Internet
communications.
 
    TOLL SERVICE
 
    A number of companies compete with BellSouth Telecommunications in its
nine-state region for intraLATA toll business by reselling toll services
obtained at bulk rates from BellSouth Telecommunications or, subject to the
approval of the applicable state public utility commission, providing toll
services over their own facilities. Commissions in the states in BellSouth
Telecommunications' wireline service territory have allowed the latter type of
intraLATA toll calling, whereby the Interexchange Carriers are assigned a
multiple digit access code (10XXX) that customers may dial to place intraLATA
toll calls through facilities of such Interexchange Carriers. The legislatures
or commissions in three states have authorized competing carriers to provide
intraLATA toll presubscribed calling with a single digit access code (1+),
giving them dialing parity with the ILEC in that area. Commissions in several
other states are considering how and when such authorization should be
implemented. However, the 1996 Act prohibits states from ordering the
implementation of new toll dialing parity until the earlier of (a) three years
from the enactment of the 1996 Act or (b) such time as the Operating Telephone
Company has qualified to provide in-region interLATA services.
 
                                       14
<PAGE>
    The 1996 Act permits the Holding Companies to offer interLATA toll service
outside of the states containing their local wireline service territories.
Holding Companies and other carriers have announced plans to compete for such
interLATA toll service in BellSouth Telecommunications' territory. AT&T, MCI,
Sprint and a number of other carriers, including other Holding Companies,
currently provide toll services to BellSouth's local service customers.
 
DIRECTORY ADVERTISING AND PUBLISHING
 
    In BellSouth's advertising and publishing business, competition for
advertising revenues has expanded. Many different media compete for advertising
revenues, and some newspaper organizations and other companies have begun
publishing their own directories. Competition for directory sales agency
contracts for the sale of advertising in publications of nonaffiliated companies
also continues to be strong. Directory listings are now offered in various media
besides paper books, such as CD ROM, the Internet and other electronic databases
through telephone company and third party networks. As such offerings expand and
are enhanced through interactivity and other features, BellSouth will experience
heightened competition in its directory advertising and publishing businesses.
BellSouth has responded to the increased competition and its changing market
environment with new directory products, product enhancements, multi-media
delivery options, including Internet directory services, pricing changes,
competitive advertising, local promotions, directory redeliveries and extended
distributions.
 
WIRELESS COMMUNICATIONS
 
    The FCC has jurisdiction over the licensing of cellular mobile radio
services in domestic markets. The FCC limits entry for providers of cellular
mobile telecommunications to two licensees for each defined metropolitan
statistical area (MSA) and each rural service area (RSA) within the country.
Each MSA and RSA in which BellSouth participates in the provision of cellular
mobile communications has a competing service provider. In many markets,
competing cellular service is provided by businesses owned or controlled by a
Holding Company, AT&T or a major telephone company.
 
    The FCC's PCS licensing process has created multiple new competitors for
BellSouth's businesses. Licenses to provide PCS service have been won in auction
by AT&T, Holding Company consortia and other large and well-capitalized
entities. PCS competes or will compete with BellSouth's local wireline and
wireless telephone businesses throughout BellSouth's service territories.
Several competitive PCS systems are now operational in BellSouth's service
territories. If all PCS licensees construct and operate wireless businesses,
there could be six or more PCS systems operating in certain areas.
 
    BellSouth's international wireless operations are generally subject to
competition from at least one other wireless service provider. These competing
service providers are generally supported by partners who are at least as
well-capitalized as BellSouth and its partners. In some cases, the competing
provider is operated by the government-owned telephone company, which may have
access to substantial financial resources. BellSouth believes that a number of
these government-owned telephone companies will be privatized within the next
few years, which may result in more formidable competition.
 
    The FCC has approved construction of enhanced specialized mobile radio
(ESMR) systems in many cities around the country. These digital mobile
communications systems provide service very similar to cellular telephone
service. There has been a consolidation of the licenses required to provide ESMR
service, so that control of this business is concentrated in the hands of a few
potential operators, giving them the ability to offer services like nationwide
roaming.
 
    BellSouth's wireless data businesses experience competition from private and
public wireless data networks, two-way paging networks, specialized mobile radio
networks, cellular networks and PCS networks. The degree and type of competition
vary from country to country. BellSouth's primary mobile
 
                                       15
<PAGE>
data competitor is Motorola, Inc.'s ARDIS data messaging business. Certain of
the Holding Companies and other carriers are developing competing mobile data
offerings using Cellular Digital Packet Data (CDPD), a cellular-based system
specifically designed for packet data applications and PCS-based services. Other
wireless data competitors include GSM operators, which may offer an integrated
packet data standard around the turn of the century.
 
BELLSOUTH COMPETITIVE STRATEGY
 
    BellSouth has developed three main strategies that govern its business
decisions in the increasingly competitive telecommunications industry. First,
BellSouth will strengthen its leadership position throughout its nine-state
wireline service territory by (a) enhancing and building its brand strength and
distribution channels; (b) providing full-service offerings including wireline
and wireless, local and long distance, and video and Internet services; and (c)
controlling costs. Second, BellSouth will continue to grow profitably its
domestic wireless business by (a) deploying value-added products and services
and competitive technology; (b) strengthening and expanding distribution
channels, including joint marketing with BellSouth Telecommunications; and (c)
expanding in-region wireless coverage through development of businesses covered
by its PCS licenses. Third, BellSouth will continue to grow and develop its
Latin American and other international operations.
 
    BellSouth markets all its services and products under the BellSouth brand
name to give them a clear, consistent identity in the marketplace. BellSouth
believes that its brand name is widely recognized and held in high esteem by its
customers. A primary marketing strategy is to enhance the recognition and
reputation of this mark throughout its service territory by jointly marketing
all BellSouth services and products with special attention to each customer
base. BellSouth's goal is for its brand name to become synonymous with quality
service and state-of-the-art technology. Accordingly, significant increases in
marketing and advertising costs have been and will be incurred. BellSouth
advertises in the various media in its territory, in connection with major
events, such as the Olympics, the Super Bowl, PGA golf tournaments and NASCAR
events, and through its affiliation with several professional and collegiate
sports organizations, which offer BellSouth a broader platform to showcase its
products and services.
 
    WIRELINE TELECOMMUNICATIONS
 
    BellSouth Telecommunications has organized its marketing efforts to parallel
its four major customer bases: consumer, small business, complex business and
interconnection services (predominantly exchange access services.)
 
    A substantial portion of the growth in BellSouth Telecommunications'
revenues from local service is derived from the sale of additional residential
lines and optional calling services to its residential customers. These
offerings are marketed in a variety of packages with varying pricing features
that are designed to appeal to a wide range of BellSouth Telecommunications'
residential customers. A substantial number of these sales are made by customer
service representatives who are on call 24 hours a day, seven days a week, as
they are contacted by subscribers on other matters.
 
    BellSouth Telecommunications' small business services are marketed by
customer service representatives through varied pricing and service options.
BellSouth Telecommunications' products and services, such as video conferencing,
ISDN service and telecommunications equipment and systems, are also demonstrated
and sold through marketing arrangements with retailers and other independent
sales representatives.
 
    BellSouth Telecommunications markets highly specialized services and
products to large and complex business customers. In addition to telephone
lines, product and service offerings to these customers include Internet access,
special networks, high-speed data transmission, business teleconferencing and
industry-specific communications configurations.
 
                                       16
<PAGE>
    FCC rules require BellSouth to offer interconnection capabilities to CLECs.
BellSouth Telecommunications already has many interconnection agreements in
place and continues to negotiate more. To strengthen bonds with these customers,
each customer has been assigned an account manager, and service centers have
been established to handle unbundled network element and resale orders.
Interconnection helps BellSouth Telecommunications open its markets to
competition, which, among other things, can facilitate BellSouth's qualification
to offer interLATA wireline service under provisions contained in the 1996 Act.
 
    BellSouth is considering offering bundled telecommunications services inside
and outside the local wireline service territory of BellSouth Telecommunications
through its own CLEC. Subject to regulatory approval in the states in which it
intends to provide service, the BellSouth CLEC would have the same flexibility
as other non-affiliated carriers to resell services provided by ILECs, including
BellSouth Telecommunications and other telecommunications service providers.
 
    The marketing of many of BellSouth's nontraditional wireline services is
enhanced by alliances with other service providers and suppliers. For instance,
Netscape Communications Corporation provides BellSouth's Internet users with its
Web browser, and persons who visit the Netscape Web site are offered a
convenient way to sign up for BellSouth's Internet service. Additional
arrangements with Yahoo! Inc. and Wired Ventures Limited further enhance
BellSouth's Internet services marketing strategy.
 
    WIRELESS COMMUNICATIONS
 
    Many of BellSouth's other services and products, such as cellular and PCS
services, including the long distance component of these wireless services,
Internet services and video services, are sold by BellSouth Telecommunications'
service representatives. In addition to utilizing BellSouth Telecommunications'
distribution channels, BellSouth's wireless offerings are sold through
company-owned stores and kiosks located in retail stores, such as Kroger and
Wal-Mart. Retailers such as Radio Shack, Best Buy and Circuit City are also part
of the wireless distribution channels. In addition, services and products are
made available through BellSouth's home page on the Worldwide Web, through a
telemarketing organization which contacts over 1 million potential customers
each month and through a substantial direct sales force.
 
    BellSouth's PCS service in the Carolinas is also marketed through
BellSouth's partners in that system, including Duke Power Company. BellSouth was
the first operational PCS provider in this market, giving it a marketing
advantage over other rivals who purchased PCS licenses covering the same
territory. BellSouth's PCS service offers a number of packages of optional
features with pricing enhancements intended to attract cellular customers from
the incumbent cellular carriers in that territory.
 
    ADVERTISING AND PUBLISHING
 
    Advertising and publishing products are marketed to organizations and
companies with unique directory needs. Export directories, a home improvement
guide, a health and medical guide, consumer tips and a restaurant and
entertainment guide are examples of such directories. Internet users in many
markets have access to BellSouth Interactive Yellow Pages. Directories are also
marketed to non-affiliated telephone companies.
 
    INTERNATIONAL TELECOMMUNICATIONS
 
    BellSouth currently has operations in Latin America, Europe and
Asia-Pacific. Most of these operations consist of cellular and PCS services, and
BellSouth seeks to expand the operations into new lines of business, where
practicable. Such new lines of business include local exchange, long distance,
Internet and other information services.
 
                                       17
<PAGE>
    During 1997, BellSouth acquired several existing operations in Latin
America, and, with its consortium partners, won two licenses to provide cellular
services in Sao Paulo, Brazil and a six-state region in northeast Brazil. With
these additions, BellSouth now has operations in nine Latin American countries.
To capitalize on its strong presence in the region, BellSouth has begun to
market its services in several countries in the region under its brand name at
local operations and is planning the future introduction of regional lines of
business, such as roaming and long distance, using the BellSouth brand name.
This transition is intended to maximize the value of BellSouth's brand name to
its domestic and international businesses while benefitting from the strong
market position created by the individual operating companies and partners.
 
    LONG DISTANCE
 
    In 1996, BellSouth began offering interLATA services to its wireless
customers. At December 31, 1997, BellSouth had approximately 2.4 million
wireless interLATA customers. Additionally, BellSouth has begun marketing 800
calling card services.
 
    BellSouth plans to begin offering interLATA wireline service to its
residential and business customers in each of its in-region states as soon as
the FCC approves its application for each state. The ability to offer interLATA
wireline services is considered critical to BellSouth's competitive strategy as
it opens its local service markets to competition.
 
    REGULATORY AND LEGISLATIVE CHANGES
 
    BellSouth's primary regulatory focus has been directed toward seeking the
modification of the regulatory process to one that is more closely aligned with
changing market conditions and overall public policy objectives. As an
alternative to regulation of intrastate earnings, BellSouth has successfully
sought price regulation, whereby prices of basic services are regulated and the
pricing of other products and services are based on market factors. While price
regulation plans do not provide for the direct recovery through basic service
rates of cost increases or extraordinary expenses, they generally provide more
flexibility to meet competitive pricing levels. BellSouth Telecommunications has
price regulation plans implemented in all states in its wireline service
territory except in Tennessee. The FCC also regulates BellSouth's interstate
services using price regulation.
 
    NEW SERVICES
 
    The opening of BellSouth Telecommunications' local service markets to
competition can allow BellSouth to qualify for entry into new business markets.
While loss of local service customers and other risks associated with increased
competition are inevitable, BellSouth will have the opportunity to offer
interLATA wireline service under provisions contained in the 1996 Act. BellSouth
believes that in order to remain competitive, it must aggressively pursue a
corporate strategy of expanding its offerings beyond its traditional businesses
and markets. These offerings include interLATA services, information services,
video and Internet services. BellSouth has entered some of these businesses
through investments in, strategic alliances with and acquisitions of established
companies in such industries, and through the development of some of these
services and capabilities internally. BellSouth has acquired several cable TV
and wireless video rights, and has been providing both cable TV and wireless
video services on a limited basis in certain metropolitan areas and is providing
Internet access. BellSouth also intends to continue to pursue certain foreign
telecommunications licenses as they are offered.
 
                                       18
<PAGE>
                            RESEARCH AND DEVELOPMENT
 
    BellSouth conducts its research and development activities internally and
through external vendors, primarily Bell Communications Research, Inc.
(Bellcore). Bellcore provides research and development and other services to
BellSouth and the other Holding Companies. In November 1997, BellSouth completed
the sale of its 14.3% interest in Bellcore to Science Applications International
Corporation. BellSouth has contracted with Bellcore for ongoing support of
engineering and systems. In addition, BellSouth is a member of the National
Telecommunications Alliance, an organization which supports its commitment to
national security and emergency preparedness.
 
                            LICENSES AND FRANCHISES
 
    BellSouth Telecommunications' 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 BellSouth Telecommunications does business. These
certificates provide for franchises of indefinite duration, subject to the
maintenance of satisfactory service at reasonable rates.
 
    The domestic cellular, PCS and mobile data systems in which BellSouth has an
interest are operated under licenses granted by the FCC. A carrier holding a
license to provide cellular service in a territory has limited eligibility for
PCS licensure covering the same territory. Prior approval of the FCC is required
for the assignment of a license or the transfer of control of a license. The
licenses are generally issued for up to 10-year periods. At the end of the
license period, a renewal application must be filed. BellSouth believes renewal
will generally be granted on a routine basis upon showing compliance with FCC
regulations and continuing service to the public. Licenses may be revoked and
license renewal applications may be denied for cause. With regard to cellular
licenses, the FCC has established the procedures and standards for conducting
comparative renewal proceedings, including the award of a "renewal expectancy"
that effectively eliminates the need to consider competing applicants when the
incumbent meets specified criteria.
 
    The wireless cable systems operate under licenses granted by the FCC for
defined geographic areas. The licenses have been either purchased through FCC
auction or through acquisition of existing businesses. Such licenses are
generally granted for five to ten year periods. The licenses are not subject to
automatic renewal but renewals are generally granted upon reapplication.
 
    The wired cable systems over which BellSouth provides domestic cable
services are operated under cable franchises granted by the city or
unincorporated county government with local franchising authority for the
geographic service area in question. These cable franchises are generally issued
for 10 to 15 year periods. They typically require the payment of cable franchise
fees to the local franchising authority, capped by federal law at 5% of gross
cable related revenues, and various forms of financial and facilities support
for a limited number of government, education and public access channels.
 
    International systems also operate under licenses granted by the governments
in the countries where such systems are located. The foreign licenses are issued
for varied terms and are generally renewable at the end of the initial license
period. As is the case with BellSouth's domestic wireless properties, the
foreign licenses may be revoked and license renewal applications may be denied
for cause.
 
    BellSouth believes that it owns or has licenses to use all patents,
copyrights, trademarks and other intellectual property necessary for it to
conduct its present business operations. It is not anticipated that any of such
property will be subject to expiration or non-renewal of rights that would
materially and adversely affect BellSouth or its subsidiaries.
 
                                       19
<PAGE>
                                   EMPLOYEES
 
    At December 31, 1997, 1996 and 1995, BellSouth and its subsidiaries employed
approximately 81,000, 81,200 and 87,600 persons, respectively. Of those totals,
approximately 57,600, 62,400 and 68,600, respectively, were telephone employees
of BellSouth Telecommunications. About 57% of BellSouth's employees at December
31, 1997 were represented by the Communications Workers of America (the CWA),
which is affiliated with the AFL-CIO. BellSouth's and BellSouth
Telecommunications' collective bargaining agreements with the CWA are scheduled
to terminate on August 6, 1998. Negotiations with the CWA over the terms of new
agreements will begin in early June 1998. The outcome of these negotiations
cannot be determined at this time.
 
    During 1995, BellSouth Telecommunications completed a 1993 plan to reduce
its work force by approximately 10,200 employees. Also during 1995, BellSouth
Telecommunications announced a plan to further reduce its work force by
approximately 11,300 employees by the end of 1997. BellSouth Telecommunications
substantially completed the 1995 plan in 1997. (See "MD&A -- Results of
Operations -- Operating Expenses -- Work Force Reduction Charge.")
 
    In 1997, BellSouth Telecommunications announced plans to outsource certain
engineering functions, as well as its information technology operations and
application development. Approximately 2,200 employees have left or will leave
BellSouth Telecommunications in connection with these outsourcing efforts which
are expected to be complete by the end of 1998. BellSouth Telecommunications has
contracted with various entities to perform these outsourced functions. These
contracts expire at various dates through 2008, are generally renewable, and are
cancelable upon the payment of additional fees or for nonperformance. Future
minimum payments for these contracts range from $465 million to $625 million
annually over the next ten years and replace costs previously incurred for
BellSouth Telecommunications' employees, facilities, equipment and other costs.
BellSouth Telecommunications outsourced these functions to improve capabilities
and cost effectiveness.
 
ITEM 2.  PROPERTIES
 
                                    GENERAL
 
    BellSouth's properties do not lend themselves to description by character or
location of principal units. BellSouth's investment in property, plant and
equipment, 89% of which is held by BellSouth Telecommunications, consisted of
the following at December 31:
 
<TABLE>
<CAPTION>
                                                                   1997   1996
                                                                   ----   ----
<S>                                                                <C>    <C>
Outside plant....................................................   40%    42%
Central office equipment.........................................   35     35
Operating and other equipment....................................    9      8
Land and buildings...............................................    9      8
Furniture and fixtures...........................................    6      6
Plant under construction.........................................    1      1
                                                                   ----   ----
                                                                   100%   100%
                                                                   ----   ----
                                                                   ----   ----
</TABLE>
 
    Outside plant consists of connecting lines (aerial, underground and buried
cable) not on customers' premises, the majority of which are on or under public
roads, highways or streets, while the remainder is on or under private property.
BellSouth currently self-insures all of its outside plant against casualty
losses. Central office equipment substantially consists of digital electronic
switching equipment and circuit equipment. Land and buildings consist
principally of central offices. Operating and other equipment consists of
wireless network equipment, embedded intrasystem wiring (substantially all of
which is on the premises of customers), motor vehicles and other equipment.
Central office equipment, buildings, furniture and fixtures and certain
operating and other equipment are insured under a blanket property insurance
program. This
 
                                       20
<PAGE>
program provides substantial limits of coverage against "all risks" of loss
including fire, windstorm, flood, earthquake and other perils not specifically
excluded by the terms of the policies.
 
    Substantially all of the installations of central office equipment for the
wireline business are located in buildings and on land owned by BellSouth
Telecommunications. Many garages, administrative and business offices and
telephone service centers are in leased quarters. Most of the land and buildings
associated with BellSouth's non-wireline businesses and administrative functions
are leased.
 
    BellSouth Telecommunications' customers are now served by electronic
switching systems and a digital network, which provides capabilities for
BellSouth Telecommunications to furnish advanced data transmission and
information management services. BellSouth is currently adding digital
capabilities to its analog cellular systems utilizing TDMA digital technology.
 
                              CAPITAL EXPENDITURES
 
    Capital expenditures consist of 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.
 
    The total investment in property, plant and equipment has increased from
$39.8 billion at January 1, 1993 to $53.8 billion at December 31, 1997, not
including deductions of accumulated depreciation. Significant additions to
property, plant and equipment will be required to meet the demand for
telecommunications services and to continually modernize and improve such
services to meet competitive demands. Population and economic expansion is
projected by BellSouth in certain growth centers within its nine-state area
during the next five to ten years. Expansion of the network will be needed to
accommodate such projected growth.
 
    BellSouth's capital expenditures for 1993 through 1997 were as follows:
 
<TABLE>
<CAPTION>
                                                              MILLIONS
                                                              --------
<S>                                                           <C>
1997........................................................   $ 4,858
1996........................................................     4,455
1995........................................................     4,203
1994........................................................     3,600
1993........................................................     3,486
</TABLE>
 
    BellSouth projects capital expenditures of approximately $5.0 billion to
$5.5 billion for 1998, consisting of $3.4 billion for BellSouth
Telecommunications and $1.6 billion to $2.1 billion primarily for BellSouth's
consolidated wireless and international businesses. A majority of the
expenditures will be to expand, enhance and modernize its current wireline and
domestic cellular operating systems, to develop international wireless and other
businesses and for property additions to complete construction of PCS systems in
the United States.
 
    In addition to its consolidated operations, BellSouth and various partners
own licenses to operate wireless communications services in numerous foreign
countries. BellSouth accounts for its investments in certain of these entities
under the equity method of accounting. Accordingly, the capital expenditure
requirements for those entities are not included in the above projection. In
1998, the most significant commitment to such operations is BellSouth's
commitment to its Brazilian operations. BellSouth's share of projected license
fee commitments and capital expenditure requirements for its Brazilian
operations in 1998 is approximately $900 million.
 
    In 1997, BellSouth generated substantially all of its funds for capital
expenditures internally and funds for its unconsolidated international
investments through both internally generated funds and external sources. In
1998, projected capital expenditures and international investments are expected
to be financed primarily through internally generated funds and, to the extent
necessary, from external sources.
 
                                       21
<PAGE>
                             ENVIRONMENTAL MATTERS
 
    BellSouth is subject to a number of environmental matters as a result of its
operations and the shared liability provisions related to the divestiture from
AT&T. As a result, BellSouth expects that it will be required to expend funds to
remedy certain facilities, including those Superfund sites for which BellSouth
has been named as a potentially responsible party, for the remediation of sites
with underground fuel storage tanks and other expenses associated with
environmental compliance. At December 31, 1997, BellSouth's recorded liability,
related primarily to remediation of these sites, was approximately $31 million.
 
    BellSouth monitors its operations with respect to potential environmental
issues, including changes in legally mandated standards and remediation
technologies. BellSouth's recorded liability reflects those specific issues
where remediation activities are currently deemed to be probable and where the
cost of remediation is estimable. BellSouth continues to believe that
expenditures in connection with additional remedial actions under the current
environmental protection laws or related matters would not be material to its
financial position or annual operating results or cash flows.
 
ITEM 3.  LEGAL PROCEEDINGS
 
    BellSouth and its subsidiaries 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. While complete assurance cannot be given as to the outcome of any legal
claims, BellSouth believes that any financial impact would not be material to
its financial position or annual operating results or cash flows. See Note O to
the Consolidated Financial Statements.
 
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
 
    No matter was submitted to a vote of shareholders in the fourth quarter of
the fiscal year ended December 31, 1997.
 
                            ------------------------
 
ADDITIONAL INFORMATION
 
                         DESCRIPTION OF BELLSOUTH STOCK
 
GENERAL
 
    The Articles of Incorporation of BellSouth authorize the issuance of
2,200,000,000 shares of common stock, par value $1 per share (the Common Stock),
and 100,000,000 shares of cumulative, first preferred stock, par value $1 per
share (the Preferred Stock). BellSouth's Board of Directors (the Board) is
authorized to provide for the issuance, from time to time, of the Preferred
Stock in series and, as to each series, to fix the number of shares in such
series and the voting, dividend, redemption, liquidation, retirement and
conversion provisions applicable to the shares of such series. No shares of
Preferred Stock are outstanding. The Board has created Series A First Preferred
Stock consisting of 30 million shares (the Series A Preferred Stock) for
possible issuance under BellSouth's Shareholder Rights Plan. (See "Preferred
Stock Purchase Rights" and "Market for Registrant's Common Equity and Related
Stockholder Matters.")
 
DIVIDEND RIGHTS
 
    The holders of Common Stock are entitled to receive, from funds legally
available for the payment thereof, dividends when and as declared by resolution
of the Board. While any series of Preferred Stock is outstanding, no dividends
(other than dividends payable solely in Common Stock) may be declared or paid on
Common Stock, and no Common Stock may be purchased, redeemed or otherwise
acquired for value, (a) unless dividends on all outstanding shares of Preferred
Stock for the current and all past dividend periods have been paid or declared
and provision made for payment thereof and (b) unless all
 
                                       22
<PAGE>
requirements with respect to any purchase, retirement or sinking fund or funds
applicable to all outstanding series of Preferred Stock have been satisfied.
Dividends on the Preferred Stock would be cumulative.
 
VOTING RIGHTS
 
    Except in connection with the "business combinations" and "fair price"
provisions discussed below, holders of shares of Common Stock are entitled to
one vote, in person or by proxy, for each share held on the applicable record
date with respect to each matter submitted to a vote at a meeting of
shareholders, but such holders do not have cumulative voting rights. The holders
of any series of Preferred Stock, when issued, may receive the right to vote as
a class on certain amendments to the Articles of Incorporation and on certain
other matters, including the election of directors in the event of certain
defaults, which may include non-payment of Preferred Stock dividends.
 
