##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549




---

FORM 10-K

|           |  |                                                                                             
|---------- |  | --------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                             
|          
|ü          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934    
|           |  | FOR THE FISCAL YEAR ENDED DECEMBER 31,
    2004                                             
|           |  | OR                                                                                          
|           |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|           |  | For the transition period
    from               to                                         
|          
|           |  | COMMISSION FILE NUMBER 1-8607                                                               

BELLSOUTH CORPORATION

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



---

Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the
past
90 days.    YesüNo

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

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

At January 31, 2005, 1,831,554,092 shares of
Common Stock and Preferred Stock Purchase Rights were
outstanding.

At June 30, 2004, the aggregate market value
of the voting and non-voting stock held by nonaffiliates was
$48,748,103,573.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrants definitive
proxy statement dated March 11, 2005, issued in connection
with the 2005

annual meeting of shareholders (Part III).




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TABLE OF CONTENTS



|                                                                                                      |                                                           |                                                                                                                                                                                          |  |  |  |  |  | 
|----------------------------------------------------------------------------------------------------- | --------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  |  |  | 
|PART I                                                                                               
|                                                                                                      | Cautionary Language Concerning Forward-Looking Statements
|                                                                                                      |                                                           | Business                                                                                                                                                                                
|                                                                                                      |                                                           | Communications Group                                                                                                                                                                    
|                                                                                                      |                                                           | Domestic Wireless                                                                                                                                                                       
|                                                                                                      |                                                           | Advertising & Publishing Group                                                                                                                                                          
|                                                                                                      |                                                           | Latin American Group                                                                                                                                                                    
|                                                                                                      |                                                           | Intellectual Property                                                                                                                                                                   
|                                                                                                      |                                                           | Research and Development                                                                                                                                                                
|                                                                                                      |                                                           | Employees                                                                                                                                                                               
|                                                                                                      |                                                           | Properties                                                                                                                                                                              
|                                                                                                      |                                                           | Legal Proceedings                                                                                                                                                                       
|                                                                                                      |                                                           | Submission of Matters to a Vote of Shareholders                                                                                                                                         
|                                                                                                      | Additional Information  Description of BellSouth Stock  
|                                                                                                      | Executive Officers                                       
|                                                                                                      | Website Access                                           
|PART II                                                                                              
|                                                                                                      |                                                           | Market for Registrants Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities                                                                            
|                                                                                                      |                                                           | SELECTED FINANCIAL AND OPERATING DATA                                                                                                                                                   
|                                                                                                      |                                                           | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS DOLLARS ARE IN MILLIONS, EXCEPT PER SHARE AMOUNTS AND AS OTHERWISE INDICATED BELLSOUTH CORPORATION
|                                                                                                      |                                                           | Consolidated Results of Operations                                                                                                                                                      
|                                                                                                      |                                                           | Results by Segment                                                                                                                                                                      
|                                                                                                      |                                                           | COMMUNICATIONS GROUP                                                                                                                                                                    
|                                                                                                      |                                                           | Domestic Wireless                                                                                                                                                                       
|                                                                                                      |                                                           | Advertising & Publishing Group                                                                                                                                                          
|                                                                                                      |                                                           | Liquidity and Financial Condition                                                                                                                                                       
|                                                                                                      |                                                           | Off-Balance Sheet Arrangements and Aggregate Contractual Obligations                                                                                                                    
|                                                                                                      |                                                           | Operating Environment                                                                                                                                                                   
|                                                                                                      |                                                           | Critical Accounting Policies                                                                                                                                                            
|                                                                                                      |                                                           | Cautionary Language Concerning Forward-Looking Statements                                                                                                                               
|                                                                                                      |                                                           | CONSOLIDATED STATEMENTS OF INCOME                                                                                                                                                       
|                                                                                                      |                                                           | CONSOLIDATED BALANCE SHEETS                                                                                                                                                             
|                                                                                                      |                                                           | CONSOLIDATED STATEMENTS OF CASH FLOWS                                                                                                                                                   
|                                                                                                      |                                                           | CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY AND COMPREHENSIVE INCOME                                                                                                                
|                                                                                                      |                                                           | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                                                                                                                              
|                                                                                                      |                                                           | REPORT OF INDEPENDENT AUDITORS                                                                                                                                                          
|PART IV                                                                                              
|                                                                                                      |                                                           | SIGNATURES                                                                                                                                                                              
|EX-10.K1 AMENDMENT TO SUPPLEMENTAL RETIREMENT PLAN                                                   
|EX-10.L BELLSOUTH EXECUTIVE FINANCIAL SERVICES PLAN                                                  
|EX-10.M BELLSOUTH SPLIT-DOLLAR LIFE INSURANCE PLAN                                                   
|EX-10.0 BELLSOUTH OFFICER PERSONAL VEHICLE PLAN                                                      
|EX-10.P BELLSOUTH SUPPLEMENTAL LIFE INSURANCE PLAN                                                   
|EX-10.Q BELLSOUTH OFFICER COMPENSATION DEFERRAL PLAN                                                 
|EX-10.R BELLSOUTH EXECUTIVE STOCK OWNERSHIP PROGRAM                                                  
|EX-10.T 2005 NAMED EXECUTIVE OFFICER COMPENSATION TERM SHEET                                         
|EX-10.W1 FIRST AMENDMENT TO DIRECTOR'S COMPENSATION DEFERRAL PLAN                                    
|EX-10.Y16 AMENDMENT DATED DECEMBER 22, 2004 T0 THE BELLSOUTH PERSONAL RETIREMENT ACCOUNT PENSION PLAN
|EX-10.HH5 FIRST AMENDMENT DATED DECEMBER 22, 2004 TO THE BELLSOUTH RETIREMENT SAVINGS PLAN           
|EX-11 COMPUTATION OF EARNINGS PER SHARE                                                              
|EX-12 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES                                              
|EX-21 SUBSIDIARIES OF BELLSOUTH                                                                      
|EX-23.A CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM                                     
|EX-23.B CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM                                     
|EX-23.C CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM                                     
|EX-24 POWER OF ATTORNEY                                                                              
|EX-31.A SECTION 302 CERTIFICATION OF F. DUANE ACKERMAN                                               
|EX-31.B SECTION 302 CERTIFICATION OF RONALD M. DYKES                                                 
|EX-32 SECTION 906 CERTIFICATION OF THE CEO                                                           
|EX-99.A CONSOLIDATED FINANCIAL STATEMENTS OF CINGULAR WIRELESS                                       