LIQUIDATION RIGHTS
 
    In the event of voluntary or involuntary liquidation of BellSouth, holders
of the Common Stock will be entitled to receive, after creditors have been paid
and the holders of the Preferred Stock, if any, have received their liquidation
preferences and accumulated and unpaid dividends, all the remaining assets of
BellSouth.
 
PRE-EMPTIVE RIGHTS; CONVERSION RIGHTS; REDEMPTION
 
    No shareholders of any class shall be entitled to any pre-emptive rights to
subscribe for or purchase any shares or other securities issued by BellSouth.
The Common Stock has no conversion rights and is not subject to redemption.
 
PREFERRED STOCK PURCHASE RIGHTS
 
    The Board has declared a dividend of one preferred stock purchase right
(Right) for each share of Common Stock from time to time outstanding. Under
certain circumstances, each Right will entitle the holder to purchase one
one-hundredth of a share of Series A Preferred Stock, $1.00 par value (Common
Equivalent Preferred Stock), which unit is substantially equivalent in voting
and dividend rights to one whole share of the Common Stock, at a price of $87.50
per one-hundredth of a share of Common Equivalent Preferred Stock (the Purchase
Price). The Rights are not presently exercisable and may be exercised only if a
person or group acquires 10% of the outstanding voting stock of BellSouth
without the prior approval of the Board (Acquiring Person) or announces a tender
or exchange offer that would result in ownership of 25% or more of the Common
Stock.
 
    If an Acquiring Person becomes such without prior Board approval, the Rights
are adjusted, and each holder, other than the Acquiring Person, then has the
right to receive, on payment of the Purchase Price, the number of shares of
Common Stock, units of the Common Equivalent Preferred Stock or other assets
having a market value equal to twice the Purchase Price.
 
    The Rights currently trade with the Common Stock and expire in 1999.
 
BUSINESS COMBINATIONS
 
    The Georgia legislature has enacted legislation which generally prohibits a
corporation which has adopted a by-law electing to be covered thereby (which
BellSouth has done) from engaging in any "business combination" (i.e., a merger,
consolidation or other specified corporate transaction) with an "interested
shareholder" (i.e., a 10% shareholder or an affiliate of the corporation which
was a 10% shareholder at any time within the preceding two years) for a period
of five years from the date such person becomes an interested shareholder,
unless the interested shareholder (a) prior to becoming an interested
shareholder, obtained the approval of the Board of Directors for either the
business combination or the transaction which resulted in the shareholder
becoming an interested shareholder, (b) becomes the owner of at least 90% of the
outstanding voting stock of the corporation in the same
 
                                       23
<PAGE>
transaction in which the interested shareholder became an interested
shareholder, excluding for purposes of determining the number of shares
outstanding those shares owned by officers, directors, subsidiaries and certain
employee stock plans of the corporation or (c) subsequent to the acquisition of
10% or more of the outstanding voting stock of the corporation, acquires
additional shares resulting in ownership of at least 90% of the outstanding
voting stock of the corporation and obtains approval of the business combination
by the holders of a majority of the shares of voting stock of the corporation,
other than those shares held by an interested shareholder, officers, directors,
subsidiaries and certain employee stock plans of the corporation. BellSouth's
"business combinations" by-law may be repealed only by an affirmative vote of
two-thirds of the continuing directors and a majority of the votes entitled to
be cast by the shareholders, other than interested shareholders, and shall not
be effective until 18 months after such shareholder vote. The Georgia statute
provides that a domestic corporation which has thus repealed such a by-law may
not thereafter readopt the by-law as provided therein.
 
FAIR PRICE PROVISIONS
 
    "Fair price" provisions contained in the Articles of Incorporation require,
generally, in connection with a merger or similar transaction between BellSouth
and an "interested shareholder" (a 10% shareholder or an affiliate of BellSouth
which was a 10% shareholder at any time within the preceding two years), the
unanimous approval of BellSouth's directors not affiliated with the interested
shareholder or the affirmative vote of two-thirds of such directors and a
majority of the outstanding shares held by disinterested shareholders, unless
(a) within the past three years the shareholder has been an interested
shareholder and has not increased its shareholdings by more than one percent in
any 12-month period or (b) all shareholders receive at least the same
consideration for their shares as the interested shareholder previously paid.
Additionally, these provisions may be revised or rescinded only upon the
affirmative vote of at least two-thirds of the directors not affiliated with an
interested shareholder and a majority of the outstanding shares held by
disinterested shareholders.
 
BOARD CLASSIFICATION; REMOVAL OF DIRECTORS
 
    Board classification provisions adopted by the shareholders and contained in
the By-laws prescribe a shareholder vote for approximately one-third of the
directors, instead of all directors, at each annual meeting of shareholders for
a three-year term. Additionally, such provisions provide that shareholders may
remove directors from office only for cause, amend the By-laws with respect to
the number of directors or amend the board classification provisions only by the
affirmative vote of the holders of at least 75% of the outstanding shares
entitled to vote for the election of directors.
 
LIMITATION ON SHAREHOLDERS' PROCEEDINGS
 
    BellSouth's By-laws require 75 days advance notice of shareholder
nominations for directors and of other matters to be brought before annual
shareholders' meetings. Such By-laws also provide that a special shareholders'
meeting may not be called by fewer than three-quarters of the outstanding shares
entitled to vote at the meeting.
 
                            ------------------------
 
    The provisions discussed under the five preceding sub-headings and the
ability to issue Preferred Stock, such as the Series A Preferred Stock described
above, with characteristics established by the Board and without the consent of
the holders of Common Stock and the ability to issue additional shares of Common
Stock may have the effect of discouraging takeover attempts and may also have
the effect of maintaining the position of incumbent management. In addition,
these provisions may have a significant effect on the ability of shareholders of
BellSouth to benefit from certain kinds of transactions that may be opposed by
the incumbent Board.
 
                                       24
<PAGE>
                               EXECUTIVE OFFICERS
 
    The executive officers of BellSouth Corporation are listed below:
 
<TABLE>
<CAPTION>
                                                                                                        THIS
                                                                                              OFFICER  OFFICE
          NAME             AGE                             OFFICE                              SINCE   SINCE
-------------------------  ---  ------------------------------------------------------------  -------  ------
<S>                        <C>  <C>                                                           <C>      <C>
F. Duane Ackerman           55  Chairman of the Board, President and Chief Executive Officer     1983    1997
Walter H. Alford*           59  Executive Vice President and Senior General Counsel              1983    1998
Richard A. Anderson         40  Group President -- Complex Business Services                     1993    1998
C. Sidney Boren             54  Executive Staff Officer                                          1984    1997
Robert L. Capell, III       50  Senior Vice President -- Advanced Data Networks                  1995    1998
Keith O. Cowan              41  Vice President -- Corporate Development                          1996    1996
Mark E. Droege              44  Vice President -- Financial Management and Treasurer             1996    1996
Jere A. Drummond            58  President and Chief Executive Officer -- BellSouth               1983    1998
                                 Communications Group
Ronald M. Dykes             51  Executive Vice President and Chief Financial Officer             1988    1995
John R. Gunter*             56  Vice President -- Network Strategies                             1988    1998
Phil S. Jacobs              48  Senior Vice President -- Managed Network Solutions and           1993    1998
                                 President BellSouth BSE, Inc.
David J. Markey             57  Vice President -- Governmental Affairs                           1986    1993
Charles C. Miller, III      45  President -- International                                       1990    1995
Charles R. Morgan           51  Executive Vice President and General Counsel                     1998    1998
William C. Pate             38  Vice President -- Advertising and Public Relations               1997    1997
William F. Reddersen        51  Group President -- Value Added Networks                          1987    1998
John G. Robinson            35  Vice President -- Strategic Management                           1997    1998
W. Patrick Shannon          35  Vice President and Controller                                    1997    1997
Richard D. Sibbernsen       51  Vice President -- Human Resources                                1997    1997
Arlen G. Yokley             60  Senior Vice President -- Corporate Compliance and Corporate      1984    1996
                                 Secretary
</TABLE>
 
    The following officers of the companies indicated may be deemed to be
executive officers of BellSouth Corporation:
 
<TABLE>
<S>                        <C>  <C>                                                           <C>      <C>
Charles B. Coe              50  President -- BellSouth Telecommunications                        1988    1998
 
Earle Mauldin               57  President and Chief Executive Officer -- BellSouth               1987    1995
                                 Enterprises, Inc.
</TABLE>
 
    All of the executive officers of BellSouth, other than Mr. Cowan, Mr.
Morgan, Mr. Pate, Mr. Robinson, Mr. Shannon and Mr. Sibbernsen have for at least
the past five years held high level management or executive positions with
BellSouth or its subsidiaries. Mr. Cowan was a partner at the law firm of Alston
&
------------------------
 
*   Messrs. Alford and Gunter have announced their plans to retire from
    BellSouth effective April 1, 1998 and during the summer of 1998,
    respectively. Prior to becoming Executive Vice President and Senior General
    Counsel in February 1998, Mr. Alford had been Executive Vice President and
    General Counsel since 1988.
 
                                       25
<PAGE>
Bird before joining BellSouth in 1996. Prior to joining BellSouth in February
1998, Mr. Morgan was a partner with Mayer, Brown & Platt, a Chicago-based
international law firm, and prior to that was Vice President, General Counsel
and Secretary of Chiquita Brands International, Inc. Mr. Pate, prior to joining
BellSouth in 1996, was employed by MCI where he was responsible for that
company's domestic and international advertising. Prior to joining BellSouth in
1993, Mr. Robinson held the position of Senior Engagement Manager with McKinsey
& Company. Prior to joining BellSouth in 1997, Mr. Shannon was employed by
USWest, Inc. as Chief Financial Officer of MediaOne, a company that provides
cable TV services. In 1997, Mr. Sibbernsen joined BellSouth from TNT Limited, a
worldwide transportation company where he was head of corporate human resources
and responsible for that company's global human resources strategies and
programs.
 
    All officers serve until their successors have been elected and qualified.
 
                                       26
<PAGE>
                                    PART II
 
ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
    The principal market for trading in BellSouth Common Stock is the New York
Stock Exchange, Inc. (NYSE). BellSouth Common Stock is also listed on the
Boston, Chicago, Pacific and Philadelphia exchanges in the United States and the
London, Frankfurt, Amsterdam and Swiss exchanges. The ticker symbol for
BellSouth Common Stock is BLS. At February 2, 1998, there were 1,023,757 holders
of record of BellSouth Common Stock. The market price and dividend information
listed below has been adjusted for the two-for-one stock split effective in
November 1995. Market price data were obtained from the NYSE Composite Tape,
which encompasses trading on the principal United States stock exchanges as well
as off-board trading. High and low prices represent the highest and lowest sales
prices for the periods indicated.
 
<TABLE>
<CAPTION>
                                                                                     MARKET PRICES      PER SHARE
                                                                                   ------------------   DIVIDENDS
                                                                                    HIGH        LOW      DECLARED
                                                                                   -------    -------   ----------
<S>                                                                                <C>        <C>       <C>
1997
First Quarter...................................................................   $47 5/8    $38 1/8   $     .36
Second Quarter..................................................................    48 5/8     39 3/8         .36
Third Quarter...................................................................    49         43 5/16        .36
Fourth Quarter..................................................................    58 1/8     45 1/4         .36
 
1996
First Quarter...................................................................   $45 7/8    $36       $     .36
Second Quarter..................................................................    42 3/8     35 1/4         .36
Third Quarter...................................................................    43 3/8     35 1/4         .36
Fourth Quarter..................................................................    44         36 1/4         .36
 
1995
First Quarter...................................................................   $30 3/8    $26 7/8   $     .345
Second Quarter..................................................................    32 1/4     29 1/8         .345
Third Quarter...................................................................    36 7/8     31             .36
Fourth Quarter..................................................................    43 7/8     36 3/8         .36
</TABLE>
 
STOCK TRANSFER AGENT AND REGISTRAR
 
    ChaseMellon Shareholder Services, L.L.C. is BellSouth's stock transfer agent
and registrar.
 
                                       27
<PAGE>
ITEM 6.  SELECTED FINANCIAL AND OPERATING DATA
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                      1997        1996       1995       1994       1993
                                                    ---------   --------   --------   --------   --------
<S>                                                 <C>         <C>        <C>        <C>        <C>
Operating Revenues................................  $20,561     $19,040    $17,886    $16,845    $15,880
Operating Expenses (1)............................   15,185      14,261     14,594     12,787     13,593
                                                    ---------   --------   --------   --------   --------
Operating Income..................................    5,376       4,779      3,292      4,058      2,287
Interest Expense..................................      761         721        724        666        689
Gain on Sales of Operations (2)...................      787         442         --         --         --
Other Income, net.................................       19         108         20         11          8
                                                    ---------   --------   --------   --------   --------
Income Before Income Taxes, Extraordinary Losses
 and Accounting Change............................    5,421       4,608      2,588      3,403      1,606
Provision for Income Taxes........................    2,151       1,745      1,024      1,243        572
                                                    ---------   --------   --------   --------   --------
Income Before Extraordinary Losses and Accounting
 Change...........................................    3,270       2,863      1,564      2,160      1,034
Extraordinary Losses, net of tax (3)..............       (9)         --     (2,796)        --        (87)
Accounting Change, net of tax.....................       --          --         --         --        (67)
                                                    ---------   --------   --------   --------   --------
  Net Income (Loss)...............................  $ 3,261     $ 2,863    $(1,232)   $ 2,160    $   880
                                                    ---------   --------   --------   --------   --------
                                                    ---------   --------   --------   --------   --------
Earnings (Loss) Per Share(4):
BASIC:
  Income Before Extraordinary Losses and
  Accounting Change...............................  $  3.30     $  2.88    $  1.57    $  2.18    $  1.04
  Extraordinary Losses, net of tax (3)............     (.01)         --      (2.81)        --       (.09)
  Accounting Change, net of tax...................       --          --         --         --       (.06)
                                                    ---------   --------   --------   --------   --------
  Net Income (Loss)...............................  $  3.29     $  2.88    $ (1.24)   $  2.18    $   .89
                                                    ---------   --------   --------   --------   --------
                                                    ---------   --------   --------   --------   --------
DILUTED:
  Income Before Extraordinary Losses and
  Accounting Change...............................  $  3.29     $  2.87    $  1.57    $  2.18    $  1.04
  Extraordinary Losses, net of tax (3)............     (.01)         --      (2.81)        --       (.09)
  Accounting Change, net of tax...................       --          --         --         --       (.06)
                                                    ---------   --------   --------   --------   --------
  Net Income (Loss)...............................  $  3.28     $  2.87    $ (1.24)   $  2.18    $   .89
                                                    ---------   --------   --------   --------   --------
                                                    ---------   --------   --------   --------   --------
Dividends Declared Per Common Share...............  $  1.44     $  1.44    $  1.41    $  1.38    $  1.38
Book Value Per Share..............................  $ 15.29     $ 13.37    $ 11.90    $ 14.48    $ 13.60
Return to Average Common Equity...................     22.8%       22.4%      (9.2%)     15.4%       6.3%
Weighted-Average Common Shares Outstanding:
  Basic...........................................      992         994        993        992        991
  Diluted.........................................      995         996        994        993        992
Return on Average Total Capital...................     15.8%       15.0%      (2.7%)     11.5%       6.1%
Total Assets......................................  $36,301     $32,568    $31,880    $34,397    $32,873
Capital Expenditures..............................  $ 4,858     $ 4,455    $ 4,203    $ 3,600    $ 3,486
Long-Term Debt....................................  $ 7,348     $ 8,116    $ 7,924    $ 7,435    $ 7,381
Debt Ratio at End of Period (5)...................     42.1%       43.5%      46.7%      39.3%      40.2%
Ratio of Earnings to Fixed Charges................     7.17        6.55       4.24       5.34       2.98
Total Employees...................................   81,000      81,241     87,571     92,121     95,084
Telephone Employees (6)...........................   57,619      62,425     68,585     73,764     77,958
Telephone Employees per 10,000 Access Lines.......     24.8        28.2       32.5       36.5       40.3
Business Volumes: (7)
  Network Access Lines in Service (thousands).....   23,201      22,135     21,133     20,220     19,333
  Access Minutes of Use (millions):
    Interstate....................................   73,634      67,690     62,411     57,778     53,345
    Intrastate....................................   23,472      21,171     19,197     16,888     15,261
  Toll Messages (millions)........................      894       1,023      1,374      1,559      1,511
  Cellular Customers (thousands): (8)
    Domestic......................................    4,105       3,612      2,847      2,156      1,559
    International.................................    1,882       1,244        655        361        192
                                                    ---------   --------   --------   --------   --------
      Total Cellular Customers....................    5,987       4,856      3,502      2,517      1,751
                                                    ---------   --------   --------   --------   --------
                                                    ---------   --------   --------   --------   --------
  PCS Customers (thousands): (8)..................       88          31         --         --         --
</TABLE>
 
------------------------------
(1) Operating Expenses for 1995 include a work force reduction charge of $1,082,
    which reduced net income by $663. See Note L to the Consolidated Financial
    Statements. Operating Expenses for 1993 include a charge for restructuring
    of $1,136, which reduced net income by $697.
(2) For 1997, represents the pretax gains on the sale of Optus Communications
    and ITT World Directories, Inc. The pretax gains on such sales were $578
    ($352 after tax) and $209 ($128 after tax), respectively. For 1996,
    represents the pretax gain on the sale of BellSouth's paging business of
    $442 ($344 after tax). See Note B to the Consolidated Financial Statements.
(3) For 1997, reflects charges related to the extinguishment of long-term debt
    issues. For 1995, reflects charges of $2,718 ($2.73 per share) for the
    discontinuance of Statement of Financial Accounting Standards No. 71,
    "Accounting for the Effects of Certain Types of Regulation," and $78 ($.08
    per share) related to the refinancing of long-term debt issues. See Notes E
    and M to the Consolidated Financial Statements.
(4) Earnings per share amounts for all periods presented have been restated to
    conform with the provisions of Statement of Financial Accounting Standards
    (SFAS) No. 128, "Earnings per Share".
(5) The debt ratio at December 31, 1995 has been adjusted to exclude $485 of
    debentures redeemed in January 1996.
(6) Telephone employees exclude those employees in BellSouth Telecommunications'
    subsidiaries which are unrelated to telephone operations.
(7) Prior period operating data are revised at later dates to reflect the most
    current information. The above information reflects the latest data
    available for the periods indicated.
(8) Calculated on the equity basis, which includes customers served based on
    BellSouth's ownership percentage in all markets served.
 
                                       28
<PAGE>
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
       (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
 
    BellSouth Corporation (BellSouth) is a holding company headquartered in
Atlanta, Georgia whose operating telephone company subsidiary, BellSouth
Telecommunications, Inc. (BellSouth Telecommunications) serves, in the
aggregate, approximately two-thirds of the population and one-half of the
territory within Alabama, Florida, Georgia, Kentucky, Louisiana, Mississippi,
North Carolina, South Carolina and Tennessee. BellSouth Telecommunications
primarily provides (i) local exchange service and toll communications services
within geographic areas, called Local Access and Transport Areas (LATAs), and
(ii) exchange access services to enable interLATA communications using the
long-distance facilities of Interexchange Carriers. Through subsidiaries, other
telecommunications services and products are provided primarily within the
nine-state BellSouth Telecommunications region. BellSouth Enterprises, Inc.
(BellSouth Enterprises), another wholly-owned subsidiary, owns businesses
providing wireless and international communications services and advertising and
publishing products.
 
    Approximately 67%, 70% and 70% of BellSouth's Total Operating Revenues for
the years ended December 31, 1997, 1996 and 1995, respectively, were from
network and related services provided by BellSouth Telecommunications. Charges
for local, access and toll services for the year ended December 31, 1997
accounted for approximately 62%, 33% and 5%, respectively, of the network and
related revenues discussed above. Revenues from wireless communications services
and from directory advertising and publishing services accounted for
approximately 17% and 9%, respectively, of Total Operating Revenues for the year
ended December 31, 1997. The remainder of such revenues was derived principally
from sales and maintenance of customer premises equipment and other nonregulated
services provided by BellSouth Telecommunications.
 
RESULTS OF OPERATIONS
 
<TABLE>
<CAPTION>
                                                                          PERCENT CHANGE
                                                                         ----------------
                                                                          1997     1996
                                                                           VS.      VS.
                                              1997     1996      1995     1996     1995
                                             -------  -------  --------  -------  -------
<S>                                          <C>      <C>      <C>       <C>      <C>
Income Before Extraordinary Losses.........  $ 3,270  $ 2,863  $  1,564    14.2%    83.1%
Extraordinary Loss for Discontinuance of
 SFAS No. 71, net of tax...................       --       --   (2,718)       --       --
Extraordinary Loss on Early Extinguishment
 of Debt,
 net of tax................................       (9)      --      (78)       --       --
                                             -------  -------  --------
Net Income (Loss)..........................  $ 3,261  $ 2,863  $(1,232)    13.9%       --
                                             -------  -------  --------
                                             -------  -------  --------
</TABLE>
 
                                       29
<PAGE>
<TABLE>
<S>                                          <C>      <C>      <C>       <C>      <C>
Earnings (Loss) Per Share:
<CAPTION>
 
                                                                          PERCENT CHANGE
                                                                         ----------------
                                                                          1997     1996
                                                                           VS.      VS.
                                              1997     1996      1995     1996     1995
                                             -------  -------  --------  -------  -------
<S>                                          <C>      <C>      <C>       <C>      <C>
Basic:
 
Income Before Extraordinary Losses.........  $  3.30  $  2.88  $   1.57    14.6%    83.4%
Extraordinary Loss for
 Discontinuance of SFAS No. 71,
 net of tax................................       --       --    (2.73)       --       --
Extraordinary Loss on Early
 Extinguishment of Debt,
 net of tax................................     (.01)      --     (.08)       --       --
                                             -------  -------  --------
Earnings (Loss) Per Share..................  $  3.29  $  2.88  $ (1.24)    14.2%       --
                                             -------  -------  --------
                                             -------  -------  --------
 
Diluted:
 
Income Before Extraordinary Losses.........  $  3.29  $  2.87  $   1.57    14.6%    82.8%
Extraordinary Loss for
 Discontinuance of SFAS No. 71,
 net of tax................................       --       --    (2.73)       --       --
Extraordinary Loss on Early
 Extinguishment of Debt,
 net of tax................................     (.01)      --     (.08)       --       --
                                             -------  -------  --------
Earnings (Loss) Per Share..................  $  3.28  $  2.87  $ (1.24)    14.3%       --
                                             -------  -------  --------
                                             -------  -------  --------
</TABLE>
 
    For a discussion of the extraordinary losses in 1997 and 1995, see
"Extraordinary Losses" below.
 
    Income Before Extraordinary Losses for 1997 increased $407 (14.2%), and
basic earnings per share increased $.42 (14.6%) compared to 1996. The increases
were primarily attributable to the after-tax gains on the sale in 1997 of Optus
Communications ($352) and ITT World Directories ($128) (See Note B to the
Consolidated Financial Statements). In addition, the increases were due to
continued strong growth in key business volumes and expense savings due to
employee reductions under BellSouth Telecommunications' work force reduction
plan initiated in 1995. The increases were partially offset by the $344
after-tax gain on the sale of BellSouth's paging business during the first
quarter of 1996. The increases were further offset by an after-tax charge of $47
related to a regulatory settlement in South Carolina during the second quarter
of 1997.
 
    Income Before Extraordinary Losses for 1996 increased $1,299 (83.1%), and
basic earnings per share increased $1.31 (83.4%) compared to 1995. The increases
were primarily attributable to the effect of an after-tax work force reduction
charge in 1995 of $663. For a discussion of such charge, see "Operating Expenses
-- Work Force Reduction Charge" below. Also contributing to the increases were
the $344 after-tax gain on sale of BellSouth's paging business (see Note B to
the Consolidated Financial Statements) as well as growth in key business
volumes, driven by continued growth of access lines and the cellular customer
base and cost control measures at BellSouth Telecommunications, including salary
and wage savings attributable to the work force reduction and restructuring
plans initiated in 1995 and 1993, respectively.
 
                                       30
<PAGE>
VOLUMES OF BUSINESS
 
    Network Access Lines in Service at December 31 (thousands):
 
<TABLE>
<CAPTION>
                                                                                PERCENT CHANGE
                                                                            ----------------------
                                                                             1997 VS.    1996 VS.
                                             1997       1996       1995        1996        1995
                                           ---------  ---------  ---------  ----------  ----------
<S>                                        <C>        <C>        <C>        <C>         <C>
By Type:
  Residence..............................     15,841     15,140     14,653       4.6%        3.3%
  Business...............................      7,088      6,732      6,225       5.3         8.1
  Other..................................        272        263        255       3.4         3.1
                                           ---------  ---------  ---------
    Total Access Lines...................     23,201     22,135     21,133       4.8         4.7
                                           ---------  ---------  ---------
                                           ---------  ---------  ---------
By State:
  Florida................................      6,237      5,899      5,597       5.7         5.4
  Georgia................................      3,990      3,772      3,550       5.8         6.3
  Tennessee..............................      2,623      2,544      2,435       3.1         4.5
  North Carolina.........................      2,337      2,213      2,101       5.6         5.3
  Louisiana..............................      2,267      2,178      2,108       4.1         3.3
  Alabama................................      1,928      1,857      1,792       3.8         3.6
  South Carolina.........................      1,404      1,344      1,292       4.5         4.0
  Mississippi............................      1,238      1,193      1,158       3.8         3.0
  Kentucky...............................      1,177      1,135      1,100       3.7         3.2
                                           ---------  ---------  ---------
    Total Access Lines...................     23,201     22,135     21,133       4.8         4.7
                                           ---------  ---------  ---------
                                           ---------  ---------  ---------
</TABLE>
 
    The total number of access lines in service increased by approximately
1,066,000 (4.8%) to 23,201,000 since December 31, 1996, compared to a 4.7% rate
of increase in 1996. Business and residence access lines increased by 5.3% and
4.6%, respectively, compared to growth rates of 8.1% and 3.3% in 1996. The
decrease in the growth rate for business lines was primarily due to the
migration of business customers from traditional business line services to
high-capacity service arrangements which are not included in business access
line counts. To a lesser degree, the growth rate for business lines was also
affected by the increased presence of facilities-based competition. Many
residential customers order additional access lines for home office purposes,
access to on-line computer services and children's phones. The number of such
additional residence lines, included in total residence lines, increased by
328,000 (21.1%) to 1,884,000 and accounted for 46.8% and 30.8% of the overall
increase in residence access lines and total access lines, respectively, since
December 31, 1996. The growth in all categories of access lines continues to
reflect economic improvement in the southeast and successful marketing programs.
 
    Access Minutes of Use (millions):
 
<TABLE>
<CAPTION>
                                                                                  PERCENT CHANGE
                                                                            --------------------------
                                                                              1997 VS.      1996 VS.
                                             1997       1996       1995         1996          1995
                                           ---------  ---------  ---------  ------------  ------------
<S>                                        <C>        <C>        <C>        <C>           <C>
Interstate...............................     73,634     67,690     62,411         8.8%          8.5%
Intrastate...............................     23,472     21,171     19,197        10.9          10.3
                                           ---------  ---------  ---------
  Total Access Minutes of Use............     97,106     88,861     81,608         9.3           8.9
                                           ---------  ---------  ---------
                                           ---------  ---------  ---------
</TABLE>
 
    Access minutes of use represent the volume of traffic carried by
Interexchange Carriers between LATAs, both interstate and intrastate, using
BellSouth Telecommunications' local facilities. In 1997, total access minutes of
use increased by 8,245 million (9.3%) compared to an increase of 8.9% in 1996.
The increases in access minutes of use were primarily attributable to access
line growth, promotions by the Interexchange Carriers and intraLATA toll
competition (which has the effect of increasing access minutes
 
                                       31
<PAGE>
of use while reducing toll messages carried over BellSouth Telecommunications'
facilities.) The growth rate in total minutes of use continues to be negatively
impacted by competition and the migration of Interexchange Carriers to
categories of service (e.g., special access) that have a fixed charge as opposed
to a volume-driven charge and to high-capacity services.
 
<TABLE>
<CAPTION>
                                                                                                PERCENT CHANGE
                                                                                          --------------------------
                                                                                            1997 VS.      1996 VS.
                                                           1997       1996       1995         1996          1995
                                                         ---------  ---------  ---------  ------------  ------------
<S>                                                      <C>        <C>        <C>        <C>           <C>
Toll Messages (millions)...............................        894      1,023      1,374       (12.6%)       (25.5%)
</TABLE>
 
    Toll messages are comprised of Message Telecommunications Service and Wide
Area Telecommunications Service. Toll messages decreased by 129 million (12.6%)
in 1997 compared to a decrease of 25.5% in 1996. The decrease in 1997 was
primarily attributable to continued competition from Interexchange Carriers in
the intraLATA toll market as well as the continuing expansion of local area
calling plans (LACPs). Some effects of competition and the expansion of LACPs
result in the transfer of calls from toll to the access and local service
categories, respectively, but the corresponding revenues are not generally
shifted at commensurate rates. Competition from the Interexchange Carriers in
the intraLATA toll market will adversely impact future toll message volumes.
 
    Cellular and personal communications service (PCS) customers served at
December 31 (equity basis) (thousands):
 
<TABLE>
<CAPTION>
                                                                                               PERCENT CHANGE
                                                                                          ------------------------
                                                                                           1997 VS.     1996 VS.
                                                           1997       1996       1995        1996         1995
                                                         ---------  ---------  ---------  -----------  -----------
<S>                                                      <C>        <C>        <C>        <C>          <C>
Domestic Cellular......................................      4,105      3,612      2,847       13.6%          26.9%
International Cellular(a)..............................      1,882      1,244        655       51.3           89.9
PCS (service initiated mid-1996).......................         88         31         --          --          --
</TABLE>
 
------------------------
 
     (a) Excluding the customers of Optus Communications from all periods,
        the number of international cellular customers (equity-weighted)
        increased by 971 (106.6%) and 477 (109.9%), respectively, for the
        years ended December 31, 1997 and 1996.
 
    Domestic cellular customers (equity-weighted) increased by 493,000 (13.6%)
since December 31, 1996. The moderation in the customer growth rate reflects the
impact of increased competition. BellSouth's penetration rate (number of
equity-basis customers as a percentage of the equity-basis population in the
service territory) increased from 8.9% at December 31, 1996 to 10.2% at December
31, 1997. While total minutes of use have continued to increase, average minutes
of use per cellular customer declined due to the continuing trends of increased
penetration into lower-usage market segments and increased competition for
high-usage customers. BellSouth expects these trends to continue.
 
    International cellular customers increased by 638,000 (51.3%) since December
31, 1996 to 1,882,000. Such growth reflects increased demand for wireless
services in the international markets which BellSouth serves and the impact of
the acquisitions of cellular properties in Nicaragua, Ecuador and Peru,
partially offset by the sale of Optus Communications. Growth in total minutes of
use for international cellular properties remained strong, primarily due to
demand stimulated by market-driven pricing programs, enhanced services and
underdeveloped land-line service. However, average minutes of use per
international customer declined due to the addition of customers in lower-usage
market segments.
 
    Domestic PCS customers (equity-weighted) totaled 88,000 at December 31, 1997
compared to 31,000 customers at December 31, 1996.
 
OPERATING REVENUES
 
    For a discussion of the impact of local service competition on revenues and
volumes of business, see "Operating Environment and Trends of the Business."
 
                                       32
<PAGE>
    Total Operating Revenues increased $1,521 (8.0%) in 1997 compared to an
increase of $1,154 (6.5%) during 1996. The increases resulted primarily from
significant increases in revenues from the wireless communications businesses
coupled with growth in revenues from BellSouth's wireline telephone business. In
addition, revenues were positively impacted by the consolidation of certain of
BellSouth's international operations ($122) that had previously been accounted
for under the equity method and included in Other Income, net. Such increases
were partially offset by a $72 reduction of revenues related to a regulatory
settlement in South Carolina. The increase in 1996 was partially offset by the
effect of the January 1996 sale of BellSouth's paging business. Excluding paging
revenues in 1995, Total Operating Revenues increased $1,503 (8.6%) in 1996.
 
    The components of Total Operating Revenues were as follows:
 
<TABLE>
<CAPTION>
                                                                                      PERCENT CHANGE
                                                                                  ----------------------
                                                                                   1997 VS.    1996 VS.
                                                 1997       1996        1995         1996        1995
                                               ---------  ---------  -----------  ----------  ----------
<S>                                            <C>        <C>        <C>          <C>         <C>
Local Service................................  $   8,499  $   8,082  $     7,294        5.2%       10.8%
Interstate Access............................      3,673      3,553        3,275        3.4         8.5
Intrastate Access............................        810        812          884       (0.2)       (8.1)
Toll.........................................        734        794        1,009       (7.6)      (21.3)
Wireless Communications......................      3,555      2,799        2,592       27.0         8.0
Directory Advertising and Publishing.........      1,934      1,742        1,677       11.0         3.9
Other Services...............................      1,356      1,258        1,155        7.8         8.9
                                               ---------  ---------  -----------
  Total Operating Revenues...................  $  20,561  $  19,040  $    17,886        8.0         6.5
                                               ---------  ---------  -----------
                                               ---------  ---------  -----------
</TABLE>
 
    LOCAL SERVICE revenues reflect amounts billed to customers for local
exchange services, which include connection to the network and optional
services, such as custom calling features. Local Service revenues for 1997
increased $417 (5.2%) compared to an increase of $788 (10.8%) in 1996.
 
    The increase in 1997 was due primarily to a 4.8% growth in access lines
since December 31, 1996. Also contributing was an increase of $241 due to higher
customer demand for optional services. Such increases were partially offset by
rate impacts which reduced revenues by $252 primarily due to revenue sharing
accruals recorded in 1997 and a non-recurring revenue reduction of $64 related
to the local service portion of the regulatory settlement in South Carolina.
 
    The increase in 1996 was due primarily to a 4.7% growth in access lines
since December 31, 1995. Also contributing were an increase of $251 due to
higher customer demand for optional services and net rate increases of $88,
which include benefits related to the effects of expanded LACPs.
 
    INTERSTATE ACCESS revenues result from the provision of access services to
Interexchange Carriers to provide telecommunications services between states and
from end-user charges collected from residential and business customers.
Interstate Access revenues increased $120 (3.4%) in 1997 compared to an increase
of $278 (8.5%) in 1996.
 
    The increase for 1997 was attributable primarily to growth in minutes of use
of 8.8%, an increase of $97 due to higher demand for special access services and
an increase in end-user charges of $99 attributable to growth in the number of
access lines. Such increases were partially offset by rate reductions which
decreased revenues by $161 since December 31, 1996.
 
    The 1996 increase was due primarily to growth in minutes of use of 8.5%, an
increase of $69 due to higher demand for special access services and an increase
in end-user charges of $58 attributable to growth in the number of access lines
in service. Such increases were offset by net rate reductions since December 31,
1995 of $25.
 
                                       33
<PAGE>
    INTRASTATE ACCESS revenues result from the provision of access services to
Interexchange Carriers which provide telecommunications services between LATAs
within a state. In 1997, Intrastate Access revenues decreased $2 (0.2%) compared
to a decrease of $72 (8.1%) in 1996.
 
    The decreases for 1997 and 1996 were due primarily to rate reductions of $82
and $160, respectively, partially offset by growth in minutes of use of 10.9%
and 10.3%, respectively.
 
    TOLL revenues are received from the provision of long distance services
within (but not between) LATAs. These services include intraLATA service beyond
the local calling area; Wide Area Telecommunications Service (WATS or 800
services) for customers with highly concentrated demand; and special services,
such as transport of voice, data and video. Toll revenues decreased $60 (7.6%)
in 1997 compared to a decrease of $215 (21.3%) in 1996.
 
    The decrease for 1997 was primarily attributable to continuing competition
from Interexchange Carriers in the intraLATA toll market as well as the
continuing expansion of LACPs, the effect of which reduced toll messages by
12.6%. The decrease was partially offset by $62 related to revenues from
Interexchange Carriers beginning in the second quarter of 1997 for toll messages
originating on BellSouth Telecommunications' public telephones.
 
    The decrease for 1996 was primarily attributable to the expansion of LACPs
and increased competition from Interexchange Carriers, the effects of which
reduced toll messages by 25.5%. The decrease was partially offset by a
retroactive independent company settlement in 1995 which reduced revenues by $31
in that period.
 
    The overall decline in intraLATA toll revenues is expected to continue over
the long term.
 
    WIRELESS COMMUNICATIONS revenues include revenues from the domestic and
international cellular communications and PCS businesses as well as revenues
from interconnections by unaffiliated cellular and PCS carriers with BellSouth
Telecommunications' network. (BellSouth's interests in the net income or loss of
the unconsolidated wireless businesses within BellSouth Enterprises, which are
accounted for under the equity method of accounting, are recorded in Other
Income, net.)
 
    Wireless Communications revenues increased $756 (27.0%) in 1997 compared to
an increase of $207 (8.0%) in 1996. The 1997 increase includes revenues from
certain of BellSouth's international operations which had previously been
accounted for under the equity method and were consolidated for the first time
in 1997. Excluding those revenues, Wireless Communications revenues would have
increased approximately 22.7%. The 1996 increase was partially offset by the
effect of the January 1996 sale of BellSouth's paging business. Revenues from
such paging services were $349 in 1995. Excluding such paging revenues in 1995,
Wireless Communications revenues increased 24.8% in 1996. The increases for both
years as adjusted were primarily attributable to continued growth of the
customer bases in domestic and international wireless markets.
 
    The number of BellSouth's proportional domestic cellular customers has grown
by 13.6%, 26.9% and 32.1%, and its proportional domestic cellular revenues have
grown by 9.0%, 22.5% and 28.9% for the years ended December 31, 1997, 1996 and
1995, respectively. Its penetration rate has grown to 10.2% at December 31, 1997
from 8.9% and 7.1% at December 31, 1996 and 1995, respectively. Such customer
and revenue growth rates are likely to continue declining, reflecting increasing
penetration rates and competition for wireless customers by additional PCS
carriers. (See "Operating Environment and Trends of the Business -- Wireless
Service Competition.")
 
    DIRECTORY ADVERTISING AND PUBLISHING revenues include revenues derived from
publishing, printing and selling advertising in, and performing related services
concerning, alphabetical and classified telephone directories. Directory
Advertising and Publishing revenues increased $192 (11.0%) in 1997 compared to a
$65 (3.9%) increase in 1996.
 
                                       34
<PAGE>
    The increase for 1997 primarily reflects volume growth, price increases and
the reclassification to Operating Expenses of commissions associated with
national accounts which had previously reduced revenues. The revenue growth rate
associated with increases in volume and pricing for 1997 was 6.7%.
 
    The increase for 1996 was primarily due to increases in the volume and
prices of advertising sold. The increase was partially offset by the effect of
BellSouth Telecommunications' adoption of issue basis accounting for directory
revenues, which increased revenues in 1995 by $41, in connection with the
discontinuance of Statement of Financial Accounting Standards (SFAS) No. 71,
"Accounting for the Effects of Certain Types of Regulation." See Note M to the
Consolidated Financial Statements.
 
    OTHER SERVICES revenues are principally comprised of revenues from customer
premises equipment (CPE) sales and maintenance services and other nonregulated
services (primarily inside wire, billing and collection and voice messaging
services) offered by BellSouth Telecommunications. Other Services revenues
increased $98 (7.8%) in 1997 compared to an increase of $103 (8.9%) in 1996.
 
    The increase for 1997 reflects increased demand and prices for nonregulated
services and higher billing-related fees at BellSouth Telecommunications
totaling $138. The increase was partially offset by the effect in 1996 of
positive rate impacts and the sale of a subsidiary which performed computer
maintenance.
 
    The 1996 increase was primarily attributable to higher demand and prices for
nonregulated services, product sales and fees totaling $132. In addition, the
increase was also due to incremental rate impacts related to potential sharing
under certain state regulatory plans. The increase was partially offset by the
sale in 1996 of a subsidiary which performed computer maintenance.
 
OPERATING EXPENSES
 
    Total Operating Expenses increased $924 (6.5%) in 1997 compared to a
decrease of $333 (2.3%) in 1996. The 1997 increase was primarily attributable to
growth within BellSouth's domestic and international cellular businesses, as
well as increases associated with the initiation of PCS service. The 1997
increase also includes expenses from certain international operations which had
previously been accounted for under the equity method of accounting and which
were consolidated for the first time in 1997. Excluding the effect of such
international operations, Total Operating Expenses increased approximately 5.7%
in 1997. The decrease in 1996 was primarily attributable to the effects of the
1995 work force reduction charge of $1,082 and the sale of BellSouth's paging
business in January 1996. Excluding these effects, Total Operating Expenses
increased $1,049 (7.9%) in 1996. The components of Total Operating Expenses were
as follows:
 
<TABLE>
<CAPTION>
                                                                                       PERCENT CHANGE
                                                                                  ------------------------
<S>                                              <C>        <C>        <C>        <C>          <C>
                                                                                    1997 VS     1996 VS.
                                                   1997       1996       1995        1996         1995
                                                 ---------  ---------  ---------  -----------  -----------
Depreciation and Amortization..................  $   3,964  $   3,719  $   3,455         6.6%         7.6%
                                                 ---------  ---------  ---------
Other Operating Expenses:
  Cost of Services and Products................      6,254      6,072      6,184         3.0         (1.8)
  Selling, General and Administrative..........      4,967      4,470      3,873        11.1         15.4
                                                 ---------  ---------  ---------
                                                    11,221     10,542     10,057         6.4          4.8
                                                 ---------  ---------  ---------
    Subtotal...................................     15,185     14,261     13,512         6.5          5.5
Work Force Reduction Charge....................         --         --      1,082          --           --
                                                 ---------  ---------  ---------
    Total Operating Expenses...................  $  15,185  $  14,261  $  14,594         6.5         (2.3)
                                                 ---------  ---------  ---------
                                                 ---------  ---------  ---------
</TABLE>
 
    DEPRECIATION AND AMORTIZATION increased $245 (6.6%) in 1997 compared to a
$264 (7.6%) increase in 1996.
 
                                       35
<PAGE>
    The 1997 increase was due primarily to higher levels of property, plant and
equipment since December 31, 1996 resulting from continued growth in the
customer base for wireless and wireline services and continued modernization of
the networks.
 
    The increase for 1996 was due primarily to higher levels of property, plant
and equipment and shorter depreciable lives subsequent to the discontinuance of
SFAS No. 71. The higher levels of property, plant and equipment resulted from
continued growth in the customer base for wireless and wireline services and
modernization of the networks. The increase was partially offset by the sale of
BellSouth's paging business in January 1996 which had depreciation and
amortization of $44 in 1995.
 
    OTHER OPERATING EXPENSES are comprised of Cost of Services and Products and
Selling, General and Administrative. Cost of Services and Products includes
employee and employee-related expenses associated with network repair and
maintenance, material and supplies expense, cost of tangible goods sold and
other expenses associated with providing services. Selling, General and
Administrative includes expenses related to sales activities such as salaries,
commissions, benefits, travel, marketing and advertising expenses and
administrative expenses.
 
    Other Operating Expenses increased $679 (6.4%) in 1997 compared to an
increase of $485 (4.8%) in 1996. The increases for 1997 and 1996 were primarily
related to growth in the wireless and wireline businesses. The increase for 1996
was partially offset by the effect of the January 1996 sale of BellSouth's
paging business. Excluding such paging-related expenses in 1995, Other Operating
Expenses increased $741 (7.6%) in 1996.
 
    The 1997 increase was due primarily to increased expenses of $149 and $277
related to the domestic and international cellular customer bases, respectively,
reflecting additional marketing and operating costs associated with higher sales
and expanded operations. The increase related to international operations
includes $76 of expenses related to operations which were consolidated for the
first time in 1997 and which had previously been accounted for under the equity
method. The increase in Other Operating Expenses also reflects higher expenses
associated with the expansion of PCS services of $84 and increased expenses of
$126 in the directory publishing operations.
 
    At BellSouth Telecommunications, Other Operating Expenses increased $12 due
principally to costs associated with 1996 Act compliance of $230, as well as
increased costs due to higher business volumes, new service offerings and
intensified marketing and advertising efforts. The increase was partially offset
by an estimated reduction of $232 in employee-related costs in the core wireline
business, including expenses for employee benefits. The decrease in
employee-related costs reflected net employee reductions in BellSouth
Telecommunications' telephone operations of approximately 4,800 since December
31, 1996, partially offset by annual compensation increases for management and
represented employees. The employee reductions were primarily attributable to a
previously disclosed work force reduction plan. The increase in Other Operating
Expenses at BellSouth Telecommunications was further offset by the April 1996
sale of a subsidiary which performed computer maintenance.
 
    For 1996, expenses related to the domestic and international cellular
businesses increased $342 as a result of sustained growth in the cellular
customer bases. The increase in 1996 also reflects higher expenses associated
with the initiation of PCS services of $69. At BellSouth Telecommunications,
Other Operating Expenses increased $202 due principally to higher business
volumes, new service offerings and intensified marketing and advertising. The
increase was partially offset by a decrease of approximately $162 for
employee-related costs in the wireline telephone operations, and the sale in
1996 of a subsidiary which performed computer maintenance. The decrease in
employee-related costs reflects employee reductions attributable to
restructuring and work force reduction plans, partially offset by annual
compensation increases for management and represented employees. The 1996
increase in Other Operating Expenses also included an increase of approximately
$50 in expenses related to the directory advertising and publishing business.
 
                                       36
<PAGE>
    WORK FORCE REDUCTION CHARGE.  In the fourth quarter of 1995, BellSouth
recognized a pretax charge of $1,082 ($663 after tax) comprised of $942 ($577
after tax) related to planned work force reductions by the end of 1997, $85 ($52
after tax) for expected severance benefit payments after 1997 and $55 ($34 after
tax) for additional net curtailment losses related to employee reductions under
a restructuring plan initiated in 1993 and completed in 1995. The 1995 plan was
substantially completed in 1997 and resulted in the reduction of the wireline
telephone operations work force by approximately 11,600 employees over the term
of the plan. See Note L to the Consolidated Financial Statements.
 
OTHER INCOME STATEMENT ITEMS
 
<TABLE>
<CAPTION>
                                                                                              PERCENT CHANGE
                                                                                           --------------------
                                                                                           1997 VS.   1996 VS.
                                                            1997       1996       1995       1996       1995
                                                          ---------  ---------  ---------  ---------  ---------
<S>                                                       <C>        <C>        <C>        <C>        <C>
Interest Expense........................................  $     761  $     721  $     724        5.5%      (0.4%)
Gain on Sales of Operations.............................        787        442         --         --         --
Other Income, net.......................................         19        108         20         --         --
Provision for Income Taxes..............................      2,151      1,745      1,024       23.3       70.4
</TABLE>
 
    INTEREST EXPENSE includes interest on debt, certain other accrued
liabilities and capital leases, partially offset by interest capitalized as a
cost of installing equipment and constructing plant. Interest Expense increased
$40 (5.5%) in 1997 compared to a decrease of $3 (0.4%) in 1996.
 
    The increase for 1997 was primarily attributable to higher average debt
balances and interest rates on short-term borrowings.
 
    The decrease for 1996 was primarily attributable to lower average interest
rates on borrowings due in part to refinancings during 1995, partially offset by
higher average debt balances in 1996.
 
    GAIN ON SALES OF OPERATIONS for 1997 represents the pretax gains on the
sales of BellSouth's investments in Optus Communications and ITT World
Directories, which totaled $578 and $209, respectively. The pretax gain for 1996
represents the sale of BellSouth's paging business in January 1996.
 
    OTHER INCOME, NET includes earnings and losses from unconsolidated
affiliates; income and losses from the sale of investments; interest and
dividend income; minority interests; and other nonoperating items. Other Income,
net decreased $89 in 1997 compared to an increase of $88 in 1996.
 
    The decrease in Other Income, net in 1997 was primarily attributable to
increased equity in losses of unconsolidated affiliates, net, partially offset
by income from the sale of Bellcore, an increase in interest income and other
nonoperating items.
 
    Equity in losses of unconsolidated affiliates was ($242) in 1997 compared to
($76) in 1996. The higher overall equity in losses of unconsolidated affiliates
reflects losses incurred by recently acquired and start-up international
businesses, principally in Latin America, as well as increased losses in the
mobile data communications business and lower earnings from unconsolidated
domestic cellular operations. The increased losses were partially offset by more
favorable results at other unconsolidated international operations, principally
in Israel, Germany and Panama.
 
    The 1996 increase resulted primarily from a $55 increase in interest income
and lower net minority interest deductions of $35. Equity in losses was ($76) in
1996, an improvement of $10 over 1995. The lower 1996 losses were primarily
attributable to improved operating results at unconsolidated domestic cellular
operations and certain international businesses, principally operations in
Israel and Venezuela. Such improvements were partially offset by increased
losses attributable to the continuing development of German cellular operations.
 
                                       37
<PAGE>
    PROVISION FOR INCOME TAXES increased $406 (23.3%) in 1997 compared to an
increase of $721 (70.4%) in 1996. BellSouth's effective tax rates were 39.7%,
37.9% and 39.6% in 1997, 1996 and 1995, respectively. The lower effective tax
rate for 1996 compared to 1997 and 1995 was due primarily to a higher tax than
book basis for the paging business, which resulted in a lower gain on sale for
computing tax expense. A reconciliation of the statutory Federal income tax
rates to these effective tax rates is provided in Note J to the Consolidated
Financial Statements.
 
EXTRAORDINARY LOSSES
 
    EARLY EXTINGUISHMENT OF DEBT.  During 1997 and 1995, BellSouth recognized
extraordinary losses of $9 and $78, net of current tax benefits of $6 and $49,
respectively, related to the early extinguishment of outstanding debt issues.
See Note E to the Consolidated Financial Statements.
 