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##### Table of Contents



ATTACHMENT


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

(a) As of filing date.

(b) Subsequently merged with and into
BellSouth Corporation.



BELLSOUTH
2004      1




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##### Table of Contents



TABLE OF CONTENTS


|                                                                                                                                                       |  |      |    | 
|------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---- | -- | 
|Item                                                                                                                                                   |  | Page
|                                                                                                                                                      
|                                                                                                                                                      
|PART I                                                                                                                                                 |  |      |    | 
|Cautionary Language Concerning
    Forward-Looking Statements                                                                                          |  |      | 3  | 
|1.    Business                                                                                                                                         |  |      | 3  | 
|Communications
    Group                                                                                                                               |  |      | 4  | 
|Domestic
    Wireless                                                                                                                                  |  |      | 7  | 
|Advertising
    & Publishing Group                                                                                                                     |  |      | 11 | 
|Latin
    American Group                                                                                                                               |  |      | 11 | 
|Intellectual
    Property                                                                                                                              |  |      | 12 | 
|Research
    and Development                                                                                                                           |  |      | 12 | 
|Employees                                                                                                                                              |  |      | 12 | 
|2.    Properties                                                                                                                                       |  |      | 12 | 
|3.    Legal
    Proceedings                                                                                                                            |  |      | 12 | 
|4.    Submission
    of Matters to
    a         Vote
    of Shareholders                                                                              |  |      | 14 | 
|Additional Information 
    Description of BellSouth Stock                                                                                            |  |      | 14 | 
|Executive Officers                                                                                                                                     |  |      | 16 | 
|Website Access                                                                                                                                         |  |      | 16 | 
|PART II                                                                                                                                                |  |      |    | 
|5.    Market
    for Registrants Common
    Equity,         Related
    Shareholder Matters
    and         Issuer
    Purchases of Equity Securities |  |      | 16 | 
|6.    Selected
    Financial and
    Operating         Data                                                                                            |  |      | 18 | 
|7.    Managements
    Discussion
    and         Analysis
    of Financial
    Condition         and
    Results of Operations                        |  |      | 19 | 
|Overview                                                                                                                                               |  |      | 19 | 
|Consolidated
    Results of Operations                                                                                                                 |  |      | 21 | 
|Results
    by Segment                                                                                                                                 |  |      | 25 | 
|Communications
    Group                                                                                                                               |  |      | 26 | 
|Domestic
    Wireless                                                                                                                                  |  |      | 30 | 
|Advertising
    & Publishing Group                                                                                                                     |  |      | 34 | 
|Liquidity
    and Financial Condition                                                                                                                  |  |      | 36 | 
|Off-Balance
    Sheet Arrangements
    and          Aggregate
    Contractual Obligations                                                              |  |      | 39 | 
|Quantitative
    and
    Qualitative          Disclosure
    About Market Risk                                                                         |  |      | 40 | 
|Operating
    Environment                                                                                                                              |  |      | 41 | 
|Critical
    Accounting Policies                                                                                                                       |  |      | 47 | 
|Cautionary
    Language
    Concerning          Forward-Looking
    Statements                                                                         |  |      | 49 | 
|8.    Consolidated
    Financial Statements
    of         BellSouth
    Corporation                                                                   |  |      |    | 
|Consolidated
    Statements of Income                                                                                                                  |  |      | 50 | 
|Consolidated
    Balance Sheets                                                                                                                        |  |      | 51 | 
|Consolidated
    Statements of Cash Flows                                                                                                              |  |      | 52 | 
|Consolidated
    Statements          of
    Shareholders
    Equity          and
    Comprehensive Income                                             |  |      | 53 | 
|Notes
    to Consolidated
    Financial          Statements                                                                                            |  |      | 54 | 