    DISCONTINUANCE OF SFAS NO. 71.  In 1995, as a result of its continuing
regulatory and marketplace assessments, BellSouth Telecommunications concluded
that it was required to discontinue application of SFAS No. 71. Accordingly,
BellSouth Telecommunications recorded a noncash extraordinary charge of $2,718
(net of a deferred tax benefit of $1,731). The extraordinary charge reflected
$3,002 (after tax) to reduce the recorded value of long-lived telephone plant
and equipment, all of which was within the regulatory framework, to the level
appropriate for nonregulated enterprises. The overall charge was partially
offset by $194 related to the method by which BellSouth Telecommunications
reported its directory publishing revenues, $71 related to the elimination of
regulatory assets and liabilities and $19 for the partial acceleration of
unamortized investment tax credits associated with the reductions in asset
carrying values and in asset lives.
 
    See Note M to the Consolidated Financial Statements.
 
FINANCIAL CONDITION
 
    BellSouth uses the net cash generated from its operations and external
financing to invest in and operate its existing and new businesses and to pay
dividends. While current liabilities exceeded current assets at both December
31, 1997 and 1996, BellSouth's 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. BellSouth
believes that such sources of funds will be sufficient to meet the needs of its
business for the foreseeable future.
 
<TABLE>
<CAPTION>
                                                                                           PERCENT CHANGE
                                                                                      ------------------------
                                                                                       1997 VS.     1996 VS.
                                                       1997       1996       1995        1996         1995
                                                     ---------  ---------  ---------  -----------  -----------
<S>                                                  <C>        <C>        <C>        <C>          <C>
Net Cash Provided by Operating Activities..........  $   7,039  $   5,863  $   5,443       20.1%         7.7%
</TABLE>
 
    OPERATING ACTIVITIES.  Net cash provided by operating activities increased
$1,176 (20.1%) in 1997 compared to an increase of $420 (7.7%) in 1996. The
increase in 1997 was primarily due to a decrease of $1,288 in cash expenditures
for accounts payable and other current liabilities. The increase was also due to
an $842 increase in operating income before depreciation and amortization. The
increases were partially offset by a decrease of $494 in other liabilities and
deferred credits.
 
    The increase in 1996 was primarily attributable to a $669 increase in
operating income excluding depreciation, amortization and the work force
reduction charge. The 1996 increase was partially offset by higher cash
expenditures for reductions of accounts payable.
 
<TABLE>
<CAPTION>
                                                                                        PERCENT CHANGE
                                                                                   ------------------------
                                                                                    1997 VS.     1996 VS.
                                                    1997       1996       1995        1996         1995
                                                  ---------  ---------  ---------  -----------  -----------
<S>                                               <C>        <C>        <C>        <C>          <C>
Net Cash Used for Investing Activities..........  $  (4,949) $  (4,199) $  (4,384)      17.9%        (4.2%)
</TABLE>
 
                                       38
<PAGE>
    INVESTING ACTIVITIES.  BellSouth's primary use of capital resources
continues to be for capital expenditures to support development of the wireline
and wireless networks. Net cash used for investing activities increased $750
(17.9%) in 1997 compared to a decrease of $185 (4.2%) in 1996. The increase in
1997 was primarily due to investments in unconsolidated international
affiliates, specifically in Latin America.
 
    The decrease in 1996 was primarily due to $930 in cash received from the
sale of BellSouth's paging business. The decrease was partially offset by higher
capital expenditures of $252 related substantially to wireline and wireless
network development and a decrease of $324 in proceeds from other investment
dispositions and repayment of advances.
 
    Capital expenditures were $4,858 in 1997 and are projected to be
approximately $5.0 billion to $5.5 billion in 1998. In addition to capital
expenditures related to its consolidated operations, BellSouth also makes
significant investments in unconsolidated affiliates. The most significant
commitment to such operations in 1998 is to BellSouth's Brazilian operations.
BellSouth's share of projected license fee commitments and capital expenditure
requirements for its Brazilian operations in 1998 is approximately $900. Capital
expenditures for 1997 were financed internally and funds for investments in
unconsolidated international operations were generated internally and from
external sources. For 1998, capital expenditures and funds for unconsolidated
international investments are expected to be financed primarily through
internally generated funds and, to the extent necessary, from external sources.
 
    Cash used in investing activities for 1997 and 1996 was partially offset by
significant proceeds from sales of various BellSouth interests. Proceeds of
$1,000 in 1997 consisted of the sale of BellSouth's interests in Optus
Communications ($735) and ITT World Directories ($265). Proceeds in 1996 of $930
represented the sale of BellSouth's paging business.
 
<TABLE>
<CAPTION>
                                                                                             PERCENT CHANGE
                                                                                         ----------------------
                                                                                          1997 VS.    1996 VS.
                                                        1997       1996        1995         1996        1995
                                                      ---------  ---------     -----     ----------  ----------
<S>                                                   <C>        <C>        <C>          <C>         <C>
Net Cash Provided by (Used for) Financing
 Activities.........................................  $    (698) $  (2,197)  $      46          --          --
</TABLE>
 
    FINANCING ACTIVITIES.  During 1997 and 1996, financing activities used cash
of $698 and $2,197, respectively. The decrease in cash used in 1997 primarily
reflects higher net proceeds in 1997 from the issuance of short-term borrowings.
 
    The increased use of cash from 1995 to 1996 of $2,243 primarily reflected
higher levels of net proceeds from all borrowing activities in 1995 compared to
1996.
 
    DEBT ACTIVITIES.  During 1997, BellSouth issued $500 of long-term debt. The
purpose of this issuance was to fund investments in international affiliates,
retire commercial paper and for general corporate purposes. Also in 1997,
BellSouth Telecommunications called and redeemed three series of debentures
totaling $600.
 
    During 1996, BellSouth issued $300 of long-term debt and, with net proceeds
as well as cash on hand, redeemed outstanding short-term debt and long-term
debentures of $417 and $485, respectively.
 
    BellSouth has committed credit lines aggregating $1,498 with various banks.
Borrowings under the committed credit lines totaled $241 at December 31, 1997.
BellSouth also maintains uncommitted lines of credit of $1,020. At December 31,
1997, there were no borrowings under the uncommitted lines. As of February 9,
1998, shelf registration statements were on file with the Securities and
Exchange Commission under which $1,927 of debt securities could be publicly
offered, $500 of which was registered on February 9, 1998.
 
    In September 1997, BellSouth announced a plan to repurchase up to $1 billion
of its Common Stock through 1998.
 
                                       39
<PAGE>
    BellSouth's debt to total capitalization ratio, decreased to 42.1% at
December 31, 1997 from 43.5% at December 31, 1996. The decrease was primarily
caused by an increase in shareholders' equity due to earnings during 1997.
 
    MARKET RATE RISK SENSITIVITY.  BellSouth is subject to market rate risks due
to fluctuations in interest rates. The majority of BellSouth's debt is in the
form of long-term, fixed-rate notes and debentures with original maturities
ranging from ten to one hundred years. Accordingly, fluctuations in interest
rates can lead to significant fluctuations in the fair value of such debt
instruments. From time to time, BellSouth enters into interest rate swap
agreements designed to mitigate its exposure to interest rate risks; however,
such activity was immaterial in 1997.
 
    BellSouth is also exposed to foreign currency risk by virtue of its
international operations. Specifically, BellSouth's foreign currency exposure
relates primarily to its foreign currency denominated balance sheet positions in
its international ventures, commitments and, to a limited extent, long-term debt
denominated in foreign currencies. BellSouth is, from time to time, party to
currency swap agreements and foreign exchange forward contracts designed to
mitigate its exposure to foreign currency risks. Such activity has generally
been limited to hedging of specific future commitments and long-term debt
denominated in foreign currencies and was immaterial in 1997. BellSouth has not
engaged in significant hedging of its foreign currency denominated balance sheet
positions in its international ventures.
 
    BellSouth's use of derivative financial instruments is designed to mitigate
foreign currency and interest rate risks, although to some extent they expose
BellSouth to credit risks. The credit risks associated with these instruments
are controlled through the evaluation and continual monitoring of the
creditworthiness of the counterparties. In the event that a counterparty fails
to meet the terms of a contract or agreement, BellSouth's exposure is limited to
the then current value of the currency rate or interest rate differential, not
the full notional amount. Such contracts and agreements have been executed with
creditworthy financial institutions. As such, BellSouth considers the risk of
nonperformance to be remote.
 
    The following table provides information, by maturity date, about
BellSouth's interest rate sensitive financial instruments, which consist of
fixed and variable rate long-term debt obligations. Fair values for the majority
of BellSouth's long-term debt obligations are based on quotes from dealers.
 
<TABLE>
<CAPTION>
                                                                                                       TOTAL
                                                                                                     RECORDED
                                  1998       1999       2000       2001       2002     THEREAFTER     AMOUNT     FAIR VALUE
                                ---------  ---------  ---------  ---------  ---------  -----------  -----------  -----------
<S>                             <C>        <C>        <C>        <C>        <C>        <C>          <C>          <C>
Debt:
  Fixed Rate Debt.............  $   3,508  $     242  $     522  $     214  $     319   $   5,941    $  10,746    $  10,748
  Average Interest Rate.......       6.04%      6.98%      6.76%      6.97%      7.67%       6.79%          --           --
 
  Variable Rate Debt..........  $     198  $      25  $      33  $      33  $      17   $       3    $     309    $     309
  Average Interest Rate.......       6.88%      6.41%      6.39%      6.39%      6.44%       7.38%          --           --
</TABLE>
 
OPERATING ENVIRONMENT AND TRENDS OF THE BUSINESS
 
    ECONOMY.  The nation's output of goods and services, which grew 2.8% in
1996, grew at the more rapid rate of 3.8% in 1997. Employment in nonfarm
business establishments grew 2.3% during the year and the unemployment rate
averaged 5.0%. Slower economic growth is expected during 1998, as increased
foreign imports, tight labor markets, slow labor force growth and modest
productivity growth act to constrain the pace of growth. The economy of the
nine-state region served by BellSouth Telecommunications' wireline telephone
business grew at about the same pace as the national economy. The number of jobs
in nonfarm businesses grew 2.2% as the unemployment rate averaged 4.7% for the
year. Real income expanded at an estimated 4.0%. Net migration added
approximately 400,000 persons, accounting for half of the region's population
growth. The demand for telecommunications services in the region reflected the
strength of its economic and population growth. The region's cost advantages
 
                                       40
<PAGE>
and strong net migration should bring an economic growth rate comparatively
better than the nation's and further increase the demand for telecommunications
services. The increased competition faced by BellSouth Telecommunications and
the growing percentage of revenues from unregulated businesses make BellSouth's
financial performance more susceptible to changes in the economy than
previously, as its operations reflect the more competitive business environment
and the greater demand elasticities for its products and services.
 
    BellSouth has minimal exposure in Asia and does not expect its businesses to
be materially adversely affected by the recent decline in the value of the
currencies of various Asian countries and the consequent inability of many
substantial businesses in those countries to pay their debts as they mature,
unless these events result in a significant general decline in business activity
in the United States or other areas of the world in which BellSouth does
business. BellSouth's operations abroad, particularly in Latin America, are
sensitive to changes in the value of the currencies in which they conduct
business, and a material decline in one or more of these currencies against the
U.S. dollar could have an adverse impact upon BellSouth's financial position or
annual operating results or cash flows. (See "Financial Condition -- Market Rate
Risk Sensitivity" for a discussion of BellSouth's foreign currency risks.)
 
    REGULATORY AND COMPETITIVE ENVIRONMENT. In providing telecommunications
services, BellSouth is subject to regulation by both state and federal
regulators with respect to rates, services, competition and other issues.
BellSouth's primary regulatory focus has been directed toward seeking
modification of the regulatory process to one that is more closely aligned with
changing market conditions and overall public policy objectives. As an
alternative to regulation of intrastate earnings, BellSouth has successfully
sought price regulation, whereby prices of basic services are regulated and the
pricing of other products and services are based on market factors. While price
regulation plans do not provide for the direct recovery through basic service
rates of cost increases or extraordinary expenses, they generally provide more
flexibility to meet competitive pricing levels.
 
    At the state level, BellSouth Telecommunications is subject to price
regulation plans in all states in its wireline territory, except Tennessee,
where a court order to implement price regulation has been appealed. At the
federal level, BellSouth Telecommunications is operating under a price
regulation plan established by the Federal Communications Commission (FCC) in
1995. The FCC's price cap plan limits aggregate price changes to the rate of
inflation minus a productivity offset, plus or minus exogenous cost changes
recognized by the FCC. The FCC has mandated an increase in the price cap
productivity factor from 5.3% to 6.5%, reducing access charges. The new rates
went into effect beginning July 1, 1997 and were computed as if the 6.5%
productivity factor had been in effect since July 1, 1996. If the Gross Domestic
Product Price Index increases by less than 6.5% over an annual period, further
price reductions will occur.
 
    BellSouth is subject to increasing competition in all areas of its business.
Regulatory, legislative and judicial actions and technological developments have
expanded the types of available services and products and the number of
companies that may offer them. Increasingly, this competition is from large
companies and joint ventures that have substantial capital, technological and
marketing resources.
 
    LOCAL SERVICE COMPETITION.  The Telecommunications Act of 1996 (the 1996
Act) requires the elimination of state legislative and regulatory barriers to
competition for local telephone service, subject only to competitively neutral
requirements to preserve and advance universal service, protect the public
safety and welfare, maintain the quality of telecommunications services and
safeguard the rights of customers. The 1996 Act also includes requirements that
incumbent local exchange carriers (ILECs), such as BellSouth Telecommunications,
negotiate with other carriers for interconnection, use of network elements on an
unbundled basis and resale of local services. If a negotiated agreement cannot
be reached, either party may seek arbitration with the state regulatory
authority, or the FCC if the state fails to act. If rates are disputed, the
arbitrator must set rates for access to network elements on an unbundled basis,
based on cost, which may include a reasonable profit. ILECs are also required to
negotiate to provide retail services at wholesale rates for the purpose of
resale by competing carriers. If agreement
 
                                       41
<PAGE>
cannot be reached, the arbitrator is to set the wholesale rates at BellSouth's
retail rates less costs to be avoided. BellSouth Telecommunications has executed
over 300 interconnection or resale agreements with such carriers. The
arbitration results for the wholesale discount rates vary by state from
approximately 14.8% to 21.8% for both business and residential service.
 
    In connection with the requirements of the 1996 Act, in August 1996, the FCC
released an order adopting rules governing interconnection and open competition
in the local telephone service industry. Among the issues specifically addressed
by the order were the network elements that BellSouth must make available;
pricing standards to be followed by states in setting rates for interconnection;
access to network elements on an unbundled basis; and resold services.
BellSouth, several other ILECs and several state regulatory bodies appealed the
order to the United States Court of Appeals for the Eighth Circuit, and in July
1997, the court ruled that state commissions, not the FCC, have exclusive
jurisdiction to set prices for local service interconnection, unbundled network
elements and local service resale. In addition, the court vacated other aspects
of the order including the FCC's "pick and choose" rule, which allowed competing
local carriers to select terms from different interconnection agreements in
negotiating their own interconnection agreements. The court also rejected the
FCC's requirement that ILECs submit pre-1996 interconnection agreements to the
state commissions for approval and the presumption that any network element that
can be technically unbundled must be unbundled. Finally, the court rejected the
FCC's requirement that ILECs physically recombine any unbundled network elements
for competing local carriers and only required that such elements be made
available for rebundling.
 
    Certain aspects of the order were upheld by the court including the ability
of the competing local carriers to recombine network elements to produce
complete telecommunications services without providing any of their own
facilities. The court also affirmed the FCC's classification of operations
support systems, operator services, directory assistance and vertical switching
features as unbundled network elements. In addition, the court upheld the FCC's
definition of "technically feasible" interconnection to exclude all economic
considerations. Finally, the court declined to rule on whether or not the Total
Element Long Run Incremental Cost (TELRIC) pricing methodology was inconsistent
with the 1996 Act, leaving the state commissions to make that decision. On
reconsideration, the court further clarified that the 1996 Act does not require
ILECs to provide recombined unbundled network elements. The United States
Supreme Court has agreed to review the court's decision, and a ruling is
expected by mid-1999. In a subsequent order, the Eighth Circuit held that the
FCC may not impose its pricing standards as a condition to granting permission
for the Operating Telephone Companies to provide interLATA communications.
 
    Notwithstanding these developments, however, BellSouth Telecommunications
and a number of carriers have negotiated interconnection agreements, and state
regulatory commissions have arbitrated and approved various terms of
interconnection between BellSouth Telecommunications and other carriers. Some
changes may be made to these agreements when the judicial appeals are concluded.
 
    In attempting to comply with the technical requirements of interconnection,
BellSouth is incurring, and expects to continue to incur, significant costs
associated with the facilitation of interconnection. BellSouth incurred
approximately $400 of costs associated with these efforts in the year ended
December 31, 1997. Of this amount, approximately $230 was expensed as incurred,
and the remainder was capitalized. It remains unclear to what degree, if any,
BellSouth will be compensated for these costs.
 
    As a result of the changes in regulation discussed above, substantial
competition has developed for BellSouth Telecommunications' business customers
which provide a greater concentration of higher margin revenues than do its
residential customers. Competitors include the Interexchange Carriers, such as
AT&T and MCI, and smaller competitive local exchange carriers (CLECs), which
resell local services of BellSouth Telecommunications and other ILECs or provide
service over their own facilities. Because of the fact that significant
residential local service competition would improve BellSouth's prospects for
obtaining regulatory authority to offer interLATA long distance service,
BellSouth believes that the Interexchange Carriers have been slow to enter the
local residential market and, therefore, the
 
                                       42
<PAGE>
development of competition for local residential service customers will continue
to be much slower than for business local service customers.
 
    ACCESS SERVICE.  Historically, access charges have been set at levels that
subsidize the cost of providing local residential service. The 1996 Act also
requires that the FCC identify the local service subsidy implicitly provided by
access charges; to provide for the removal of such subsidy from access rates in
order that access charges reflect underlying costs; to arrange for a universal
service fund to ensure the continuation of universal service; and to develop the
arrangements for payments into that fund by all carriers. In May 1997, the FCC
adopted orders regarding revisions to the price cap plan, access charge reform
and the establishment of a universal service fund. The orders on the price cap
plan and access charge reform resulted in access rate reductions related to
per-minute-of-use charges and increases to per-line charges.
 
    In addition, the access charge reform order resulted in several changes to
the existing interstate access rate structure designed to move access charges,
over time, to more economically efficient levels and to create more efficient
rate structures. Non-traffic-sensitive costs, that were previously recovered on
a per-minute-of-use basis, were changed to be recovered on a flat-rate, per-line
basis. As part of this plan, subscriber line charges (SLCs) were increased and a
new presubscribed interexchange carrier charge (PICC) was established. As SLC
and PICC charges are increased over time, usage charges are reduced.
 
    The universal service order established new funding mechanisms for
high-cost, low-income service areas. BellSouth Telecommunications began
contributing to the new funds on January 1, 1998 and is allowed recovery of its
contributions through increased interstate access charges. Major changes to the
support mechanism to subsidize the provision of services to high-cost areas will
occur January 1, 1999. The new support mechanism, when implemented in 1999, will
be based on forward-looking economic costs; however, a cost model has yet to be
adopted. A new proceeding was initiated in June 1997 to select a cost model with
final FCC action expected in 1998.
 
    All of the foregoing orders have been appealed to United States Courts of
Appeal in several different Circuits.
 
    As a result of the legal requirement to offer expanded interconnection for
interstate special and switched access transport, BellSouth Telecommunications
must permit competitive carriers and customers to terminate their transmission
lines on BellSouth Telecommunications' facilities through collocation
arrangements. The effects of the rules are to increase competition for access
transport. Furthermore, Interexchange Carriers are increasingly connecting their
lines directly to their customers' facilities, bypassing the networks of
BellSouth Telecommunications and thereby avoiding access charges entirely. In
addition, commercial applications of Internet telephony are being developed.
This medium could attract substantial long distance traffic because of its lower
cost structure, because FCC rules do not currently impose access charges on
Internet communications.
 
    WIRELESS SERVICE COMPETITION.  BellSouth's wireless communications
businesses face increasing competition from additional providers in each of
BellSouth's markets. The number of BellSouth's proportional domestic cellular
customers has grown by 13.6%, 26.9% and 32.1%, and its proportional domestic
cellular revenues have grown by 9.0%, 22.5% and 28.9% for the years ended
December 31, 1997, 1996 and 1995, respectively. The penetration rate of
BellSouth's domestic cellular services has grown to 10.2% at December 31, 1997
from 8.9% and 7.1% at December 31, 1996 and 1995, respectively. Such growth is
likely to continue declining, reflecting increasing penetration rates and
competition for wireless customers by additional PCS carriers.
 
    The FCC's PCS licensing process has created multiple new competitors for
BellSouth's businesses. Licenses to provide PCS services have been won in
auction by AT&T, Holding Company consortia and other large and well-capitalized
entities. PCS competes or will compete with BellSouth's local wireline
 
                                       43
<PAGE>
and wireless telephone businesses throughout BellSouth's service territories.
Several competitive PCS systems are now operational.
 
    BellSouth's international wireless operations are generally subject to
competition from at least one other wireless service provider. These competing
wireless service providers are generally supported by partners who are at least
as well-capitalized as BellSouth and its partners. In some cases, the competing
provider is operated by the government-owned telephone company, which may have
access to substantial financial resources. BellSouth believes that a number of
these companies will be privatized within the next few years, which may result
in more formidable competition. The number of BellSouth's proportional
international cellular customers, excluding the customers of Optus
Communications in all periods, has grown by 106.6%, 109.9% and 90.4% for the
years ended December 31, 1997, 1996 and 1995, respectively. BellSouth's
proportional share of international cellular revenues, excluding revenues of
Optus Communications, increased 76.4%, 59.0% and 59.3%, respectively, for the
years ended December 31, 1997, 1996 and 1995.
 
    BELLSOUTH COMPETITIVE STRATEGY.  BellSouth has developed three main
strategies that govern its business decisions in the increasingly competitive
telecommunications industry. First, BellSouth will strengthen its leadership
position throughout its nine-state wireline territory by (a) enhancing and
building its brand strength and distribution channels; (b) providing
full-service offerings including wireline and wireless, local and long distance,
and video and Internet services; and (c) controlling costs. Second, BellSouth
will continue to grow profitably its domestic wireless businesses by (a)
deploying value-added products and services and competitive technology; (b)
strengthening and expanding distribution channels, including joint marketing
with BellSouth Telecommunications; and (c) expanding in-region wireless coverage
through development of businesses covered by its licenses. Third, BellSouth will
continue to grow and develop its Latin American and other international
operations.
 
    NEW SERVICES.  The opening of BellSouth Telecommunications' local service
markets to competition can allow BellSouth to qualify for entry into new
business markets. While loss of local service customers and other risks
associated with increased competition are inevitable, BellSouth will have the
opportunity to offer interLATA wireline service under provisions contained in
the 1996 Act. BellSouth believes that in order to remain competitive, it must
aggressively pursue a corporate strategy of expanding its offerings beyond its
traditional businesses and markets. These offerings include interLATA services,
information services, video services and Internet services. BellSouth has
entered some of these businesses through investments in, strategic alliances
with and acquisitions of established companies in such industries, and through
the development of some of these services and capabilities internally. BellSouth
has acquired several cable TV and wireless video rights, and has been providing
both cable TV and wireless video services on a limited basis in certain
metropolitan areas and is providing Internet access. BellSouth also intends to
continue to pursue certain foreign telecommunications licenses as they are
offered.
 
    BellSouth plans to begin offering interLATA wireline service in each of its
in-region states as soon as the FCC approves its application for each state.
BellSouth has received favorable determinations from the regulatory commissions
in several states in its wireline service territory, but the FCC has rejected
all applications to provide in-region interLATA service on which it has ruled.
The applicants have appealed such denials to the United States Court of Appeals
for the District of Columbia Circuit. In addition, the United States District
Court for the Northern District of Texas has ruled that the provisions of the
1996 Act prohibiting the Holding Companies from providing interLATA service are,
in effect, an unconstitutional bill of attainder and are unenforceable. The
ruling has been stayed pending appeal. BellSouth will continue to seek approvals
from the FCC and other state commissions and judicial review of adverse
decisions which it believes to be erroneous. However, because of the scrutiny of
such applications by the FCC and the Justice Department, the time required to
obtain judicial review of adverse decisions and the possible challenges by the
Interexchange Carriers of any approved applications, it is uncertain when
BellSouth will be authorized to commence interLATA service in any of its
in-region states.
 
                                       44
<PAGE>
YEAR 2000 COMPLIANCE
 
    BellSouth has initiated a company-wide program to identify and address
issues associated with the ability of its date-sensitive information, telephony
and business systems to properly recognize the year 2000 in order to avoid
interruption of the operation of these systems at the turn of the century. This
program is being conducted by a management team which is coordinating the
efforts of internal resources as well as third party vendors in making all
necessary changes to BellSouth's systems. Some of these changes are being made
as a part of larger systems upgrades. BellSouth plans to have all conversion and
initial testing completed by the end of 1998 and to complete testing and
deployment by mid-1999. Some of the costs associated with these efforts were
incurred in 1997, and the remainder will be incurred over the next two years.
BellSouth estimates the costs of these efforts will be between $100 to $200 over
the life of the project. BellSouth expects to avoid disruption of its
information, telephony and business systems as a result of these efforts.
 
NEW ACCOUNTING PRONOUNCEMENTS
 
    SEGMENT REPORTING.  In June 1997, the FASB issued SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information," superseding SFAS No.
14, "Financial Reporting of Segments of a Business Enterprise." SFAS No. 131
establishes new standards for reporting operating segment information in annual
and interim financial statements. The new standard requires reporting of
operating segment information based on the way that financial information for
the entity is organized for senior management for evaluating performance and
allocating resources. The standard is effective for year-end 1998 and need not
be applied to interim financial statements in that year. Comparative information
for earlier years on the same basis of segmentation must also be reported.
 
    At present, BellSouth presents its operations as one business segment in its
financial statements. However, based on a preliminary assessment of the
requirements of the new standard, BellSouth anticipates reporting operating
segment information for multiple reportable segments. Determination of all such
reportable segments, however, has not been finalized.
 
    CAPITALIZATION OF INTERNAL USE SOFTWARE.  In 1996, the AICPA issued a
Statement of Position (SOP) exposure draft dealing with the costs of internal
use software. The treatment accorded such costs in the past has been very
diverse in practice. The proposed SOP will require capitalization of such costs
after certain preliminary development efforts have been made. Costs to be
capitalized are direct costs and interest costs related to development efforts.
The proposed SOP is expected to be issued in early 1998 and will require
adoption by BellSouth no later than January 1, 1999. Earlier adoption will be
permitted for years for which financial statements have not been issued.
 
    Adoption of the proposed SOP will result in a temporary increase in earnings
in the year of adoption as a result of the capitalization of costs which had
previously been expensed. If expenditures remain at a consistent level, the
earnings impact will decline in each year following the change. The decline will
continue until the amortization expense related to the capitalized software
costs equals the level of software costs treated as expense prior to the change.
In addition, adoption of the proposed SOP will result in higher levels of
capitalized software costs on the balance sheet.
 
SAFE HARBOR STATEMENT
 
    CERTAIN OF THE INFORMATION CONTAINED IN THIS AND OTHER REPORTS ADDRESSES
KNOWN TRENDS AND UNCERTAINTIES AFFECTING BELLSOUTH'S BUSINESS AND PROSPECTS AND
MAY CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995. BELLSOUTH'S EXPECTATIONS CONTAINED IN
OR UNDERLYING SUCH FORWARD-LOOKING STATEMENTS ARE BASED ON A NUMBER OF
ASSUMPTIONS, INCLUDING BUT NOT LIMITED TO: (1) ECONOMIC GROWTH AND DEMAND FOR
WIRELINE AND WIRELESS COMMUNICATIONS SERVICES CONTINUES IN BELLSOUTH'S SERVICE
TERRITORIES; (2) THE FINAL RESOLUTION OF THE ACCESS REFORM AND UNIVERSAL SERVICE
ORDERS OF THE FCC (AND THE RESULTANT CUSTOMER IMPACTS) IS REASONABLY
EARNINGS-NEUTRAL; (3) LOCAL WIRELINE AND WIRELESS SERVICE COMPETITION DOES NOT
HAVE SIGNIFICANTLY INCREASING ADVERSE IMPACTS
 
                                       45
<PAGE>
ON EARNINGS; (4) THE CONTINUING COSTS TO IMPLEMENT NETWORK CHANGES AND OPERATING
SYSTEMS NECESSARY TO SATISFY REGULATORY CONDITIONS FOR BELLSOUTH'S PROVISION OF
INTERLATA SERVICE ARE NOT MATERIALLY GREATER THAN CURRENTLY PROJECTED; (5)
BELLSOUTH'S EXPECTATIONS AS TO THE COST AND SUCCESS OF ITS EFFORTS FOR YEAR 2000
COMPLIANCE, INCLUDING THE SUCCESS OF ITS KEY SUPPLIERS AND CUSTOMERS, ARE
REASONABLY ACCURATE; AND (6) THE CURRENT LEVEL OF ECONOMIC, MONETARY AND
POLITICAL STABILITY CONTINUES IN FOREIGN COUNTRIES IN WHICH BELLSOUTH HAS
SIGNIFICANT INVESTMENTS OR OPERATIONS. ANY DEVELOPMENTS SIGNIFICANTLY DEVIATING
FROM THESE ASSUMPTIONS COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE FORECAST OR IMPLIED IN THE AFOREMENTIONED FORWARD-LOOKING STATEMENTS.
 
                                       46
<PAGE>
ITEM 8.  CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
                              REPORT OF MANAGEMENT
 
    To the Shareholders of BellSouth Corporation:
 
    These financial statements have been prepared in conformity with generally
accepted accounting principles and have been audited by Coopers & Lybrand
L.L.P., independent accountants, whose report is contained herein.
 
    The integrity and objectivity of the data in these financial statements,
including estimates and judgments relating to matters not concluded by the end
of the year, are the responsibility of the management of BellSouth. Management
has also prepared all other information included therein unless indicated
otherwise.
 
    Management maintains a system of internal accounting controls which is
continuously reviewed and evaluated. However, there are inherent limitations
that should be recognized in considering the assurances provided by any system
of internal accounting controls. The concept of reasonable assurance recognizes
that the cost of a system of internal accounting controls should not exceed, in
management's judgment, the benefits to be derived. Management believes that
BellSouth's system does provide reasonable assurance that the transactions are
executed in accordance with management's general or specific authorizations and
are recorded properly to maintain accountability for assets and to permit the
preparation of financial statements in conformity with generally accepted
accounting principles. Management also believes that this system provides
reasonable assurance that access to assets is permitted only in accordance with
management's authorizations, that the recorded accountability for assets is
compared with the existing assets at reasonable intervals and that appropriate
action is taken with respect to any differences. Management also seeks to assure
the objectivity and integrity of its financial data by the careful selection of
its managers, by organizational arrangements that provide an appropriate
division of responsibility and by communications programs aimed at assuring that
its policies, standards and managerial authorities are understood throughout the
organization. Management is also aware that changes in operating strategy and
organizational structure can give rise to disruptions in internal controls.
Special attention is given to controls while the changes are being implemented.
 
    Management maintains a strong internal auditing program that independently
assesses the effectiveness of the internal controls and recommends possible
improvements thereto. In addition, as part of its audit of these financial
statements, Coopers & Lybrand L.L.P. completed a review of the accounting
controls to establish a basis for reliance thereon in determining the nature,
timing and extent of audit tests to be applied. Management has considered the
internal auditor's and Coopers & Lybrand L.L.P.'s recommendations concerning the
system of internal controls and has taken actions that it believes are
cost-effective in the circumstances to respond appropriately to these
recommendations. Management believes that as of December 31, 1997, the system of
internal controls was adequate to accomplish the objectives discussed herein.
 
    Management also recognizes its responsibility for fostering a strong ethical
climate so that BellSouth's affairs are conducted according to the highest
standards of personal and corporate conduct. This responsibility is communicated
to all employees through policies and guidelines addressing such issues as
conflict of interest, safeguarding of BellSouth's real and intellectual
properties, providing equal employment opportunities and ethical relations with
customers, suppliers and governmental representatives. BellSouth maintains a
program to assess compliance with these policies and our ethical standards
through its Senior Vice President--Corporate Compliance and Corporate Secretary.
 
<TABLE>
<S>                                            <C>
                      /s/ F. Duane Ackerman                          /s/ Ronald M. Dykes
</TABLE>
 
<TABLE>
<S>                                         <C>
F. Duane Ackerman                           Ronald M. Dykes
CHAIRMAN OF THE BOARD, PRESIDENT AND        EXECUTIVE VICE PRESIDENT AND
CHIEF EXECUTIVE OFFICER                     CHIEF FINANCIAL OFFICER
</TABLE>
 
February 3, 1998
 
                                       47
<PAGE>
                       AUDIT COMMITTEE CHAIRMAN'S LETTER
 
    The Audit Committee of the Board of Directors consists of four members who
are neither officers nor employees of BellSouth Corporation. Information as to
these persons, as well as their duties, is provided in the Proxy Statement. The
Audit Committee met six times during 1997 and reviewed with the Chief Corporate
Auditor, Coopers & Lybrand L.L.P. and management current audit activities, plans
and the results of selected internal audits. The Audit Committee also reviewed
the objectivity of the financial reporting process and the adequacy of internal
controls. The Audit Committee recommended, subject to shareholder ratification,
the appointment of the independent accountants and considered factors relating
to their independence. In addition, the Audit Committee provided guidance in
matters regarding ethical considerations and business conduct, reviewed the
operations of political action committees and monitored compliance with laws and
regulations. The Chief Corporate Auditor and Coopers & Lybrand L.L.P. each met
privately with the Audit Committee on occasion to encourage confidential
discussions as to any auditing matters.
                                          /s/ Ronald A. Terry
 
                                          Ronald A. Terry
                                          CHAIRMAN, AUDIT COMMITTEE
 
February 3, 1998
 
                       REPORT OF INDEPENDENT ACCOUNTANTS
 
To the Shareholders
BellSouth Corporation
Atlanta, Georgia
 
    We have audited the accompanying consolidated balance sheets of BellSouth
Corporation as of December 31, 1997 and 1996, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1997. These financial statements are the
responsibility of BellSouth Corporation's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
 
    We conducted our audits in accordance with generally accepted auditing
standards. 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 includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
    In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of BellSouth
Corporation as of December 31, 1997 and 1996, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
 
    As discussed in Note M to the consolidated financial statements, BellSouth
Corporation discontinued accounting for the operations of BellSouth
Telecommunications, Inc. in accordance with Statement of Financial Accounting
Standards No. 71, "Accounting for the Effects of Certain Types of Regulation,"
effective June 30, 1995.
 
                                          /s/ Coopers & Lybrand L.L.P.
Atlanta, Georgia
February 3, 1998
 
                                       48
<PAGE>
                             BELLSOUTH CORPORATION
                       CONSOLIDATED STATEMENTS OF INCOME
                    (IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                                             FOR THE YEARS ENDED DECEMBER 31,
                                                                            -----------------------------------
                                                                              1997         1996         1995
                                                                            ---------    ---------    ---------
<S>                                                                         <C>          <C>          <C>
Operating Revenues:
  Network and related services:
    Local service.......................................................    $   8,499    $   8,082    $   7,294
    Interstate access...................................................        3,673        3,553        3,275
    Intrastate access...................................................          810          812          884
    Toll................................................................          734          794        1,009
  Wireless communications...............................................        3,555        2,799        2,592
  Directory advertising and publishing..................................        1,934        1,742        1,677
  Other services........................................................        1,356        1,258        1,155
                                                                            ---------    ---------    ---------
    Total Operating Revenues............................................       20,561       19,040       17,886
                                                                            ---------    ---------    ---------
Operating Expenses:
  Cost of services and products.........................................        6,254        6,072        6,184
  Depreciation and amortization.........................................        3,964        3,719        3,455
  Selling, general and administrative...................................        4,967        4,470        3,873
  Work force reduction charge (Note L)..................................           --           --        1,082
                                                                            ---------    ---------    ---------
    Total Operating Expenses............................................       15,185       14,261       14,594
                                                                            ---------    ---------    ---------
Operating Income........................................................        5,376        4,779        3,292
Interest Expense........................................................          761          721          724
Gain on Sales of Operations (Note B)....................................          787          442           --
Other Income, net.......................................................           19          108           20
                                                                            ---------    ---------    ---------
Income Before Income Taxes and Extraordinary Losses.....................        5,421        4,608        2,588
Provision for Income Taxes (Note J).....................................        2,151        1,745        1,024
                                                                            ---------    ---------    ---------
Income Before Extraordinary Losses......................................        3,270        2,863        1,564
Extraordinary Loss for Discontinuance of SFAS No. 71,
 net of tax (Note M)....................................................           --           --       (2,718)
Extraordinary Loss on Early Extinguishment of Debt,
 net of tax (Note E)....................................................           (9)          --          (78)
                                                                            ---------    ---------    ---------
      Net Income (Loss).................................................    $   3,261    $   2,863    $  (1,232)
                                                                            ---------    ---------    ---------
                                                                            ---------    ---------    ---------
Weighted-Average Common Shares Outstanding: (Notes A, G)
  Basic.................................................................          992          994          993
  Diluted...............................................................          995          996          994
Dividends Declared Per Common Share (Note G)............................    $    1.44    $    1.44    $    1.41
 
Basic Earnings (Loss) Per Share: (Notes A, G)
  Income Before Extraordinary Losses....................................    $    3.30    $    2.88    $    1.57
  Extraordinary Loss for Discontinuance of SFAS No. 71,
    net of tax (Note M).................................................           --           --        (2.73)
  Extraordinary Loss on Early Extinguishment of Debt,
    net of tax (Note E).................................................         (.01)          --         (.08)
                                                                            ---------    ---------    ---------
      Net Income (Loss).................................................    $    3.29    $    2.88    $   (1.24)
                                                                            ---------    ---------    ---------
                                                                            ---------    ---------    ---------
Diluted Earnings (Loss) Per Share: (Notes A, G)
  Income Before Extraordinary Losses....................................    $    3.29    $    2.87    $    1.57
  Extraordinary Loss for Discontinuance of SFAS No. 71,
    net of tax (Note M).................................................           --           --        (2.73)
  Extraordinary Loss on Early Extinguishment of Debt,
    net of tax (Note E).................................................        (0.01)          --        (0.08)
                                                                            ---------    ---------    ---------
      Net Income (Loss).................................................    $    3.28    $    2.87    $   (1.24)
                                                                            ---------    ---------    ---------
                                                                            ---------    ---------    ---------
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       49
<PAGE>
                             BELLSOUTH CORPORATION
                          CONSOLIDATED BALANCE SHEETS
                    (IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                                                                       DECEMBER 31,
                                                                                                   --------------------
                                                                                                     1997       1996
                                                                                                   ---------  ---------
<S>                                                                                                <C>        <C>
ASSETS
Current Assets:
  Cash and cash equivalents......................................................................  $   2,570  $   1,178
  Temporary cash investments.....................................................................         17         51
  Accounts receivable, net of allowance for uncollectibles of $246 and $180......................      4,750      4,087
  Material and supplies..........................................................................        393        451
  Other current assets...........................................................................        387        531
                                                                                                   ---------  ---------
    Total Current Assets.........................................................................      8,117      6,298
Investments and Advances (Note B)................................................................      2,675      2,430
Property, Plant and Equipment, net (Note C)......................................................     22,861     21,825
Deferred Charges and Other Assets................................................................        702        610
Intangible Assets, net...........................................................................      1,946      1,405
                                                                                                   ---------  ---------
    Total Assets.................................................................................  $  36,301  $  32,568
                                                                                                   ---------  ---------
                                                                                                   ---------  ---------
 
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
  Debt maturing within one year (Note E).........................................................  $   3,706  $   2,124
  Accounts payable...............................................................................      1,825      1,446
  Other current liabilities (Note D).............................................................      3,252      2,871
                                                                                                   ---------  ---------
    Total Current Liabilities....................................................................      8,783      6,441
                                                                                                   ---------  ---------
Long-Term Debt (Note E)..........................................................................      7,348      8,116
                                                                                                   ---------  ---------
Deferred Credits and Other Liabilities:
  Accumulated deferred income taxes..............................................................      2,023      1,899
  Unamortized investment tax credits.............................................................        213        278
  Other liabilities and deferred credits (Note F)................................................      2,769      2,585
                                                                                                   ---------  ---------
    Total Deferred Credits and Other Liabilities.................................................      5,005      4,762
                                                                                                   ---------  ---------
Shareholders' Equity (Note G):
  Common stock, $1 par value (2,200 shares authorized; 992 and 991 shares outstanding)...........      1,010      1,009
  Paid-in capital................................................................................      7,750      7,697
  Retained earnings..............................................................................      7,382      5,541
  Shares held in trust and treasury..............................................................       (575)      (532)
  Guarantee of ESOP debt (Note H)................................................................       (402)      (466)
                                                                                                   ---------  ---------
    Total Shareholders' Equity...................................................................     15,165     13,249
                                                                                                   ---------  ---------
    Total Liabilities and Shareholders' Equity...................................................  $  36,301  $  32,568
                                                                                                   ---------  ---------
                                                                                                   ---------  ---------
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       50
<PAGE>
                             BELLSOUTH CORPORATION
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                                 (IN MILLIONS)
<TABLE>
<CAPTION>
                                              NUMBER OF SHARES                              AMOUNT
                                           ----------------------   ------------------------------------------------------
                                                       SHARES                                       SHARES       GUARANTEE
                                           COMMON   HELD IN TRUST    PAR    PAID-IN   RETAINED   HELD IN TRUST    OF ESOP
                                           STOCK    AND TREASURY    VALUE   CAPITAL   EARNINGS   AND TREASURY      DEBT
                                           ------   -------------   ------  -------   --------   -------------   ---------
<S>                                        <C>      <C>             <C>     <C>       <C>        <C>             <C>
Balance at
 December 31, 1994.......................    503          (7)       $  503  $ 8,064   $ 6,721        $(336)        $(584)
Two-for-one stock split (Note G).........    503          (6)          503     (503)
Net loss.................................                                              (1,232)
Dividends declared.......................                                              (1,400)
Shares issued for:
  Employee benefit plans.................      1                         1       30
  Grantor trusts.........................                                        38                    (38)
ESOP activities and related tax
 benefit.................................                                                  10                         58
Foreign currency translation
 adjustment..............................                                       (10)
                                           ------        ---        ------  -------   --------      ------       ---------
Balance at
 December 31, 1995.......................  1,007         (13)        1,007    7,619     4,099         (374)         (526)
Net income...............................                                               2,863
Dividends declared.......................                                              (1,430)
Shares issued for:.......................
  Employee benefit plans.................      1                         1       14                     11
  Grantor trusts.........................      1          (1)            1       34                    (35)
Shares purchased for:
  Treasury...............................                 (3)                                          (85)
  Grantor trusts.........................                 (1)                                          (49)
ESOP activities and related tax
 benefit.................................                                                   9                         60
Foreign currency translation
 adjustment..............................                                        30
                                           ------        ---        ------  -------   --------      ------       ---------
Balance at
 December 31, 1996.......................  1,009         (18)        1,009    7,697     5,541         (532)         (466)
Net income...............................                                               3,261
Dividends declared.......................                                              (1,428)
Shares issued for:
  Employee benefit plans.................                  2                    (25)                    85
  Grantor trusts.........................      1          (1)            1       59                    (60)
  Acquisitions...........................                  2                      8                     89
Purchase of Treasury Stock...............                 (3)                                         (157)
ESOP activities and related tax
 benefit.................................                                                   8                         64
Foreign currency translation
 adjustment..............................                                        11
                                           ------        ---        ------  -------   --------      ------       ---------
Balance at
 December 31, 1997.......................  1,010         (18)       $1,010  $ 7,750   $ 7,382        $(575)        $(402)
                                           ------        ---        ------  -------   --------      ------       ---------
                                           ------        ---        ------  -------   --------      ------       ---------
 
<CAPTION>
 
                                            TOTAL
                                           -------
<S>                                        <C>
Balance at
 December 31, 1994.......................  $14,368
Two-for-one stock split (Note G).........       --
Net loss.................................   (1,232)
Dividends declared.......................   (1,400)
Shares issued for:
  Employee benefit plans.................       31
  Grantor trusts.........................       --
ESOP activities and related tax
 benefit.................................       68
Foreign currency translation
 adjustment..............................      (10)
                                           -------
Balance at
 December 31, 1995.......................   11,825
Net income...............................    2,863
Dividends declared.......................   (1,430)
Shares issued for:.......................
  Employee benefit plans.................       26
  Grantor trusts.........................       --
Shares purchased for:
  Treasury...............................      (85)
  Grantor trusts.........................      (49)
ESOP activities and related tax
 benefit.................................       69
Foreign currency translation
 adjustment..............................       30
                                           -------
Balance at
 December 31, 1996.......................   13,249
Net income...............................    3,261
Dividends declared.......................   (1,428)
Shares issued for:
  Employee benefit plans.................       60
  Grantor trusts.........................       --
  Acquisitions...........................       97
Purchase of Treasury Stock...............     (157)
ESOP activities and related tax
 benefit.................................       72
Foreign currency translation
 adjustment..............................       11
                                           -------
Balance at
 December 31, 1997.......................  $15,165
                                           -------
                                           -------
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       51
<PAGE>
                             BELLSOUTH CORPORATION
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN MILLIONS)
 
<TABLE>
<CAPTION>
                                                                                      FOR THE YEARS ENDED DECEMBER 31,
                                                                                      ---------------------------------
                                                                                        1997        1996        1995
                                                                                      ---------  ----------  ----------
<S>                                                                                   <C>        <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income (loss).................................................................  $   3,261  $    2,863  $   (1,232)
  Adjustments to net income (loss):
    Gain on sales of operations.....................................................       (787)       (442)         --
    Depreciation and amortization...................................................      3,964       3,719       3,455
    Provision for uncollectibles....................................................        304         254         213
    Deferred income taxes and unamortized investment tax credits....................        243         120      (1,971)
    Pension income..................................................................       (164)        (14)        (53)
    Dividends from unconsolidated affiliates........................................        198         130         149
    Losses from unconsolidated affiliates, net......................................        242          76          86
    Extraordinary loss for discontinuance of SFAS No. 71............................         --          --       4,449
    Extraordinary loss on early extinguishment of debt..............................         15          --         127
    Work force reduction charge.....................................................         --          --       1,082
    Net change in:
      Accounts receivable and other current assets..................................       (742)       (645)       (770)
      Accounts payable and other current liabilities................................        580        (708)       (283)
      Deferred charges and other assets.............................................       (125)       (126)        (28)
      Other liabilities and deferred credits........................................         87         581         315
    Other reconciling items, net....................................................        (37)         55         (96)
                                                                                      ---------  ----------  ----------
    Net cash provided by operating activities.......................................      7,039       5,863       5,443
                                                                                      ---------  ----------  ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Capital expenditures..............................................................     (4,858)     (4,455)     (4,203)
  Purchases of licenses and other intangible assets.................................       (328)       (147)       (170)
  Proceeds from sales of operations.................................................      1,000         930          --
  Proceeds from disposition of short-term investments...............................        267         355         187
  Purchases of short-term investments...............................................       (233)       (336)       (207)
  Proceeds from investment dispositions and repayments of advances..................         59         102         426
  Investments in and advances to unconsolidated affiliates..........................     (1,083)       (620)       (521)
  Other investing activities, net...................................................        227         (28)        104
                                                                                      ---------  ----------  ----------
    Net cash used for investing activities..........................................     (4,949)     (4,199)     (4,384)
                                                                                      ---------  ----------  ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Net proceeds from (repayments of) short-term borrowings...........................        879        (497)        510
  Proceeds from long-term debt......................................................        645         392       2,488
  Repayments of long-term debt......................................................       (692)       (544)     (1,555)
  Dividends paid....................................................................     (1,428)     (1,430)     (1,385)
  Other financing activities, net...................................................       (102)       (118)        (12)
                                                                                      ---------  ----------  ----------
    Net cash provided by (used for) financing activities............................       (698)     (2,197)         46
                                                                                      ---------  ----------  ----------
Net Increase (Decrease) in Cash and Cash Equivalents................................      1,392        (533)      1,105
Cash and Cash Equivalents at Beginning of Period....................................      1,178       1,711         606
                                                                                      ---------  ----------  ----------
Cash and Cash Equivalents at End of Period..........................................  $   2,570  $    1,178  $    1,711
                                                                                      ---------  ----------  ----------
                                                                                      ---------  ----------  ----------
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       52
<PAGE>
                             BELLSOUTH CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
 
NOTE A -- ACCOUNTING POLICIES
 
    ORGANIZATION.  BellSouth Corporation (BellSouth) is a holding company
headquartered in Atlanta, Georgia whose operating telephone company subsidiary,
BellSouth Telecommunications, Inc. (BellSouth Telecommunications), serves, in
the aggregate, approximately two-thirds of the population and one-half of the
territory within Alabama, Florida, Georgia, Kentucky, Louisiana, Mississippi,
North Carolina, South Carolina and Tennessee. BellSouth Telecommunications
primarily provides (i) local exchange service and toll communications services
within geographic areas, called Local Access and Transport Areas (LATAs), and
(ii) network access services to enable interLATA communications using the long
distance facilities of Interexchange Carriers. Through subsidiaries, other
telecommunications services and products are provided primarily within the
nine-state BellSouth Telecommunications region. BellSouth Enterprises, Inc.
(BellSouth Enterprises), another wholly-owned subsidiary, owns businesses
providing wireless and international communications services and advertising and
publishing products.
 
    Substantially all of BellSouth's Total Operating Revenues are derived from
domestic operations. For the year ended December 31, 1997, approximately 67% of
BellSouth's Total Operating Revenues were from network and related services, 17%
were from wireless communications services and 9% were from directory
advertising and publishing services. The remainder of such Total Operating
Revenues was derived principally from other nonregulated services provided by
BellSouth Telecommunications.
 
    BASIS OF PRESENTATION.  The consolidated financial statements include the
accounts of BellSouth and subsidiaries in which it has a controlling financial
interest. Investments in certain partnerships, joint ventures and subsidiaries
are accounted for using the equity method. All significant intercompany
transactions and accounts have been eliminated. Certain amounts in the prior
period consolidated financial statements have been reclassified to conform to
the current year's presentation.
 
    BASIS OF ACCOUNTING.  BellSouth's consolidated financial statements have
been prepared in accordance with generally accepted accounting principles. Such
financial statements include estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and
liabilities and the amounts of revenues and expenses. Actual results could
differ from those estimates.
 