|Reports
    of Independent
    Registered          Public
    Accounting Firms                                                                         |  |      | 84 | 
|Report
    of Management on
    Internal          Control
    Over Financial Reporting                                                                 |  |      | 85 | 
|9.    Changes
    in and
    Disagreements          with
    Accountants on
    Accounting          and
    Financial Disclosure                       |  |      | 86 | 
|9A.    Controls
    and Procedures                                                                                                                     |  |      | 86 | 
|9B.    Other
    Information                                                                                                                           |  |      | 86 | 
|PART III                                                                                                                                               |  |      |    | 
|*10.    Directors
    and Executive
    Officers          of
    the Registrant                                                                        |  |      | 86 | 
|*11.    Executive
    Compensation                                                                                                                     |  |      | 86 | 
|*12.    Security
    Ownership of
    Certain          Beneficial
    Owners and
    Management          and
    Related Shareholder Matters           |  |      | 87 | 
|*13.    Certain
    Relationships
    and          Related
    Transactions                                                                            |  |      | 87 | 
|*14.    Principal
    Accountant
    Fees          and
    Services                                                                                    |  |      | 87 | 
|PART IV                                                                                                                                                |  |      |    | 
|15.    Exhibits
    and Financial
    Statement         Schedules                                                                                      |  |      | 88 | 
|Signatures                                                                                                                                             |  |      |    | 



|  |                                                                                                                                                                                            
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | All or a portion of the referenced sections have
    been included in BellSouth Corporations definitive proxy
    statement dated March 11, 2005 and incorporated herein by
    reference.



2 BELLSOUTH
2004




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##### Table of Contents






PART I






Cautionary Language Concerning


Forward-Looking Statements


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

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


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




| |   |                                                                                                                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a change in economic conditions in the markets
    where we operate or have material investments which could affect
    demand for our services;                                                                                                                                              
| |  | the impact and the success of Cingular Wireless,
    our wireless joint venture with SBC Communications, Inc. (SBC),
    including marketing and product development efforts,
    technological changes and financial capacity;                                                               
| |  | Cingular Wireless failure to realize, in
    the amounts and within the timeframe contemplated, the capital
    and expense synergies and other financial benefits expected from
    its acquisition of AT&T Wireless as a result of technical,
    logistical, regulatory and other factors;
| |  | changes in laws or regulations, or in their
    interpretations, which could result in the loss, or reduction in
    value, of our licenses, concessions or markets, or in an
    increase in competition, compliance costs or capital
    expenditures;                                      
| |  | continued pressures on the telecommunications
    industry from a financial, competitive and regulatory
    perspective;                                                                                                                                                                      
| |  | the intensity of competitive activity and its
    resulting impact on pricing strategies and new product offerings;                                                                                                                                                                           
| |  | changes in the federal and state regulations
    governing the terms on which we offer retail and wholesale
    services;                                                                                                                                                                     
| |  | continued successful penetration of the interLATA
    long distance market;                                                                                                                                                                                                                   
| |  | the impact on our business of consolidation in
    the wireline and wireless industries in which we operate;                                                                                                                                                                                  
| |  | the issuance by the Financial Accounting
    Standards Board or other accounting bodies of new accounting
    standards or changes to existing standards;                                                                                                                                     
| |  | changes in available technology that increase the
    likelihood of our customers choosing alternate technology to the
    products offered by BellSouth (technology substitution);                                                                                                           
| |  | higher than anticipated start-up costs or
    significant up-front investments associated with new business
    initiatives;                                                                                                                                                                  
| |  | the outcome of pending litigation; and                                                                                                                                                                                                                                                        
| |  | unanticipated higher capital spending from, or
    delays in, the deployment of new technologies.                                                                                                                                                                                             