    Effective June 30, 1995, BellSouth discontinued application of Statement of
Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of
Certain Types of Regulation." See Note M for further discussion of the impacts
of discontinuance of SFAS No. 71.
 
    CASH AND CASH EQUIVALENTS.  BellSouth considers 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 temporary cash
investments on the Consolidated Balance Sheets. Interest income on cash
equivalents, temporary cash investments and other interest-bearing instruments
was $193, $163 and $108 for the years ended December 31, 1997, 1996 and 1995,
respectively.
 
    MATERIAL AND SUPPLIES.  New and reusable material is carried in inventory,
principally at average original cost, except that specific costs are used in the
case of large individual items. Nonreusable material is carried at estimated
salvage value.
 
    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
 
                                       53
<PAGE>
                             BELLSOUTH CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
 
NOTE A -- ACCOUNTING POLICIES (CONTINUED)
based on the remaining life method of depreciation and straight-line composite
rates determined on the basis of equal life groups of certain categories of
telephone plant acquired in a given year. When depreciable telephone plant is
disposed of, the original cost less net salvage value is charged to accumulated
depreciation. 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. 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, net.
 
    INTANGIBLE ASSETS.  Intangible Assets consist of the excess consideration
paid over the fair value of net tangible assets acquired in business
combinations, and include acquired licenses and customer lists. Intangible
Assets are being amortized using the straight-line and accelerated methods over
periods of benefit. Such periods do not exceed 40 years. The carrying value of
Intangible Assets is periodically reviewed on the basis of whether such
intangibles are fully recoverable from projected net cash flows of the related
business unit. Amortization of such intangibles was $58, $49 and $50 for the
years ended December 31, 1997, 1996 and 1995, respectively. At December 31, 1997
and 1996, accumulated amortization of intangibles was $321 and $220,
respectively.
 
    FOREIGN CURRENCY.  Assets and liabilities of foreign subsidiaries and equity
investees with a functional currency other than U.S. dollars are translated into
U.S. dollars at exchange rates in effect at the end of the reporting period.
Foreign entity revenues and expenses are translated into U.S. 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 Paid-In Capital.
 
    Exchange gains and losses on transactions of the company and its equity
investees denominated in a currency other than their functional currency are
generally included in results of operations as incurred unless the transactions
are hedged (see "Derivative Financial Instruments" below). The exchange gains
and losses for the years ended December 31, 1997, 1996 and 1995 were not
material.
 
    DERIVATIVE FINANCIAL INSTRUMENTS.  BellSouth generally enters into
derivative financial instruments only for hedging purposes. 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 hedged
item. If a derivative instrument either initially fails or later ceases to meet
the criteria for deferral or settlement accounting, any subsequent gains or
losses are recognized currently in income.
 
    Foreign exchange forward contracts are carried at fair value in the
consolidated balance sheets. Gains and losses on foreign exchange forward
contracts used as currency hedges of existing assets or liabilities are deferred
and offset the deferred losses and gains of the underlying asset or liability.
The net effect is ultimately recognized in income as the underlying transaction
matures. Gains and losses related to qualifying hedges of firm commitments also
are deferred and are recognized in income or as adjustments of carrying amounts
when the hedged transaction occurs.
 
    Currency swap contracts entered into as hedges of existing assets and
liabilities are carried at fair value in the Consolidated Balance Sheets. Gains
and losses on currency swaps are deferred and offset against the deferred
currency losses and gains of the underlying asset or liability. The net effect
is ultimately recognized in income as the underlying transaction matures.
 
                                       54
<PAGE>
                             BELLSOUTH CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
 
NOTE A -- ACCOUNTING POLICIES (CONTINUED)
    Interest rate swap agreements are treated as off-balance-sheet financial
instruments. Receipts or payments resulting from these instruments are
recognized as adjustments to Interest Expense as received or paid.
 
    REVENUE RECOGNITION.  Revenues are recognized when earned. Certain revenues
derived from local telephone and wireless services are billed monthly in advance
and are recognized the following month when services are provided. Directory
Advertising and Publishing revenues and related directory costs are recognized
upon publication of directories. Revenues derived from other telecommunications
services, principally network access, toll and cellular airtime usage, are
recognized monthly as services are provided. Allowances for uncollectible billed
services are adjusted monthly. The provision for such uncollectible accounts was
$304, $254 and $213 for the years ended December 31, 1997, 1996 and 1995,
respectively.
 
    Revenues from services provided to AT&T Corp., BellSouth's largest customer,
were approximately 8%, 9% and 10% of Total Operating Revenues for 1997, 1996 and
1995, respectively.
 
    MAINTENANCE AND REPAIRS.  The cost of maintenance and repairs of plant,
including the cost of replacing minor items not affecting substantial
betterments, is charged to Operating Expenses.
 
    INCOME TAXES.  The balance sheet reflects deferred tax balances associated
with the anticipated tax impact of future income or deductions implicit in the
balance sheet 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.
 
    For financial reporting purposes, BellSouth is amortizing deferred
investment tax credits earned prior to the 1986 repeal of the investment tax
credit and also some transitional credits earned after the repeal. The credits
are being amortized as a reduction to the provision for income taxes over the
estimated useful lives of the assets to which the credits relate.
 
    EARNINGS PER SHARE.  In 1997, BellSouth adopted SFAS No. 128, "Earnings per
Share," which requires the presentation of both basic and diluted earnings per
share. Basic earnings per share is computed based on the weighted-average number
of common shares outstanding during each year. Diluted earnings per share is
based on the sum of the weighted-average number of common shares outstanding
plus common stock equivalents arising out of employee stock options and benefit
plans. Earnings per share information for all prior periods have been restated
to conform to the requirements of the standard. Common stock equivalents
included in the calculation of diluted earnings per share were approximately 3
million, 2 million and 1 million, respectively, for the years ended December 31,
1997, 1996 and 1995. BellSouth's earnings, used for per share calculations, are
the same for both the basic and diluted methods.
 
                                       55
<PAGE>
                             BELLSOUTH CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
 
NOTE B -- INVESTMENTS AND ADVANCES
 
    Investments and Advances as of December 31 consist of the following:
 
<TABLE>
<CAPTION>
                                                                                       1997       1996
                                                                                     ---------  ---------
<S>                                                                                  <C>        <C>
Investments accounted for under the equity method..................................  $   2,007  $   1,676
Advances to and notes receivable from affiliates...................................        631        675
Other investments..................................................................         37         79
                                                                                     ---------  ---------
  Total Investments and Advances...................................................  $   2,675  $   2,430
                                                                                     ---------  ---------
                                                                                     ---------  ---------
</TABLE>
 
    BellSouth's equity method investments primarily include various partnerships
in domestic and international wireless properties and other international
communications consortia. Losses related to investments accounted for under the
equity method were $(242), $(76) and $(86) for the three years ended December
31, 1997, 1996 and 1995, respectively, and are included as a component of Other
Income, net.
 
    DOMESTIC CELLULAR.  BellSouth's domestic cellular investments consist
primarily of a 60.0% non-controlling financial interest in the Los Angeles
Cellular Telephone Company and a 43.8% interest in the Houston Cellular
Telephone Company. At December 31, 1997, BellSouth's aggregate investment in
these entities exceeded the underlying book value of the investees' net assets
by $851. The excess of consideration paid over net assets acquired, along with
other intangible assets, is being amortized using either straight-line or
accelerated methods over periods of benefit, which do not exceed 40 years.
 
    INTERNATIONAL COMMUNICATIONS.  BellSouth has equity investments in
international cellular operations in Latin America, Europe, the Asia-Pacific
region and other international markets with ownership ranging from 22.5% to
46.5%.
 
    In 1997, two joint ventures in which BellSouth is a partner were awarded
licenses to provide cellular services in Sao Paulo, Brazil and a six-state
region in northeastern Brazil. BellSouth's ownership interests in these entities
is 41.0% and 42.5%, respectively. The joint ventures bid approximately $2,400
and $500, respectively, for the licenses. BellSouth's proportionate shares of
the remaining unpaid portion of such license fees which are required to be paid
in 1998 are $574 and $124, respectively.
 
    OTHER INVESTMENTS.  BellSouth has noncontrolling financial interests ranging
from 70% to 80% in the CSL Ventures and 1155 Peachtree Associates real estate
partnerships. BellSouth had notes receivable from and advances to these
partnerships totaling $194 and $193 at December 31, 1997 and 1996, respectively.
The notes bear interest at rates ranging from 6.31% to 9.31% while the advances
bear interest at the federal funds rate plus .30%. Principal amounts outstanding
at December 31, 1997 are due and payable to BellSouth between January 15, 1998
and August 8, 2002. The instruments require periodic payments of interest and
are collateralized by various real estate holdings.
 
    BellSouth has a credit agreement with Prime South Diversified, Inc. (Prime)
to provide up to $250 in financing, of which $250 had been borrowed by Prime as
of December 31, 1997 and 1996, respectively. The loan is collateralized by the
stock of Prime, which indirectly, wholly owns Community Cable TV in Las Vegas,
and its wholly-owned subsidiary, Prime South Holdings, Inc. The loan bears
interest at a variable rate of 10% to 11% and matures in 2001.
 
    BellSouth and RAM Communications Group, Inc. (RAM) are partners in an entity
that owns and operates certain mobile data communications networks. Through its
investment, BellSouth holds a 49%
 
                                       56
<PAGE>
                             BELLSOUTH CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
 
NOTE B -- INVESTMENTS AND ADVANCES (CONTINUED)
interest in the United States mobile data operations and various interests in
foreign mobile data operations ranging from 6% to 72.5%.
 
    Minority interests of consolidated subsidiaries, included as a component of
Other Income, net, were $(34), $(27) and $(62) for the years ended December 31,
1997, 1996 and 1995, respectively.
 
    SALES OF OPERATIONS AND INVESTMENTS.  In August 1997, BellSouth sold its
24.5% interest in Optus Communications to Cable and Wireless, a U.K.
telecommunications company. Under the agreement, BellSouth received
approximately $735 in cash for its 490 million shares in Optus Communications.
In addition, BellSouth will receive either a 22.3% interest in Occidente y
Caribe Celular S.A. (Occel), a cellular communications company located in
Colombia, or the equivalent value of that interest in cash, at BellSouth's
option, or if Cable and Wireless is not able to transfer its interest in Occel
to BellSouth within two years from the sale of Optus Communications. The pretax
gain on the sale was $578 ($352 after tax).
 
    In July 1997, BellSouth sold to ITT Corporation its 20% ownership interest
in ITT World Directories Inc. for total proceeds of $265. The pretax gain on
such sale was $209 ($128 after tax).
 
    In November 1997, BellSouth Telecommunications sold to Science Applications
International Corporation its 14.3% interest in Bell Communications Research,
Inc. (Bellcore) for total proceeds of $65. The pretax gain on such sale,
included as a component of Other Income, net, was $38.
 
    In January 1996, BellSouth sold to Mobile Media Communications, Inc. its
paging subsidiary, Mobile Communications Corporation of America (MCCA), and its
two-way nationwide narrowband personal communications services license for a
total of approximately $930. The pretax gain on such sale was $442 ($344 after
tax). MCCA's operating revenues and expenses were $349 and $300, respectively,
for the year ended December 31, 1995.
 
NOTE C -- PROPERTY, PLANT AND EQUIPMENT
 
    Property, plant and equipment is summarized as follows at December 31:
 
<TABLE>
<CAPTION>
                                                                                     1997       1996
                                                                                   ---------  ---------
<S>                                                                                <C>        <C>
Outside plant....................................................................  $  21,642  $  20,866
Central office equipment.........................................................     18,716     17,442
Operating and other equipment....................................................      4,523      3,595
Building and building improvements...............................................      4,433      3,595
Furniture and fixtures...........................................................      2,987      3,017
Plant under construction.........................................................        815        716
Station equipment................................................................        522        638
Land.............................................................................        190        190
                                                                                   ---------  ---------
                                                                                      53,828     50,059
  Less: Accumulated depreciation.................................................     30,967     28,234
                                                                                   ---------  ---------
    Total Property, Plant and Equipment, net.....................................  $  22,861  $  21,825
                                                                                   ---------  ---------
                                                                                   ---------  ---------
</TABLE>
 
                                       57
<PAGE>
                             BELLSOUTH CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
 
NOTE D -- OTHER CURRENT LIABILITIES
 
    Other current liabilities are summarized as follows at December 31:
 
<TABLE>
<CAPTION>
                                                                                       1997       1996
                                                                                     ---------  ---------
<S>                                                                                  <C>        <C>
Taxes accrued......................................................................  $     835  $     517
Advanced billing and customer deposits.............................................        620        539
Dividends payable..................................................................        365        363
Salaries and wages payable.........................................................        335        335
Interest and rents accrued.........................................................        309        293
Compensated absences...............................................................        248        244
Other..............................................................................        540        580
                                                                                     ---------  ---------
  Total Other Current Liabilities..................................................  $   3,252  $   2,871
                                                                                     ---------  ---------
                                                                                     ---------  ---------
</TABLE>
 
NOTE E -- DEBT
 
    DEBT MATURING WITHIN ONE YEAR:  Debt maturing within one year is summarized
as follows at December 31:
 
<TABLE>
<CAPTION>
                                                                                   1997       1996
                                                                                 ---------  ---------
<S>                                                                              <C>        <C>
Short-term notes payable:
  Bank loans...................................................................  $     465  $      73
  Commercial paper.............................................................      2,438      1,885
Current maturities of long-term debt...........................................        803        166
                                                                                 ---------  ---------
  Total Debt Maturing Within One Year..........................................  $   3,706  $   2,124
                                                                                 ---------  ---------
                                                                                 ---------  ---------
 
Weighted-average interest rate at end of period:
  Bank loans...................................................................       7.05%      7.40%
  Commercial paper.............................................................       5.92%      5.50%
</TABLE>
 
    BellSouth has committed credit lines aggregating $1,498 with various banks.
Borrowings under the committed lines totaled $241 and $92, respectively, at
December 31, 1997 and 1996. BellSouth also maintains uncommitted lines of credit
aggregating $1,020. At December 31, 1997, there were no borrowings under the
uncommitted lines. There are no significant commitment fees or requirements for
compensating balances associated with any lines of credit.
 
                                       58
<PAGE>
                             BELLSOUTH CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
 
NOTE E -- DEBT (CONTINUED)
    LONG-TERM: Long-term debt, summarized below, consists primarily of
debentures and notes issued by BellSouth Telecommunications. Interest rates and
maturities in the table below are for the amounts outstanding at December 31,
1997.
 
<TABLE>
<CAPTION>
                                                   CONTRACTUAL
                                                  INTEREST RATES      MATURITIES      1997       1996
                                                ------------------  --------------  ---------  ---------
<S>                                             <C>                 <C>             <C>        <C>
BellSouth Telecommunications Debentures:            4.375% - 6.75%     1998 - 2045  $   1,820  $   1,905
                                                        6.65% - 7%            2095        644        635
                                                        7% - 8.25%     2010 - 2035      1,450      2,050
                                                                                    ---------  ---------
                                                                                        3,914      4,590
BellSouth Telecommunications Notes............          5.25% - 7%     1998 - 2008      2,175      2,175
BellSouth Capital Funding Corporation Notes...       4.89% - 9.25%     1998 - 2097      1,290        820
Guarantee of ESOP debt........................      9.125% - 9.19%            2003        534        594
Other.........................................                                            275        136
Unamortized discount, net of premium..........                                            (37)       (33)
                                                                                    ---------  ---------
                                                                                        8,151      8,282
Current maturities............................                                           (803)      (166)
                                                                                    ---------  ---------
  Total Long-Term Debt........................                                      $   7,348  $   8,116
                                                                                    ---------  ---------
                                                                                    ---------  ---------
</TABLE>
 
    Maturities of long-term debt outstanding (principal amounts) at December 31,
1997 are summarized below. Maturities after the year 2002 include $500 principal
amount of 6.65% debentures due in 2095. At December 31, 1997, such debentures
had an accreted book value of $144.
 
<TABLE>
<CAPTION>
                                1998       1999       2000       2001       2002     THEREAFTER     TOTAL
                              ---------  ---------  ---------  ---------  ---------  -----------  ---------
<S>                           <C>        <C>        <C>        <C>        <C>        <C>          <C>
Maturities..................  $     803  $     274  $     555  $     247  $     336   $   6,329   $   8,544
                              ---------  ---------  ---------  ---------  ---------  -----------  ---------
                              ---------  ---------  ---------  ---------  ---------  -----------  ---------
</TABLE>
 
    Notes issued by BellSouth Capital Funding Corporation (Capital Funding) are
used to finance the businesses of BellSouth Enterprises and the unregulated
subsidiaries of BellSouth Telecommunications. BellSouth has agreed to ensure the
timely payment of principal, premium, if any, and interest on Capital Funding's
debt securities.
 
    During 1997 and 1995, BellSouth Telecommunications retired certain long-term
debt issues totaling $600 and $1,885, respectively. As a result of the early
extinguishment of these issues, extraordinary losses of $9 ($.01 per share) and
$78 ($.08 per share), net of current tax benefits of $6 and $49, respectively,
were recognized in 1997 and 1995.
 
    At December 31, 1997, shelf registration statements were on file with the
Securities and Exchange Commission under which $1,427 of debt securities could
be offered.
 
                                       59
<PAGE>
                             BELLSOUTH CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
 
NOTE F -- OTHER LIABILITIES AND DEFERRED CREDITS
 
    Other liabilities and deferred credits are summarized as follows at December
31:
 
<TABLE>
<CAPTION>
                                                                                       1997       1996
                                                                                     ---------  ---------
<S>                                                                                  <C>        <C>
Postretirement benefits other than pensions (see Notes H and L)....................  $     787  $     744
Accrued pension cost (see Notes H and L)...........................................        559        581
Minority interests.................................................................        504        439
Compensation related...............................................................        495        437
Postemployment benefits (see Note L)...............................................        242        229
Other..............................................................................        182        155
                                                                                     ---------  ---------
  Total Other Liabilities and Deferred Credits.....................................  $   2,769  $   2,585
                                                                                     ---------  ---------
                                                                                     ---------  ---------
</TABLE>
 
NOTE G -- SHAREHOLDERS' EQUITY
 
    STOCK SPLIT.  In September 1995, BellSouth's Board of Directors approved a
two-for-one stock split effected in the form of a stock dividend, whereby each
shareholder of record as of October 11, 1995 received on November 8, 1995 one
additional share of Common Stock for each share owned as of the record date. As
a result of the split, 503,555,084 shares were issued and $503 was transferred
from Paid-In Capital to Common Stock. Also in September 1995, BellSouth's Board
of Directors approved an increase in the number of authorized shares of Common
Stock to 2,200,000,000 from 1,100,000,000.
 
    PREFERRED STOCK AUTHORIZED.  BellSouth's 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 A
for possible issuance under BellSouth's Shareholder Rights Plan. As of December
31, 1997, no preferred shares had been issued.
 
    SHAREHOLDER RIGHTS PLAN.  In 1989, BellSouth adopted a Shareholder Rights
Plan by declaring a dividend of one right for each share of Common Stock then
outstanding and to be issued thereafter. Each right entitles shareholders to buy
one one-hundredth of a share of Series A First Preferred Stock for $87.50 per
share. The rights may be exercised only if a person or group acquires 10% of the
Common Stock of BellSouth without the prior approval of the Board of Directors
or announces a tender or exchange offer that would result in ownership of 25% or
more of the Common Stock. If a person or group acquires 10% of BellSouth's stock
without prior Board approval, other shareholders are then allowed to purchase
BellSouth Common Stock 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 1999.
 
    SHARES HELD IN TRUST AND TREASURY.  During 1995, 1996, and 1997 BellSouth
issued shares to grantor trusts to provide partial funding for the benefits
payable under certain nonqualified benefit plans. The trusts are irrevocable and
assets contributed to the trusts can only be used to pay such benefits with
certain exceptions. At December 31, 1997 and 1996, the assets held in the trusts
consist of cash and 17,156,663 and 15,796,782 shares, respectively, of BellSouth
Common Stock. Of the total shares of BellSouth Common Stock held by the trusts,
15,946,663 were issued by BellSouth directly to the trusts, out of previously
unissued shares and 1,210,000 shares were acquired in open market transactions
through use of the trusts' funds.
 
    The total cost of the shares issued by BellSouth as of the date of funding
the trusts is included in Common Stock and Paid-In Capital; however, because
these shares are not considered outstanding for
 
                                       60
<PAGE>
                             BELLSOUTH CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
 
NOTE G -- SHAREHOLDERS' EQUITY (CONTINUED)
financial reporting purposes, the shares are included within Shares Held in
Trust and Treasury, a reduction to Shareholders' Equity. In addition, there is
no earnings per share impact of these shares. The cost of shares acquired in
open market purchases by the trust are also included in Shares Held in Trust and
Treasury.
 
    In addition to shares held by the grantor trusts, Shares Held in Trust and
Treasury includes treasury shares purchased in connection with BellSouth's
announced plans to repurchase shares of its Common Stock. In September 1997,
BellSouth announced a plan to repurchase up to $1 billion of its Common Stock
through 1998. In 1997 and 1996, BellSouth purchased 3,413,989 and 2,207,152
treasury shares for an aggregate of $157 and $85, respectively. A total of
4,124,624 and 276,168 shares, respectively were reissued under various employee
benefit plans and for other purposes.
 
    Shares Held in Trust and Treasury as of December 31, 1997 and 1996 are
comprised of the following:
 
<TABLE>
<CAPTION>
                                                                  1997                        1996
                                                       --------------------------  --------------------------
                                                          SHARES        AMOUNT        SHARES        AMOUNT
                                                       -------------  -----------  -------------  -----------
<S>                                                    <C>            <C>          <C>            <C>
Shares held by Grantor Trusts........................     17,156,663   $     519      15,796,782   $     458
Shares held in Treasury..............................      1,220,349          56       1,930,984          74
                                                       -------------       -----   -------------       -----
    Total Shares Held in Trust and Treasury..........     18,377,012   $     575      17,727,766   $     532
                                                       -------------       -----   -------------       -----
                                                       -------------       -----   -------------       -----
</TABLE>
 
    GUARANTEE OF ESOP DEBT.  Financial reporting practices require that the
amount equivalent to BellSouth's guarantee of the amortizing notes issued by its
ESOP trusts be presented as a reduction to Shareholders' Equity. The amount
recorded as a decrease in Shareholders' Equity represents the cost of
unallocated BellSouth Common Stock purchased with the proceeds of the amortizing
notes and the timing difference resulting from the shares allocated accounting
method. See Note H.
 
NOTE H -- EMPLOYEE BENEFIT PLANS
 
    PENSION PLANS.  Substantially all employees of BellSouth are covered by
noncontributory defined benefit pension plans. Principal plans are discussed
below; other plans are not significant individually or in the aggregate.
 
    The plan covering nonrepresented employees is a cash balance plan which
provides pension benefits determined by a combination of compensation-based
service and additional credits and individual account-based interest credits.
The cash balance plan is subject to a minimum benefit determined under a plan in
existence for nonrepresented employees prior to July 1, 1993 which provided
benefits based upon credited service and employees' average compensation for a
specified period. The minimum benefit under the prior plan is applicable to
employees retiring through 2005. The 1997 and 1996 projected benefit obligations
assume interest and additional credits greater than the minimum levels specified
in the written plan. Pension benefits provided for represented employees are
based on specified benefit amounts and years of service and include the
projected effect of future bargained-for improvements.
 
    BellSouth's funding policy is to make contributions to trust funds with the
objective of accumulating sufficient assets to pay all pension benefits for
which BellSouth is liable. Contributions are actuarially determined using the
aggregate cost method, subject to ERISA and Internal Revenue Service
limitations. Pension plan assets consist primarily of equity securities and
fixed income investments.
 
                                       61
<PAGE>
                             BELLSOUTH CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
 
NOTE H -- EMPLOYEE BENEFIT PLANS (CONTINUED)
    The components of net pension income are summarized below:
 
<TABLE>
<CAPTION>
                                                                          1997       1996       1995
                                                                        ---------  ---------  ---------
<S>                                                                     <C>        <C>        <C>
Service cost -- benefits earned during the year.......................  $     247  $     288  $     239
Interest cost on projected benefit obligation.........................        818        799        812
Actual return on plan assets..........................................     (2,576)    (1,957)    (3,041)
Net amortization and deferral.........................................      1,347        856      1,937
                                                                        ---------  ---------  ---------
  Net pension (income)................................................  $    (164) $     (14) $     (53)
                                                                        ---------  ---------  ---------
                                                                        ---------  ---------  ---------
</TABLE>
 
    Effective December 31, 1997, the nonrepresented cash balance plans were
recombined from six into one cash balance plan. Although only one nonrepresented
cash balance plan exists, separate demographic pools are maintained to generate
pension income based upon specific company information. The plan recombination
will have no material impact on BellSouth in 1998. The change in net pension
income is affected by several variables, including changes in actuarial
assumptions such as discount rate, return on plan assets and plan amendments.
The consolidated net pension income amounts reflected above are exclusive of
curtailment effects reflected in the work force reduction and restructuring
activities (see Note L) and do not reflect curtailment gains in the amount of
$36 and $43 in 1997 and 1996, respectively.
 