Business

OVERVIEW

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

We are a Fortune 100 company with annual
revenues of over $20 billion. Our core business is wireline
communications and our largest customer segment is the retail
consumer. We have interests in wireless communications through
our ownership of approximately 40% of Cingular Wireless
(Cingular), the nations largest wireless company based on
number of customers. We also operate one of the largest
directory advertising businesses in the United States. We have
assets of approximately $60 billion and employ almost
63,000 individuals. Our principal executive offices are located
at 1155 Peachtree Street, N.E., Atlanta, Georgia 30309-3610
(telephone number 404-249-2000). We were incorporated and became
a publicly traded company in December 1983 as a result of the
breakup of the Bell System. We are incorporated under the laws
of the State of Georgia.


During 2004, we realigned our assets towards
domestic wireless and increased investment in broadband to
better position the company for the future. Specifically, our
wireless joint venture, Cingular Wireless, purchased AT&T
Wireless in October 2004, causing Cingular to become the largest
wireless company in the United States and increasing the
percentage of our revenue from wireless operations on a pro
forma basis to approximately 40%. To further this realignment in
strategy, we sold our Latin American operations to
Telefónica Móviles in transactions that closed in late
2004 and early 2005.


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




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

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



BELLSOUTH
2004      3




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##### Table of Contents






Communications Group

OVERVIEW

We are the leading communications service
provider in the southeastern United States (US), serving
substantial portions of the population within Alabama, Florida,
Georgia, Kentucky, Louisiana, Mississippi, North Carolina, South
Carolina and Tennessee. BellSouth Telecommunications, Inc.
(BST), our wholly-owned subsidiary, provides wireline
communications services, including local exchange, network
access, intraLATA long distance services and Internet services.
BellSouth Long Distance, Inc. (BSLD), our long distance
subsidiary, provides long distance services to residential and
small business customers in our nine southeastern states, long
distance services to enterprise customers with locations
throughout the country, and wholesale long distance primarily to
wireless communications providers, smaller wireline
telecommunications providers and unaffiliated long distance
providers. Communications Group operations generated 90% of our
total operating revenues in 2004, 2003 and 2002.

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




| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Consumer.This unit
    serves the largest segment of the market within our region, the
    residential customer. While traditional local and long distance
    telephone service remains the core of this market, customer
    demands are rapidly broadening to include an expanded range of
    services, from convenience features such as caller ID, call
    forwarding and voice mail, to dial-up access to the Internet,
    high-speed DSL and video services. During 2004, the Consumer
    unit represented 43% of Communications Group revenues.                                                                                                                                                                                                                                                                                                                                                                                          
|
| | Small Business.This
    unit focuses on providing, in addition to traditional local and
    long distance voice services, advanced voice, data, Internet and
    networking solutions to small and medium-sized businesses. It
    offers a full selection of standard and customized
    communications services to this market. During 2004, the Small
    Business unit represented 12% of Communications Group revenues.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| | Large Business.This
    unit, known as BellSouth Business, provides a wide range of
    standard and highly specialized services and products to large
    and complex business customers. In addition to traditional local
    and long distance voice services, product and service offerings
    to these customers include Internet access, private networks,
    high-speed data equipment and transmission, conferencing and
    industry-specific communications arrangements for industries
    such as banking, healthcare and manufacturing. During 2004, the
    Large Business unit represented 17% of Communications Group
    revenues.                                                                                                                                                                                                                                                                                                
|
| | Interconnection Services.This unit provides interconnection to
    our network and other related wholesale services to
    telecommunications carriers for use in providing services to
    their customers. Interconnection refers to the link between our
    telecommunications network and the telecommunications network of
    other service providers. In addition to interconnection
    services, we provide services such as voice and data transport
    services. During 2004, the Interconnection Services unit
    represented 24% of Communications Group revenues and generated
    45% of our reported data revenues. The unit provides services to
    both affiliated and nonaffiliated customers in five different
    carrier markets: wireless service providers, competitive local
    exchange carriers, competitive switched and special access
    providers, long distance carriers and information service
    providers.