    The following table sets forth the funded status of the plans at December
31:
 
<TABLE>
<CAPTION>
                                                                                     1997       1996
                                                                                   ---------  ---------
<S>                                                                                <C>        <C>
Actuarial present value of:
  Vested benefit obligation......................................................  $  10,222  $   9,321
                                                                                   ---------  ---------
                                                                                   ---------  ---------
  Accumulated benefit obligation.................................................  $  10,682  $   9,824
                                                                                   ---------  ---------
                                                                                   ---------  ---------
  Projected benefit obligation...................................................  $  12,335  $  11,303
Plan assets at fair value........................................................     17,313     15,614
                                                                                   ---------  ---------
Plan assets in excess of projected benefit obligation............................      4,978      4,311
Unrecognized net gain due to past experience different from assumptions made.....     (4,743)    (4,286)
Unrecognized prior service cost..................................................       (335)      (304)
Unrecognized net asset at transition.............................................       (109)      (130)
                                                                                   ---------  ---------
  Accrued pension cost...........................................................  $    (209) $    (409)
                                                                                   ---------  ---------
                                                                                   ---------  ---------
</TABLE>
 
    Accrued pension costs in the previous table consist of $559 and $581 at
December 31, 1997 and 1996, respectively, classified as Other Liabilities and
Deferred Credits and $350 and $172, respectively, classified as Deferred Charges
and Other Assets.
 
    The significant actuarial assumptions at December 31, 1997 and 1996 were as
follows:
 
<TABLE>
<CAPTION>
                                                                                          1997         1996
                                                                                       -----------  -----------
<S>                                                                                    <C>          <C>
Weighted-average discount rate.......................................................        7.0%         7.5%
Weighted-average rate of compensation increase.......................................        5.9%         5.8%
Expected long-term rate of return on plan assets.....................................        8.25 %       8.25 %
</TABLE>
 
    POSTRETIREMENT BENEFITS OTHER THAN PENSIONS.  BellSouth sponsors
postretirement health and life insurance welfare plans for most of its
nonrepresented and represented employees. BellSouth's transition benefit
obligation is being amortized over 15 years, the average remaining service
period of
 
                                       62
<PAGE>
                             BELLSOUTH CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
 
NOTE H -- EMPLOYEE BENEFIT PLANS (CONTINUED)
active plan participants at adoption. The accounting for the health care plan
does not anticipate future adjustments to the cost-sharing arrangements provided
for in the written plan for employees who retire after December 31, 1991.
 
    BellSouth's funding policy is to make contributions to trust funds with the
objective of accumulating sufficient assets to pay all health and life benefits
for which BellSouth is liable. Contributions are actuarially determined using
the aggregate cost method, subject to ERISA and Internal Revenue Service
limitations. Assets in the health and life plans consist primarily of equity
securities and fixed income investments.
 
    Net postretirement benefit cost (income) for the years ended December 31,
1997, 1996 and 1995, respectively, is composed of the following:
<TABLE>
<CAPTION>
                                                                              1997                  1996            1995
                                                                      --------------------  --------------------  ---------
                                                                       HEALTH      LIFE      HEALTH      LIFE      HEALTH
                                                                      ---------  ---------  ---------  ---------  ---------
<S>                                                                   <C>        <C>        <C>        <C>        <C>
Service cost -- benefits earned during the year.....................  $      27  $      10  $      35  $      12  $      27
Interest on accumulated postretirement benefit obligation...........        218         45        225         43        223
Actual return on plan assets........................................       (242)      (168)      (163)      (103)      (185)
Amortization of transition liability (asset)........................         96        (13)        96        (13)       110
Other amortization and deferral, net................................        179        114        115         58        115
                                                                      ---------  ---------  ---------  ---------  ---------
Net postretirement benefit cost (income)............................  $     278  $     (12) $     308  $      (3) $     290
                                                                      ---------  ---------  ---------  ---------  ---------
                                                                      ---------  ---------  ---------  ---------  ---------
 
<CAPTION>
 
                                                                        LIFE
                                                                      ---------
<S>                                                                   <C>
Service cost -- benefits earned during the year.....................  $      10
Interest on accumulated postretirement benefit obligation...........         38
Actual return on plan assets........................................       (125)
Amortization of transition liability (asset)........................        (13)
Other amortization and deferral, net................................         77
                                                                      ---------
Net postretirement benefit cost (income)............................  $     (13)
                                                                      ---------
                                                                      ---------
</TABLE>
 
                                       63
<PAGE>
                             BELLSOUTH CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
 
NOTE H -- EMPLOYEE BENEFIT PLANS (CONTINUED)
 
    The consolidated net postretirement benefit cost (income) amounts reflected
above are exclusive of curtailment effects reflected in the work force reduction
and restructuring activities discussed in Note L.
 
    The following table sets forth the plans' funded status at December 31, 1997
and 1996, respectively:
 
<TABLE>
<CAPTION>
                                                                     1997                  1996
                                                             --------------------  --------------------
                                                              HEALTH      LIFE      HEALTH      LIFE
                                                             ---------  ---------  ---------  ---------
<S>                                                          <C>        <C>        <C>        <C>
Accumulated postretirement benefit obligation:
  Retirees.................................................  $   2,125  $     372  $   1,994  $     318
  Fully eligible active plan participants..................        524        166        437        135
  Other active plan participants...........................        525        167        541        164
                                                             ---------  ---------  ---------  ---------
                                                                 3,174        705      2,972        617
Plan assets at fair value..................................      1,666        931      1,379        778
                                                             ---------  ---------  ---------  ---------
Accumulated postretirement benefit obligation less than (in
 excess of) plan assets....................................     (1,508)       226     (1,593)       161
Unrecognized prior service cost............................         39         47         71         17
Unrecognized net (gains) losses............................       (279)       (67)      (279)         7
Unrecognized transition obligation (asset).................        961       (138)     1,057       (144)
                                                             ---------  ---------  ---------  ---------
(Accrued) prepaid postretirement benefit cost..............  $    (787) $      68  $    (744) $      41
                                                             ---------  ---------  ---------  ---------
                                                             ---------  ---------  ---------  ---------
</TABLE>
 
    The significant actuarial assumptions at December 31, 1997 and 1996 were as
follows:
 
<TABLE>
<CAPTION>
                                                                                          1997         1996
                                                                                       -----------  -----------
<S>                                                                                    <C>          <C>
Weighted-average discount rate.......................................................        7.0%         7.5%
Weighted-average rate of compensation increase.......................................        5.9%         5.8%
Health care cost trend rate (1)......................................................        9.0%         8.5%
Expected long-term rate of return on plan assets (2).................................        8.25 %       8.25 %
</TABLE>
 
------------------------
(1) Trend rate used to value the accumulated postretirement obligation in 1997
    and 1996 is assumed to decrease to 5% by 2003.
 
(2) Rate net of an estimated 30% tax reduction for the nonrepresented employees'
    trust for 1997 and 1996.
 
    The health care cost trend rate assumption affects the amounts reported. A
one-percentage-point increase in the assumed health care cost trend rates for
each future year would increase the accumulated postretirement benefit
obligation by $258 at December 31, 1997 and the estimated aggregate service and
interest cost components of the 1997 postretirement benefit cost by $18.
 
    DEFINED CONTRIBUTION PLANS.  BellSouth maintains several contributory
savings plans which cover substantially all employees. The BellSouth Retirement
Savings Plan and the BellSouth Savings and Security Plan (collectively, the
Savings Plans) are tax-qualified defined contribution plans. Assets of the plans
are held by two trusts (the Trusts) which, in turn, are part of the BellSouth
Master Savings Trust.
 
    In 1990, a leveraged Employee Stock Ownership Plan (ESOP) was incorporated
into the Savings Plans. The Trusts borrowed $850 by issuing amortizing notes
which are guaranteed by BellSouth (see Note E). The Trusts used the loan
proceeds to purchase shares of BellSouth common stock in the open market. These
shares are held in suspense accounts in the Trusts; a scheduled number of shares
is released for allocation to participants as each semiannual loan payment is
made. The Trusts service the
 
                                       64
<PAGE>
                             BELLSOUTH CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
 
NOTE H -- EMPLOYEE BENEFIT PLANS (CONTINUED)
debt with contributions from BellSouth and with dividends paid on the shares
held by the Trusts. None of the shares held by the Trusts is subject to
repurchase.
 
    A portion of employees' eligible contributions to the Savings Plans is
matched by BellSouth at rates determined annually by the Board of Directors.
BellSouth's matching obligation is fulfilled with shares released from the
suspense accounts semi-annually for allocation to participants. The number of
shares allocated to each participant's account is based on the market price of
the shares at the time of allocation. If shares released for allocation do not
fulfill BellSouth's matching obligation, BellSouth makes further contributions
to the Trusts to fund the purchase of additional shares in the open market to
fulfill the remaining obligation.
 
    BellSouth recognizes expense using the shares allocated accounting method,
which combines the cost of the shares allocated for the period plus interest
incurred, reduced by the dividends used to service the ESOP debt. Dividends on
all ESOP shares are recorded as a reduction to Retained Earnings, and all ESOP
shares are included in the computation of earnings per share.
 
<TABLE>
<CAPTION>
                                                             1997            1996            1995
                                                        --------------  --------------  --------------
<S>                                                     <C>             <C>             <C>
Compensation cost.....................................             $76             $58             $75
Interest expense......................................             $31             $33             $37
Actual interest on ESOP Notes.........................             $50             $56             $62
Cash contributions, excluding dividends paid to the
 Trusts...............................................             $90             $91            $101
Dividends paid to the Trusts, used for debt service...             $43             $44             $44
Shares allocated to participants......................      16,710,607      14,305,917      11,942,278
Shares committed to be released.......................              --              --              --
Shares unallocated....................................      15,068,117      17,472,807      19,836,446
</TABLE>
 
NOTE I -- STOCK COMPENSATION PLANS
 
    At December 31, 1997, BellSouth has stock options outstanding under several
stock-based compensation plans. The BellSouth Corporation Stock Plan (the Stock
Plan) provides for grants to key employees of stock options and various other
stock-based awards. One share of BellSouth Common Stock is the underlying
security for any award. The aggregate number of shares of BellSouth Common Stock
which may be granted under the Stock Plan in any calendar year cannot exceed one
percent of the shares outstanding at the time of grant. Prior to adoption of the
Stock Plan, stock options were granted under the BellSouth Corporation Stock
Option Plan. Stock options granted under both plans entitle an optionee to
purchase shares of BellSouth Common Stock within prescribed periods at a price
either equal to, or in excess of, the fair market value on the date of grant.
Options granted under these plans generally become exercisable at the end of
three to five years and have a term of 10 years.
 
    BellSouth applies APB Opinion 25 and related Interpretations in accounting
for its stock plans. Accordingly, no compensation cost has been recognized for
grants of stock options. Had compensation
 
                                       65
<PAGE>
                             BELLSOUTH CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
 
NOTE I -- STOCK COMPENSATION PLANS (CONTINUED)
cost for BellSouth's stock-based compensation plans been determined in
accordance with the provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation," BellSouth's net income (loss) and earnings (loss) per share would
have been changed to the pro forma amounts indicated below:
 
<TABLE>
<CAPTION>
                                                                           1997       1996       1995
                                                                         ---------  ---------  ---------
<S>                                                                      <C>        <C>        <C>
Net income (loss) -- as reported.......................................  $   3,261  $   2,863  $  (1,232)
Net income (loss) -- pro forma.........................................  $   3,242  $   2,852  $  (1,235)
 
Basic earnings (loss) per share -- as reported.........................  $    3.29  $    2.88  $   (1.24)
Basic earnings (loss) per share -- pro forma...........................  $    3.27  $    2.87  $   (1.24)
Diluted earnings (loss) per share -- as reported.......................  $    3.28  $    2.87  $   (1.24)
Diluted earnings (loss) per share -- pro forma.........................  $    3.26  $    2.86  $   (1.24)
</TABLE>
 
    The pro forma amounts reflected above are not representative of the effects
on reported net income in future years because, in general, the options granted
in 1997, 1996 and 1995 do not vest for several years and additional awards are
made each year.
 
    The following table summarizes the activity for stock options outstanding:
 
<TABLE>
<CAPTION>
                                                             1997            1996            1995
                                                        --------------  --------------  --------------
<S>                                                     <C>             <C>             <C>
Options outstanding at January 1......................      18,571,392      14,287,748      10,345,924
Options granted.......................................       6,253,883       5,376,513       5,269,040
Options exercised.....................................      (2,000,745)       (692,545)     (1,226,040)
Options forfeited.....................................        (263,124)       (400,324)       (101,176)
Options outstanding at December 31....................      22,561,406      18,571,392      14,287,748
 
Weighted-average option prices per common share:
  Outstanding at January 1............................          $34.11          $30.56          $28.65
  Granted at fair market value........................          $44.46          $42.50          $30.85
  Granted at above fair market value..................             N/A             N/A          $41.34
  Exercised...........................................          $29.38          $26.24          $24.46
  Forfeited...........................................          $40.03          $33.71          $30.10
  Outstanding at December 31..........................          $37.33          $34.11          $30.56
 
Weighted-average fair value of options granted at fair
 market value during the year.........................           $8.75           $7.66           $5.60
Weighted-average fair value of options granted at
 above fair market value during the year..............             N/A             N/A           $2.48
Options exercisable at December 31....................       6,032,516       6,523,291       5,242,258
Shares available for grant at December 31.............       9,917,798       9,910,692      10,074,447
</TABLE>
 
    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:
 
<TABLE>
<CAPTION>
                                                                          1997         1996         1995
                                                                       -----------  -----------  -----------
<S>                                                                    <C>          <C>          <C>
Expected life (years)................................................          5            7            7
Dividend yield.......................................................       3.24%        3.39%        4.55%
Expected volatility..................................................       19.0%        15.4%        15.8%
Risk-free interest rate..............................................       6.22%        5.56%        7.21%
</TABLE>
 
                                       66
<PAGE>
                             BELLSOUTH CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
 
NOTE I -- STOCK COMPENSATION PLANS (CONTINUED)
    The following table summarizes information about stock options outstanding
at December 31, 1997:
 
<TABLE>
<CAPTION>
                                    OPTIONS OUTSTANDING                        OPTIONS EXERCISABLE
                    ----------------------------------------------------  -----------------------------
                       NUMBER           WEIGHTED-           WEIGHTED-        NUMBER        WEIGHTED-
     RANGE OF        OUTSTANDING    AVERAGE REMAINING        AVERAGE      EXERCISABLE       AVERAGE
 EXERCISE PRICES     AT 12/31/97     CONTRACTUAL LIFE    EXERCISE PRICE   AT 12/31/97   EXERCISE PRICE
------------------  -------------  --------------------  ---------------  ------------  ---------------
 
<S>                 <C>            <C>                   <C>              <C>           <C>
     $19.81-$29.53      6,347,145       5.38 years          $   27.91       3,151,789      $   26.97
     $29.56-$42.21      4,866,215       6.66 years          $   34.95       1,355,306      $   35.52
     $42.56-$44.19      5,403,479       8.16 years          $   42.64       1,316,821      $   42.81
     $44.38-$55.34      5,944,567       9.12 years          $   44.51         208,600      $   44.38
 
     $19.81-$55.34     22,561,406       7.31 years          $   37.33       6,032,516      $   32.95
</TABLE>
 
NOTE J -- INCOME TAXES
 
    In accordance with SFAS No. 109, "Accounting for Income Taxes," the balance
sheet reflects the anticipated tax impact of future taxable income or deductions
implicit in the balance sheet in the form of temporary differences. These
temporary differences reflect the difference between the basis in assets and
liabilities as measured in the financial statements and as measured by tax laws
using enacted tax rates.
 
    The provision for income taxes is summarized as follows:
 
<TABLE>
<CAPTION>
                                                                             1997       1996       1995
                                                                           ---------  ---------  ---------
<S>                                                                        <C>        <C>        <C>
Federal:
  Current................................................................  $   1,619  $   1,390  $   1,061
  Deferred, net..........................................................        272        170       (148)
  Investment tax credits, net............................................        (65)       (77)       (69)
                                                                           ---------  ---------  ---------
                                                                               1,826      1,483        844
                                                                           ---------  ---------  ---------
State:
  Current................................................................        289        235        203
  Deferred, net..........................................................         36         27        (23)
                                                                           ---------  ---------  ---------
                                                                                 325        262        180
                                                                           ---------  ---------  ---------
    Total provision for income taxes.....................................  $   2,151  $   1,745  $   1,024
                                                                           ---------  ---------  ---------
                                                                           ---------  ---------  ---------
</TABLE>
 
    Extraordinary losses in 1997 and 1995 are presented in the Consolidated
Statements of Income, net of tax benefits totaling $6 and $1,780, respectively.
All of the 1997 benefit was current. Of the 1995 benefit, $49 was current and
$1,731 was deferred.
 
                                       67
<PAGE>
                             BELLSOUTH CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
 
NOTE J -- INCOME TAXES (CONTINUED)
    Temporary differences which gave rise to deferred tax assets and
(liabilities) at December 31 were as follows:
 
<TABLE>
<CAPTION>
                                                                                      1997       1996
                                                                                    ---------  ---------
<S>                                                                                 <C>        <C>
  Compensation related............................................................  $     748  $     707
  Allowance for uncollectibles....................................................         94         87
  Work force reduction charge.....................................................         66        210
  Regulatory sharing accruals.....................................................         58         32
  Other...........................................................................        186        244
                                                                                    ---------  ---------
                                                                                        1,152      1,280
  Valuation allowance.............................................................        (72)       (64)
                                                                                    ---------  ---------
  Deferred Tax Assets.............................................................      1,080      1,216
                                                                                    ---------  ---------
  Depreciation....................................................................     (2,206)    (2,110)
  Equity investments..............................................................       (266)      (354)
  Issue basis accounting..........................................................       (214)      (197)
  Licenses........................................................................       (199)      (187)
  Other...........................................................................       (259)      (133)
                                                                                    ---------  ---------
    Deferred Tax Liabilities......................................................     (3,144)    (2,981)
                                                                                    ---------  ---------
      Net Deferred Tax Liability..................................................  $  (2,064) $  (1,765)
                                                                                    ---------  ---------
                                                                                    ---------  ---------
</TABLE>
 
    The valuation allowance, which increased by $8 and $9 in 1997 and 1996,
respectively, primarily relates to state net operating losses that may not be
utilized during the carryforward period. Of the Net Deferred Tax Asset
(Liability) at December 31, 1997 and 1996, $(41) and $134, respectively, were
current and $(2,023) and $(1,899), respectively, were noncurrent.
 
    A reconciliation of the Federal statutory income tax rate to BellSouth's
effective tax rate follows:
 
<TABLE>
<CAPTION>
                                                                               1997       1996       1995
                                                                             ---------  ---------  ---------
<S>                                                                          <C>        <C>        <C>
Federal statutory tax rate.................................................       35.0%      35.0%      35.0%
State income taxes, net of Federal income tax benefit......................        3.9        3.7        4.5
Amortization of investment tax credits.....................................       (1.2)      (1.7)      (2.7)
Equity of unconsolidated subsidiaries......................................        1.6        1.6        2.0
Benefit of capital loss carryforward.......................................         --         --       (0.4)
Basis difference in disposed subsidiary....................................         --       (1.5)        --
Miscellaneous items, net...................................................        0.4        0.8        1.2
                                                                             ---------  ---------  ---------
  Effective tax rate.......................................................       39.7%      37.9%      39.6%
                                                                             ---------  ---------  ---------
                                                                             ---------  ---------  ---------
</TABLE>
 
NOTE K -- SUPPLEMENTAL CASH FLOW INFORMATION
 
<TABLE>
<CAPTION>
                                                                             1997       1996       1995
                                                                           ---------  ---------  ---------
<S>                                                                        <C>        <C>        <C>
CASH PAID FOR:
Income Taxes.............................................................  $   1,839  $   1,427  $   1,231
                                                                           ---------  ---------  ---------
                                                                           ---------  ---------  ---------
Interest.................................................................  $     759  $     740  $     760
                                                                           ---------  ---------  ---------
                                                                           ---------  ---------  ---------
</TABLE>
 
                                       68
<PAGE>
                             BELLSOUTH CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
 
NOTE K -- SUPPLEMENTAL CASH FLOW INFORMATION (CONTINUED)
    In 1997, BellSouth began consolidating certain international operations
which had previously been accounted for under the equity method. Such
consolidation resulted in an increase in assets of $375 (net of a $225 decrease
in equity investments) and a corresponding increase in liabilities.
 
NOTE L -- WORK FORCE REDUCTION CHARGE
 
    In the fourth quarter of 1995, BellSouth recognized a pretax charge of
$1,082 related to work force reductions. The primary component of the charge,
$942 for planned work force reductions in the core wireline business by the end
of 1997, consisted of $561 under the provisions of SFAS No. 112, "Employers'
Accounting for Postemployment Benefits," related to those employees who would
receive severance benefits under preexisting separation plans, and $381 for
curtailment losses under the provisions of SFAS No. 88, "Employers' Accounting
for Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits" and SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." Substantially all of the
curtailment losses relate to postretirement benefits other than pensions. The
remaining components of the charge were $85 for expected severance benefit
payments after 1997, also under SFAS No. 112, and $55 for additional net
curtailment losses related to employee reductions under a restructuring plan
initiated in 1993 and completed in 1995.
 
    The plan was substantially completed in 1997 and resulted in the reduction
of the wireline telephone operations work force by approximately 11,600
employees over the term of the plan.
 
NOTE M -- DISCONTINUANCE OF SFAS NO. 71
 
    In 1995, as a result of its continuing regulatory and marketplace
assessments, BellSouth Telecommunications concluded that it was required to
discontinue application of SFAS No. 71, "Accounting for the Effects of Certain
Types of Regulation," for financial reporting purposes. Accordingly, BellSouth
Telecommunications recorded a noncash extraordinary charge of $2,718 (net of a
deferred tax benefit of $1,731). The components of the charge are as follows:
 
<TABLE>
<CAPTION>
                                                                                     PRETAX    AFTER TAX
                                                                                    ---------  ---------
<S>                                                                                 <C>        <C>
Reduction in recorded value of long-lived telephone plant.........................  $  (4,896) $  (3,002)
Full adoption of issue basis accounting...........................................        317        194
Elimination of regulatory assets and liabilities..................................        111         71
Partial adjustment to unamortized investment tax credits..........................         19         19
                                                                                    ---------  ---------
  Total...........................................................................  $  (4,449) $  (2,718)
                                                                                    ---------  ---------
                                                                                    ---------  ---------
</TABLE>
 
                                       69
<PAGE>
                             BELLSOUTH CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
 
NOTE M -- DISCONTINUANCE OF SFAS NO. 71 (CONTINUED)
    The reduction of telephone plant, $4,896 (pretax), was recorded as an
increase to the related accumulated depreciation accounts, the categories and
amounts of which are as follows:
 
<TABLE>
<S>                                                                          <C>
Central Office Equipment:
  Digital switching........................................................  $   1,305
  Circuit-other............................................................      1,291
                                                                             ---------
    Total Central Office Equipment.........................................      2,596
                                                                             ---------
Outside Plant:
  Buried metallic cable....................................................      1,345
  Aerial metallic cable....................................................        630
  Underground metallic cable...............................................        325
                                                                             ---------
    Total Outside Plant....................................................      2,300
                                                                             ---------
  Total....................................................................  $   4,896
                                                                             ---------
                                                                             ---------
</TABLE>
 
    Such reduction of plant was determined by an impairment analysis that
identified estimated amounts not recoverable from future discounted cash flows.
The analysis considered projected effects of future competition as well as
changes in technology and capital requirements. The plant-related charge, all of
which related to assets within the regulatory framework, was further supported
by depreciation studies that identified inadequate levels of accumulated
depreciation for certain asset categories. These studies give recognition to the
historical underdepreciation of assets resulting primarily from
regulator-prescribed asset lives that exceeded the estimated economic asset
lives.
 
    For financial reporting purposes, the average depreciable lives of affected
categories of long-lived telephone plant have been reduced to more closely
reflect the economic and technological lives. Differences between
regulator-approved asset lives and the current estimated economic asset lives
are as follows:
 
<TABLE>
<CAPTION>
                                                                       COMPOSITE OF             ESTIMATED
                                                                    REGULATOR-APPROVED       ECONOMIC ASSET
CATEGORY                                                                ASSET LIVES               LIVES
----------------------------------------------------------------  -----------------------  -------------------
                                                                                   (IN YEARS)
<S>                                                               <C>                      <C>
Digital switching...............................................              17.0                   10.0
Circuit-other...................................................              10.5                    9.1
Buried metallic cable...........................................              20.0                   14.0
Aerial metallic cable...........................................              20.0                   14.0
Underground metallic cable......................................              25.0                   12.0
</TABLE>
 
    The remaining components of the extraordinary charge, which partially offset
the plant-related portion of the overall charge, include $194 (after tax)
related to the adoption by BellSouth Telecommunications of issue basis
accounting for its directory publishing revenues. BellSouth's unregulated
subsidiaries already recognized directory publishing revenues and production
expenses using issue basis accounting.
 
    The overall extraordinary charge was also reduced by $71 (after tax) to
reflect the removal of regulatory assets and liabilities that were recorded as a
result of previous actions by regulators. Virtually all of these regulatory
assets and liabilities arose in connection with the incorporation of new
accounting standards into the ratemaking process and were transitory in nature.
In addition, the overall extraordinary charge was reduced by $19 (after tax) for
the partial acceleration of unamortized investment tax credits associated with
the reductions in asset carrying values and in asset lives.
 