BUSINESS STRATEGY

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

We intend to:



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

BUSINESS OPERATIONS

Voice services

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

We also offer our voice services on a wholesale
basis to other competitive local carriers for resale to their
customers. Competitors primarily utilize our local network under




4 BELLSOUTH
2004




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##### Table of Contents



two methods: resale and, to a greater extent,
through the use of unbundled network elements (UNEs). Lines
provided on a resale basis include all of the components
necessary for a wholesale customer to provide complete service
delivery to an end-user. UNEs represent components of our
network that wholesale customers may combine with components of
their own networks, or with other UNEs purchased from us, to
allow complete service delivery to an end-user. In February
2005, the FCC released an order and new rules related to the UNE
platform (UNE-P). Its action effectively relieves us of the
obligation to accept new UNE-P orders after March 10, 2005,
and provides a 12-month transition period to phase out existing
UNE-P service.


We provide network access and interconnection
services by connecting the equipment and facilities of our
customers with the communications networks of long distance
carriers, competitive switched and special access providers, and
wireless providers, including Cingular. Similarly, we provide
access and interconnection services to competitive local
exchange carriers so their subscribers can reach ours and vice
versa. As a result of access charge reform, the revenues that we
derive from these services have diminished over the past several
years.


BellSouth was historically permitted to provide
long distance services only within, but not between, certain
areas (referred to as LATAs) that were defined at the time of
the Bell System divestiture in December 1983. Legislation was
enacted in 1996 that allowed BellSouth, upon approval by the
FCC, to provide interLATA services. BellSouth received that
approval for all nine states in its region during 2002.


As a consequence of the long distance approval
described above, BellSouth has aggressively entered the
interLATA long distance market in its nine state region.
BellSouth offers a wide array of calling plans to both its
residential and business customers. Many of these long distance
offers have been packaged with the Companys local, data
and wireless offerings so as to present a bundle of
services to its customers. These bundles allow
customers to purchase services at prices lower than they would
have paid if they had bought the underlying services on a stand
alone basis. As of December 31, 2004, BellSouth has
achieved a long distance market penetration of 47% among its
residential local customers and 53% among its mass market
business local customers.


Wireline voice services provided approximately
62% of BellSouths total operating revenues for 2004, 2003
and 2002.


Broadband and data services

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

We offer a wide range of data services serving
the retail as well as the wholesale markets. Revenues from
retail offerings such as FastAccess® (DSL), ISDN,
Frame Relay, Lightgate and SmartRing accounted for 55% of total
data revenues in 2004 while wholesale offerings accounted for
the remaining 45%.


DSL service is an important broadband service for
BellSouth. Over 83% of the households in our region are
qualified to receive DSL from BellSouth, and we ended 2004 with
over 2.0 million Fast Access® DSL subscribers.
BellSouth participates in the DSL market in two significant
ways. First, we offer retail DSL-based high speed Internet
service that we market under the name BellSouth®
FastAccess® DSL. Second, we offer DSL transport
products to Internet service providers and other carriers,
which, in turn, provide information services, such as Internet
access, to their end users.


We have differentiated our Internet access
products by providing a range of tiered speeds and associated
pricing that appeal to a larger market. We currently offer three
levels of service: download speeds of up to 256 kps, up to
1.5 megabits, and up to 3.0 megabits. In many
instances, our network is capable of providing speeds up to
6.0 megabits and we have announced plans to upgrade our
capabilities and expand our footprint in 2005. In addition, we
currently have 1.0 million dial-up customers. This is an
important market as it provides a pool of potential customers
for our higher speed products. In 2004, BellSouth conducted a
trial of a new broadband on demand service. In this trial,
BellSouth provisioned a low speed DSL Internet service to trial
participants. These customers, when visiting certain designated
websites, would experience faster speeds, or they could boost or
turbo the speed of their service with the click of a
button for an additional charge.


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


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




|  |                                                                                                                                                                                                                                        
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a suite of VoIP network based IP products,
    including Centrex IP service for Large Business customers,
    Internet Protocol Telephone Gateway (IPTG) service and VoIP
    Conversion service for Interconnection Service customers;
| | a VoIP service specifically designed for Large
    Business customers and known as BellSouth Converged Solutions;
    and                                                                                                              
| | a number of PBX equipment-based IP voice and data
    services.                                                                                                                                                                        



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We expect to develop and introduce additional
VoIP services to all of our customer market segments as this new
technology continues to evolve in the marketplace.


Broadband and data services generated
approximately 22% of BellSouths total operating revenues
for 2004 and 21% for 2003 and 2002.


Video

In August 2004, we began acting as a selling
agent for DirecTV. Although this relationship has little impact
on our revenues, it enables us to offer a bundle of wireline and
wireless voice along with data and video. As technology evolves,
we are continuing to look at future options for providing video
services. For example, in 2005 we commenced a trial of
Microsofts IP-TV technology that, if commercially
deployed, would enable BellSouth to deliver an integrated suite
of new voice, data and interactive video capabilities and
services to our customers over an upgraded DSL-based broadband
transmission platform.

Other Communications Group
revenues

Other Communications Group revenues are comprised
primarily of charges for billing and collection services for
long distance carriers, enhanced white pages listings, customer
late payment fees, customer premises equipment sales and
maintenance services. Other revenue also includes charges for
permitting our competitors to set up their equipment in our
facilities (referred to as collocation). Historically, revenues
from local payphone services were included in this category. By
the end of 2003, we had ceased offering local payphone services.
BellSouth also provides wholesale long distance services,
primarily to wireless communications providers and smaller
wireline telecommunications providers, as well as to
unaffiliated long distance providers. Other Communications Group
services provided approximately 7% of BellSouths total
operating revenues for 2004 and 2003 and 8% for 2002.

WIRELINE REGULATORY ENVIRONMENT

The FCC regulates rates and other aspects of our
provision of interstate telecommunications services, including
international rates and interstate access charges. State
regulatory commissions have jurisdiction over our provision of
intrastate telecommunications services, including local and long
distance rates and network access services. Access charges are
designed to compensate our wireline subsidiary for the use of
its networks by other carriers. Our future operations and
financial results will be substantially influenced by
developments in a number of federal and state regulatory
proceedings. Adverse results in these proceedings could
materially affect our revenues, expenses and ability to compete
effectively against other telecommunications carriers.

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


COMPETITION

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

Wireless providers

We face strong competition from wireless service
providers. Competition in the wireless industry has created
lower price point service offerings that include larger buckets
of anytime minutes that include long distance, causing many
customers to choose wireless for their primary voice
communications option. As wireless companies expand their
offerings to include high speed data services, we expect this
migration trend to continue.

Traditional telecommunication service
providers

We compete for customers based principally on
service offerings, price and customer service. Increasing
competition has resulted in innovative packaging and services
that strive to simplify the customers experience. Pricing
pressures in the market have increased resulting in
opportunities for the customer to purchase value based packages
and services. Competitive pressures across the board have
resulted in an increase in advertising and promotional spending.
Competitors are able to resell our local services, or lease
separate unbundled network elements (UNE). In addition, an
increasing number of voice and data communications networks
utilizing fiber optic lines have been constructed by
communications providers in all major metropolitan areas
throughout our wireline service territory.

UNE prices are determined using a forward-looking
cost model and the premise of a hypothetical, most efficient,
lowest cost network design. Because the pricing is not based on
actual cost, certain costs that exist in todays network
are not adequately addressed in the determinations. A
competitors use of UNEs and the UNE platform results in
lower revenue per access line and has a detrimental impact on
our margins as we are not allowed to charge UNE competitors for
the actual cost we incur to maintain and service the access
lines. The impact can be increased by competitors offering
of service bundles that target high value customers. In
addition, competitors offerings can sometimes cause us to
lose revenues from non-UNE sources, including access to our
switches and calling features, inside wire maintenance, operator
services and directory assistance. As a result of regulated
artificially low wholesale prices and highly competitive retail
pricing, our competitors have been effective in gaining market
share, primarily in metropolitan areas. At December 31,
2004, we had provisioned approximately 3.0 million resale
and UNE lines to competing carriers, an increase of 10% since
December 31, 2003.


Companies compete with us for long distance
services by reselling long distance services obtained at bulk
rates from us or from other carriers, or by providing long
distance services over their own facilities.