                                       70
<PAGE>
                             BELLSOUTH CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
 
NOTE N -- FINANCIAL INSTRUMENTS
 
    The recorded amounts of cash and cash equivalents, temporary cash
investments, bank loans and commercial paper approximate fair value due to the
short-term nature of these instruments. The fair value for BellSouth
Telecommunications Debentures and Notes are estimated based on the closing
market prices for each issue at December 31, 1997 and 1996. Fair value estimates
for the Guarantee of ESOP Debt, BellSouth Capital Funding Corporation Notes,
foreign exchange contracts, foreign currency swaps and interest rate swaps are
based on quotes from dealers. Since judgment is required to develop the
estimates, the estimated amounts presented herein may not be indicative of the
amounts that BellSouth could realize in a current market exchange.
 
    Following is a summary of financial instruments where the fair values differ
from the recorded amounts as of December 31, 1997 and 1996:
 
<TABLE>
<CAPTION>
                                                                          1997                      1996
                                                                ------------------------  ------------------------
                                                                              ESTIMATED                 ESTIMATED
                                                                 RECORDED       FAIR       RECORDED       FAIR
                                                                  AMOUNT        VALUE       AMOUNT        VALUE
                                                                -----------  -----------  -----------  -----------
<S>                                                             <C>          <C>          <C>          <C>
BALANCE SHEET FINANCIAL INSTRUMENTS
  Long-Term Debt:
    BellSouth Telecommunications Debentures...................   $   3,914    $   3,949    $   4,590    $   4,422
    BellSouth Telecommunications Notes........................       2,175        2,193        2,175        2,141
    BellSouth Capital Funding Corporation Notes...............       1,290        1,324          820          856
    Guarantee of ESOP Debt....................................         534          584          594          675
OFF BALANCE SHEET FINANCIAL INSTRUMENTS
  Interest Rate Swaps.........................................          --           (6)          --           (5)
  Foreign Exchange Forward Contracts..........................          --           (3)          --           --
</TABLE>
 
    DERIVATIVE FINANCIAL INSTRUMENTS.  BellSouth is, from time to time, party to
currency swap agreements, interest rate swap agreements and foreign exchange
forward contracts in its normal course of business for purposes other than
trading. These financial instruments are used to mitigate foreign currency and
interest rate risks, although to some extent they expose the company to market
risks and credit risks. The credit risks associated with these instruments are
controlled through the evaluation and continual monitoring of the
creditworthiness of the counterparties. In the event that a counterparty fails
to meet the terms of a contract or agreement, BellSouth's exposure is limited to
the then current value of the currency rate or interest rate differential, not
the full notional amount. Such contracts and agreements have been executed with
creditworthy financial institutions. As such, BellSouth considers the risk of
nonperformance to be remote.
 
    CURRENCY SWAP.  BellSouth entered into a currency swap in 1994 to hedge
European Currency Units (ECU) 125,000,000 debt issued by Capital Funding. The
currency swap and related debt mature in February 1999. At December 31, 1997,
the net currency swap receivable, which equals the fair value of the swap, was
$0 and the related net interest receivable was $7, both of which are included in
accounts receivable in the consolidated balance sheet at December 31, 1997.
 
    INTEREST RATE SWAPS.  BellSouth enters into interest rate swap agreements to
exchange fixed and variable rate interest payment obligations without the
exchange of the underlying principal amounts. As of December 31, 1997 and 1996,
BellSouth was a party to various interest rate swaps with an aggregate notional
amount of $120. Under these swaps, BellSouth paid fixed rates averaging 7.13% at
December 31, 1997 and 1996 and received variable rates averaging 5.69% and 5.52%
at December 31, 1997 and 1996, respectively. These swaps mature at dates ranging
from 2001 to 2002.
 
                                       71
<PAGE>
                             BELLSOUTH CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
 
NOTE N -- FINANCIAL INSTRUMENTS (CONTINUED)
    OTHER.  BellSouth has also issued letters of credit and financial guarantees
which approximate $356 at December 31, 1997. Of this total, $275 represents the
U.S. Dollar equivalent of the outstanding debt of E-Plus (a partially-owned
wireless communications company located in Germany) guaranteed by BellSouth.
BellSouth has agreed to guarantee E-Plus borrowings up to a U.S. Dollar
equivalent of $397 (705 million German Marks) at December 31, 1997.
 
    Since there is no market for the instruments, it is not practicable to
estimate their fair value.
 
    CONCENTRATIONS OF CREDIT RISK.  Financial instruments which potentially
subject BellSouth to credit risk consist principally of trade accounts
receivable. Concentrations of credit risk with respect to these receivables,
other than those from Interexchange Carriers, are limited due to the composition
of the customer base, which includes a large number of individuals and
businesses. At December 31, 1997 and 1996, approximately $485 and $492,
respectively, of trade accounts receivable were from Interexchange Carriers.
 
NOTE O -- COMMITMENTS AND CONTINGENCIES
 
    LEASES.  BellSouth has entered into operating leases for facilities and
equipment used in operations. Rental expense under operating leases was $273,
$269 and $252 for 1997, 1996 and 1995, respectively. Capital leases currently in
effect are not significant.
 
    The following table summarizes the approximate future minimum rentals under
noncancelable operating leases in effect at December 31, 1997:
 
<TABLE>
<CAPTION>
                                          1998  1999  2000  2001  2002   THEREAFTER   TOTAL
                                          ----  ----  ----  ----  ----   ----------   ------
<S>                                       <C>   <C>   <C>   <C>   <C>    <C>          <C>
Minimum rentals.........................  $148  $142  $122  $103  $88       $431      $1,034
                                          ----  ----  ----  ----  ----     -----      ------
                                          ----  ----  ----  ----  ----     -----      ------
</TABLE>
 
    OUTSIDE PLANT.  BellSouth currently self-insures all of its outside plant
against casualty losses. The net book value of outside plant was $7,408 and
$7,621 at December 31, 1997 and 1996, respectively. Such outside plant, located
in the nine southeastern states served by BellSouth Telecommunications, is
susceptible to damage from severe weather conditions and other perils, including
hurricanes.
 
    OUTSOURCING CONTRACTS.  Beginning in 1997, BellSouth Telecommunications
contracted with various entities to outsource the performance of certain
engineering functions, as well as its information technology operations and
application development. These contracts expire at various dates through 2008,
are generally renewable, and are cancelable upon the payment of additional fees
or for nonperformance. Future minimum payments for these contracts range from
$465 to $625 annually over the next ten years and replace costs previously
incurred for BellSouth Telecommunications' employees, facilities, equipment and
other costs.
 
    LEGAL CLAIMS.  BellSouth and its subsidiaries 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. BellSouth Telecommunications is also subject to
claims attributable to pre-divestiture events involving environmental
liabilities, rates, taxes, contracts and torts. Certain contingent liabilities
for pre-divestiture events are shared with AT&T Corp.
 
    While complete assurance cannot be given as to the outcome of any legal
claims, BellSouth believes that any financial impact would not be material to
its financial position or annual operating results or cash flows.
 
                                       72
<PAGE>
                             BELLSOUTH CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
 
NOTE P -- QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
 
    In the following summary of quarterly financial information, all adjustments
necessary for a fair presentation of each period were included. The results for
third quarter 1997 include pretax gains on sales of operations of $787, which
increased net income by $480. The results for first quarter 1996 include a
pretax gain on sale of paging business of $442, which increased net income by
$344.
 
<TABLE>
<CAPTION>
                                                                 FIRST     SECOND      THIRD     FOURTH
                                                                QUARTER    QUARTER    QUARTER    QUARTER
                                                               ---------  ---------  ---------  ---------
<S>                                                            <C>        <C>        <C>        <C>
1997
Operating Revenues...........................................  $   4,845  $   4,923  $   5,193  $   5,600
Operating Income.............................................  $   1,353  $   1,224  $   1,346  $   1,453
Income Before Extraordinary Loss.............................  $     693  $     654  $   1,185  $     738
Extraordinary Loss on Early Extinguishment of Debt, net of
 tax.........................................................         --         --         --         (9)
                                                               ---------  ---------  ---------  ---------
Net Income...................................................  $     693  $     654  $   1,185  $     729
                                                               ---------  ---------  ---------  ---------
                                                               ---------  ---------  ---------  ---------
EARNINGS PER SHARE:
Basic and Diluted
  Income Before Extraordinary Loss...........................  $     .70  $     .66  $    1.19  $     .74
  Extraordinary Loss on Early Extinguishment of Debt, net of
    tax......................................................         --         --         --       (.01)
                                                               ---------  ---------  ---------  ---------
  Net Income*................................................  $     .70  $     .66  $    1.19  $     .73
                                                               ---------  ---------  ---------  ---------
                                                               ---------  ---------  ---------  ---------
 
1996
Operating Revenues...........................................  $   4,541  $   4,620  $   4,829  $   5,050
Operating Income.............................................  $   1,183  $   1,188  $   1,201  $   1,207
Net Income...................................................  $     970  $     629  $     631  $     633
Earnings Per Share - Basic...................................  $     .98  $     .63  $     .63  $     .64
Earnings Per Share - Diluted.................................  $     .97  $     .63  $     .63  $     .64
</TABLE>
 
------------------------
 
    * Sum of quarterly amounts does not equal annual amount due to rounding.
 
                                       73
<PAGE>
SUPPLEMENTARY DATA
 
                             BELLSOUTH CORPORATION
                               DOMESTIC CELLULAR
                          PROPORTIONATE OPERATING DATA
                             (DOLLARS IN MILLIONS)
                                  (UNAUDITED)
 
    The following table sets forth unaudited, supplemental financial data for
BellSouth's domestic cellular operations reflecting proportionate consolidation
of entities in which BellSouth has an interest. This presentation differs from
the consolidation methodology used to prepare BellSouth's principal financial
statements in accordance with generally accepted accounting principles. The
proportionate operating data reflect BellSouth's ownership percentage of
entities consolidated for financial reporting purposes and BellSouth's ownership
percentage in the entities which are accounted for on the equity method for
financial reporting purposes. The data exclude gains (losses) from the
disposition of property interests and other unusual items and include equipment
revenue, net of cost.
 
<TABLE>
<CAPTION>
                                                                                                  YEAR ENDED
                                                                                                 DECEMBER 31,
                                                                                             --------------------
                                                                                               1997       1996
                                                                                             ---------  ---------
<S>                                                                                          <C>        <C>
Cellular Revenue, net......................................................................  $   2,520  $   2,312
                                                                                             ---------  ---------
Operating Expenses.........................................................................      1,364      1,308
Depreciation and Amortization..............................................................        461        364
                                                                                             ---------  ---------
    Total Operating Expenses...............................................................      1,825      1,672
                                                                                             ---------  ---------
Operating Income...........................................................................        695        640
Other Expenses, net (including interest and taxes).........................................        301        277
                                                                                             ---------  ---------
    Net Income.............................................................................  $     394  $     363
                                                                                             ---------  ---------
                                                                                             ---------  ---------
Operating Margins as a Percentage of Revenue:
  Including Depreciation and Amortization..................................................       27.6%      27.7%
  Excluding Depreciation and Amortization..................................................       45.9%      43.4%
Operational Comparisons (thousands):
  Proportionate Cellular Population Served.................................................     40,235     40,696
  Proportionate Cellular Customers.........................................................      4,105      3,612
</TABLE>
 
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE
 
    No change in accountants or disagreements on the adoption of appropriate
accounting standards or financial disclosure has occurred during the periods
included in this report.
 
                                    PART III
 
ITEMS 10 THROUGH 13.
 
    Information regarding executive officers required by Item 401 of Regulation
S-K is furnished in a separate disclosure on page 25 in Part I of this report
since the registrant did not furnish such information in its definitive proxy
statement prepared in accordance with Schedule 14A.
 
                                       74
<PAGE>
    The additional information required by these items will be included in the
registrant's definitive proxy statement dated March 10, 1998 as follows, and is
herein incorporated by reference pursuant to General Instruction G(3):
 
<TABLE>
<CAPTION>
                                                                                                    PAGE(S) IN
                                                                                                    DEFINITIVE
                                                                                                       PROXY
      ITEM                                         DESCRIPTION                                       STATEMENT
-----------------  ----------------------------------------------------------------------------  -----------------
<S>                <C>                                                                           <C>
       10.         Directors and Executive Officers of the Registrant..........................        5-12
       11.         Executive Compensation......................................................      26-31(a)
       12.         Security Ownership of Certain Beneficial
                    Owners and Management......................................................         12
       13.         Certain Relationships and Related Transactions..............................        26(b)
-----------------
 
    (a) Beginning with "Compensation Committee Interlocks and Insider Participation"
 
    (b) Includes only "Compensation Committee Interlocks and Insider Participation"
</TABLE>
 
                                    PART IV
 
ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
 
<TABLE>
<CAPTION>
                                                                                                    PAGE(S) IN THIS
                                                                                                       FORM 10-K
                                                                                                   -----------------
<S>                                                                                                <C>
a. Documents filed as a part of the report:
    (1) Financial Statements:
        Report of Independent Accountants........................................................         48
        Consolidated Statements of Income........................................................         49
        Consolidated Balance Sheets..............................................................         50
        Consolidated Statements of Shareholders' Equity..........................................         51
        Consolidated Statements of Cash Flows....................................................         52
        Notes to Consolidated Financial Statements...............................................         53
    (2) Financial statement schedules have been omitted because the required information is
        contained in the financial statements and notes thereto or because such schedules are not
        required or applicable.
    (3) Exhibits: Exhibits identified in parentheses below, on file with the SEC, are
        incorporated herein by reference as exhibits hereto. All management contracts or
        compensatory plans or arrangements required to be filed as exhibits to this Form 10-K
        Report pursuant to Item 14(c) are filed as Exhibits 10a through 10y inclusive.
</TABLE>
 
<TABLE>
<CAPTION>
 EXHIBIT
 NUMBER
---------
<S>        <C>
 3a        Restated and Amended Articles of Incorporation of BellSouth Corporation as of February 23, 1998.
 3b        Bylaws of BellSouth Corporation as Amended on February 23, 1998.
 4         BellSouth Corporation Shareholder Rights Agreement. (Exhibit 4-b to Form 8-K. Date of report November
           27, 1989.)
</TABLE>
 
                                       75
<PAGE>
<TABLE>
<CAPTION>
 EXHIBIT
 NUMBER
---------
 4a        No instrument which defines the rights of holders of long and intermediate term debt of BellSouth
           Corporation is filed herewith pursuant to Regulation S-K, Item 601(b)(4)(iii)(A). Pursuant to this
           regulation, BellSouth Corporation hereby agrees to furnish a copy of any such instrument to the SEC upon
           request.
<S>        <C>
10a        BellSouth Corporation Officer Short Term Incentive Award Plan. (Exhibit 10y to Form 10-Q for the quarter
           ended September 30, 1996, File No. 1-8607.)
10b        BellSouth Corporation Executive Long Term Incentive Plan. (Exhibit 10e to Form 10-K for the year ended
           December 31, 1991, File No. 1-8607.)
10c        BellSouth Corporation Executive Long Term Disability and Survivor Protection Plan as amended and
           restated effective January 1, 1994. (Exhibit 10c-1 to Form 10-K for the year ended December 31, 1993,
           File No. 1-8607.)
10d        BellSouth Corporation Executive Transfer Plan. (Exhibit 10ee to Registration Statement No. 2-87846.)
10e        BellSouth Corporation Death Benefit Program. (Exhibit 10ff to Form 10-K for the year ended December 31,
           1989, File No. 1-8607.)
10f        BellSouth Corporation Plan For Non-Employee Directors' Travel Accident Insurance. (Exhibit 10ii to
           Registration Statement No. 2-87846.)
10g        BellSouth Corporation Executive Incentive Award Deferral Plan as amended and restated effective
           September 23, 1996. (Exhibit 10g to Form 10-K for the year ended December 31, 1996, File No. 1-8607.)
10h        BellSouth Corporation Nonqualified Deferred Compensation Plan as amended and restated effective November
           25, 1996. (Exhibit 10h to Form 10-K for the year ended December 31, 1996, File No. 1-8607.)
10i        BellSouth Corporation Supplemental Executive Retirement Plan as amended on May 18, 1995. (Exhibit 10j-1
           to Form 10-Q for the quarter ended June 30, 1995, File No. 1-8607.)
10j        BellSouth Corporation Directors Retirement Plan. (Exhibit 10qq to Form 10-K for the year ended December
           31, 1986, File No. 1-8607.)
10k        BellSouth Corporation Financial Counseling Plan. (Exhibit 10r to Form 10-K for the year ended December
           31, 1992, File No. 1-8607.)
10k-1      Amendment dated November 3, 1995 to the BellSouth Corporation Financial Counseling Plan for Executives.
           (Exhibit 10l-1 to Form 10-K for the year ended December 31, 1995, File No. 1-8607.)
10l        BellSouth Corporation Deferred Compensation Plan for Non-Employee Directors. (Exhibit 10gg to
           Registration Statement No. 2-87846.)
10m        BellSouth Corporation Executive Life Insurance Plan. (Exhibit 10v to Form 10-K for the year ended
           December 31, 1992, File No. 1-8607.)
10n        BellSouth Corporation Non-Employee Directors' Stock Option Plan. (Exhibit 10z to Form 10-Q for the
           quarter ended March 31, 1997, File No. 1-8607.)
10o        Form of Executive Officer Successor and Retirement Agreement. (Exhibit 10aa to Form 10-Q for the quarter
           ended September 30, 1996, File No. 1-8607.)
10p        BellSouth Non-Employee Directors Charitable Contribution Program. (Exhibit 10z to Form 10-K for the year
           ended December 31, 1992, File No. 1-8607.)
10q        BellSouth Personal Retirement Account Pension Plan, as amended and restated effective July 1, 1996.
           (Exhibit 10r to Form 10-Q for the quarter ended September 30, 1996, File No. 1-8607.)
</TABLE>
 
                                       76
<PAGE>
<TABLE>
<CAPTION>
 EXHIBIT
 NUMBER
---------
10q-1      Amendment dated April 15, 1997 to the BellSouth Personal Retirement Account Pension Plan (Exhibit 10q-1
           to Form 10-Q for the quarter ended March 31, 1997, File No. 1-8607.)
<S>        <C>
10q-2      Amendment dated September 12, 1997 to the BellSouth Personal Retirement Account Pension Plan (Exhibit
           10q-1 to Form 10-Q for the quarter ended September 30, 1997, File No. 1-8607.)
10q-3      Amendment dated October 31, 1997 to the BellSouth Personal Retirement Account Pension Plan (Exhibit
           10q-2 to Form 10-Q for the quarter ended September 30, 1997, File No. 1-8607.)
10r        BellSouth Corporation Trust Under Executive Benefit Plan(s) as amended April 28, 1995. (Exhibit 10u-1 to
           Form 10-Q for the quarter ended June 30, 1995, File No. 1-8607.)
10r-1      Amendment dated May 23, 1996 to the BellSouth Corporation Trust Under Executive Benefit Plan(s).
           (Exhibit 10s-1 to Form 10-Q for the quarter ended June 30, 1996, File No. 1-8607.)
10s        BellSouth Telecommunications, Inc. Trust Under Executive Benefit Plan(s) as amended April 28, 1995.
           (Exhibit 10v-1 to Form 10-Q for the quarter ended June 30, 1995, File No. 1-8607.)
10s-1      Amendment dated May 23, 1996 to the BellSouth Telecommunications, Inc. Trust Under Executive Benefit
           Plan(s). (Exhibit 10t-1 to Form 10-Q for the quarter ended June 30, 1996, File No. 1-8607.)
10t        BellSouth Corporation Trust Under Board of Directors Benefit Plan(s) as amended April 28, 1995. (Exhibit
           10w-1 to Form 10-Q for the quarter ended June 30, 1995, File No. 1-8607.)
10t-1      Amendment dated May 23, 1996 to the BellSouth Corporation Trust Under Board Directors Benefit Plan(s).
           (Exhibit 10u-1 to Form 10-Q for the quarter ended June 30, 1996, File No. 1-8607.)
10u        BellSouth Telecommunications, Inc. Trust Under Board of Directors Benefit Plan(s) as amended April 28,
           1995. (Exhibit 10x-1 to Form 10-Q for the quarter ended June 30, 1995, File No. 1-8607.)
10u-1      Amendment dated May 23, 1996 to the BellSouth Telecommunications, Inc. Trust Under Board of Directors
           Benefit Plan(s). (Exhibit 10v-1 to Form 10-Q for the quarter ended June 30, 1996, File No. 1-8607.)
10v        BellSouth Corporation Stock Plan as amended on September 23, 1996 and November 24, 1996. (Exhibit 10v to
           Form 10-K for the year ended December 31, 1996, File No. 1-8607.)
10w        BellSouth Retirement Savings Plan as amended and restated effective July 1, 1996. (Exhibit 10x to Form
           10-Q for the quarter ended September 30, 1996, File No. 1-8607.)
10w-1      Amendment dated February 18, 1997 to the BellSouth Retirement Savings Plan (Exhibit 10w-1 to Form 10-Q
           for the quarter ended March 31, 1997, File No. 1-8607.)
10w-2      Amendment dated June 24, 1997 to the BellSouth Retirement Savings Plan (Exhibit 10w-2 to Form 10-Q/A for
           the quarter ended June 30, 1997, File No. 1-8607.)
10x        BellSouth Corporation Officer Estate Enhancement Plan and Agreement. (Exhibit 10x to Form 10-K for the
           year ended December 31, 1996, File No. 1-8607.)
10y        BellSouth Change in Control Executive Severance Agreements. (Exhibit 10y to Form 10-K for the year ended
           December 31, 1996, File No. 1-8607.)
11         Computation of Earnings Per Share.
12         Computation of Ratio of Earnings to Fixed Charges.
21         Subsidiaries of BellSouth.
24         Powers of Attorney.
</TABLE>
 
                                       77
<PAGE>
<TABLE>
<CAPTION>
 EXHIBIT
 NUMBER
---------
27         Financial Data Schedule.
<S>        <C>
99a        Annual report on Form 11-K for BellSouth Retirement Savings Plan for the fiscal year ended December 31,
           1997 (to be filed as an amendment hereto within 180 days of the end of the period covered by this
           report.)
</TABLE>
 
<TABLE>
<S>        <C>
99b        Annual report on Form 11-K for BellSouth Savings and Security ESOP Plan for the
           fiscal year ended December 31, 1997 (to be filed as an amendment hereto within 180
           days of the end of the period covered by this report.)
</TABLE>
 
b. Reports on Form 8-K:
 
<TABLE>
<CAPTION>
   DATE OF EVENT                                      SUBJECT
--------------------  ------------------------------------------------------------------------
<S>                   <C>
January 22, 1998                        Fourth Quarter 1997 Earnings Release
</TABLE>
 
                                       78
<PAGE>
                                   SIGNATURES
 
    Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
 
                                          BELLSOUTH CORPORATION
 
                                            /s/ W. PATRICK SHANNON
     ---------------------------------------------------------------------------
 
                                          W. Patrick Shannon
                                          VICE PRESIDENT AND CONTROLLER
                                          February 25, 1998
 
    Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
 
PRINCIPAL EXECUTIVE OFFICER:
F. Duane Ackerman*
CHAIRMAN OF THE BOARD,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
 
PRINCIPAL FINANCIAL OFFICER:
Ronald M. Dykes*
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
 
PRINCIPAL ACCOUNTING OFFICER:
W. Patrick Shannon*
VICE PRESIDENT AND CONTROLLER
 
<TABLE>
<S>                                            <C>
DIRECTORS:
F. Duane Ackerman*                             John G. Medlin, Jr.*
Reuben V. Anderson*                            Robin B. Smith*
James H. Blanchard*                            C. Dixon Spangler, Jr.*
J. Hyatt Brown*                                William S. Stavropoulos*
Armando M. Codina*                             Ronald A. Terry*
Phyllis Burke Davis*                           J. Tylee Wilson*
 
                                               *By: /s/ W. PATRICK SHANNON
                                               ---------------------------------
</TABLE>
 
                                                 W. Patrick Shannon
                                       (INDIVIDUALLY AND AS ATTORNEY-IN-FACT)
                                                 February 25, 1998
 
                                       79
<PAGE>
                       CONSENT OF INDEPENDENT ACCOUNTANTS
 
    We consent to the incorporation by reference in the registration statements
of BellSouth Corporation on Form S-3 (Nos. 33-29411, 33-48929, 33-49461,
33-51449, 33-63173, 333-21233, 333-31301 and 333-45607) and Form S-8 (Nos.
33-38265, 33-38264, 33-38263, 33-30773, 33-30772, 33-26518, 33-12165, 2-94802,
33-49459, 333-01427, 333-01429, 333-13783 and 333-38295) of our report, dated
February 3, 1998, which includes an explanatory paragraph stating that the
Company discontinued accounting for the operations of BellSouth
Telecommunications, Inc. in accordance with Statement of Financial Accounting
Standards No. 71, "Accounting for the Effects of Certain Types of Regulation,"
effective June 30, 1995, on our audits of the consolidated financial statements
of BellSouth Corporation as of December 31, 1997 and 1996, and for each of the
three years in the period ended December 31, 1997, which report is included in
this Annual Report on Form 10-K.
 
                                    /s/ Coopers & Lybrand L.L.P.
 
Atlanta, Georgia
 
February 25, 1998
 
                                       80