FCC rules require us to offer expanded
interconnection for interstate special and switched network
access trans-




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##### Table of Contents



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


Although our competitors vary by state and
market, we believe that at December 31, 2004 our most
significant local service competitors remain AT&T Corp. and
MCI Inc. and our most significant long distance competitors
include AT&T, MCI and Sprint Corporation. In addition, we
are beginning to face significant competition from cable
companies, such as Time Warner Inc. and Comcast Corporation.


There have been a number of proposed mergers
announced in recent months signaling a consolidation in the
telecommunications industry. While the ultimate impact remains
uncertain, we believe consolidation to fewer players could lead
to more rational pricing in the marketplace and benefit the
overall investment environment.


Broadband service providers

Technological developments have made it feasible
for cable television networks to carry data and voice
communications. We are seeing new competition as a result of the
development of commercial applications using Internet Protocol
technology (VoIP). This medium could attract substantial traffic
because of its lower cost structure due to the fact that FCC
rules do not currently impose access charges on most
communications carried over this technology.

FRANCHISES AND LICENSES

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






Domestic Wireless


OVERVIEW

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

Cingular provides a wide array of wireless
services for individual, business and governmental users. On
October 26, 2004, Cingular completed its previously
announced acquisition of AT&T Wireless, creating the largest
wireless carrier in the United States based on number of
customers. In addition, Cingular is one of the largest digital
wireless network operators in the United States. At
December 31, 2004:




| |   |                                                                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Cingular reported US wireless cellular service
    and personal communication services (PCS) customers totaling
    49.1 million;                                                                                                                                        
| |  | Cingular had access to licenses to provide
    cellular or PCS wireless communications services covering an
    aggregate of 290 million in population (POPs), or approximately
    98% of the US population, including all of the 100 largest
    US metropolitan areas;
| |  | Cingulars primary digital networks utilize
    Global System for Mobile Communication (GSM) technology and Time
    Division Multiple Access (TDMA) technology;                                                                                                         
| |  | 65% of Cingulars subscriber base was GSM
    equipped and 79% of its total minutes were carried on its GSM
    network; and                                                                                                                                             
| |  | Cingular had over 17 million active users of
    its data services.                                                                                                                                                                                                      

Cingular supplements its own networks with
roaming agreements that allow its subscribers to use other
providers wireless services in regions where Cingular does
not have network coverage. Cingular refers to the area covered
by its network footprint and roaming agreements as its coverage
area. With these roaming agreements, as of December 31,
2004, Cingular was able to offer its customers digital wireless
services covering 95% of the US population.

Cingular also offers multi-band devices that
allow its customers to access networks using both the cellular
and PCS frequencies across the US as well as international
networks around the world. Cingular provides its customers
equipped with multi-band devices the largest global coverage of
any US wireless carrier, with service available in over
170 countries. Cingular plans to continue to expand its
service and coverage area and increase the capacity and quality
of its digital network through new network construction,
acquisitions, joint ventures, and roaming arrangements with
other wireless providers. Cingular also offers wholesale
services to resellers, who purchase wireless services from
Cingular for resale to their customers.


In October 2004, Cingular sold Cingular
Interactive, L.P., a data messaging business utilizing the
proprietary Mobitex packet switched network.
Cingular retained Cingular Interactives direct e-mail
customers, as well as several other major accounts. Cingular
will continue Cingular Interactives involvement in this
data business as a reseller.


In 2001, Cingular and T-Mobile USA exchanged FCC
licenses, and subsequently formed a joint venture, to share
infrastructure covering the metropolitan New York market, most
of California and parts of Nevada. In May 2004, Cingular and
T-Mobile entered into an agreement to dissolve the joint
venture, distribute the related network assets, sell to T-Mobile
certain assets and spectrum and exchange certain spectrum, since
Cingular determined that the AT&T Wireless acquisition would
provide spectrum and network infrastructure in areas missing
from Cingulars




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original footprint. The first phase of these
transactions closed in January 2005.


Pursuant to the dissolution agreement, in January
2005 Cingular sold its ownership of the California/Nevada
network assets to T-Mobile for $2.3 billion in cash, net of
cash payments required by the dissolution. The ownership of the
New York network assets returned to T-Mobile. Cingular retained
the right to utilize the California/Nevada and New York networks
during a four-year transition period and has guaranteed to
purchase a minimum number of minutes over this term with a
minimum purchase of $1.2 billion. Cingular and
T-Mobile retained all of their respective customers in each
market.


BUSINESS STRATEGY

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

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | build the best network by integrating the
    Cingular and AT&T Wireless networks, accelerating the build
    out of the network to improve coverage in suburban and
    neighborhood areas and strengthen the in-building penetration in
    urban areas, deploying its 3rd generation cellular/PCS system in
    major markets across the country and working with its rural
    roaming partners to improve and expand coverage outside of its
    footprint and assist them in providing consistent products and
    services to its customers that roam across their networks;
| |  | deliver exceptional customer service through the
    implementation of policies and procedures at every point of
    contact with its customers to improve the customer experience;                                                                                                                                                                                                                                                                                                                                                                                                
| |  | rationalize its direct and indirect distribution
    channels and expand sales locations opportunistically to create
    an unmatched distribution network;                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | continue to offer compelling products and
    services, including devices, features and pricing plans, that
    differentiate Cingular from its competitors; and                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | efficiently integrate AT&T Wireless
    business and operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

OPERATIONS

Voice services

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

POSTPAID VOICE SERVICE

Consumer postpaid voice service is generally
offered on a contract basis for one or two year periods. Under
the terms of these contracts, service is provided and billed on
a monthly basis according to the applicable pricing plan chosen.
Cingulars wireless services include basic local wireless
communications service, long distance service and roaming
services, which enable customers to utilize other carriers
networks when they are roaming outside
Cingulars network. Cingular also bills other carriers for
providing roaming services to their customers when their
customers utilize Cingulars network. Cingular had
approximately 42.9 million postpaid contract customers
(excluding reseller customers) at December 31, 2004. In
addition to basic wireless voice telephony services, Cingular
offers many enhanced features, such as caller ID, call waiting,
call forwarding, three-way calling, no answer/busy transfer and
voice mail, with many of its pricing plans. In some markets,
Cingular makes available additional services for a monthly fee,
such as unlimited Mobile-to-Mobile calling, discounted
international roaming and international long distance, expanded
off peak hours, roadside assistance and handset insurance.

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


PREPAID VOICE SERVICE

Cingular offers prepaid service to meet the
demands of distinct consumer segments, such as the youth market,
families and small business customers, who prefer to pay in
advance. As of December 31, 2004, retail prepaid users
represented approximately 7% of Cingulars total customers.
Cingular believes its prepaid service offering benefits from
being part of a national brand, particularly with regard to
distribution. Its prepaid strategy focuses on increasing the
profitability of this customer segment by offering a wider array
of services and features to increase the revenue and retention
of these customers. Its prepaid services offer customers many
features available on its postpaid plans, including unlimited
nights and weekends, long distance, caller ID, call waiting,
voicemail and off-network roaming, as well as enhanced features
like text messaging, downloadable graphics and ringtones, games
and information alerts. At the same time, the customer retains
the benefits of no credit check and enhanced ability to control
spending and some of its prepaid customers have no contract or
monthly billing. In addition, Cingular continues to focus on
increasing the distribution of its prepaid offering to include
the Internet, automated replenishment services and strategic
retail partners.

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




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Data services

Cingular currently offers a wide array of
consumer data services such as wireless Internet browsing,
wireless e-mail, text messaging, instant messaging, multi-media
messaging and downloadable content and applications. Cingular
continues to focus on improving the customer experience through
the deployment of advanced data capable devices, through
constantly enhancing the user interface on these devices, and by
making the provisioning of data services on these devices as
seamless as possible. With the acquisition of AT&T Wireless,
we believe that Cingular is the largest provider of wireless
data in the US wireless industry based on annual data
revenues for 2004.

Cingular provides wireless access to corporate
business applications for customers who have mobile field
personnel. Its wireless solutions allow sales managers to access
corporate e-mail when away from the office and allows
technicians to solve problems and access corporate databases
from the field. To deliver these services, Cingular offers a
wide range of wireless data devices for business needs. Cingular
supports all major operating system platforms 
BlackBerry, Windows Mobile, Palm and Symbian and a wide range of
devices, including data-enabled handsets, integrated personal
digital assistants (PDAs) (such as, BlackBerry handhelds),
personal computer data cards and special purpose devices.


Equipment sales

Cingular sells a wide variety of handsets,
integrated PDAs and wireless PC card modems manufactured by
various suppliers for use with its service. Cingular provides
postpaid contract customers substantial equipment subsidies to
initiate or upgrade service. Cingular also provides its
customers and resellers with subscriber identity modules (SIMs)
to use in special purpose devices that they can buy directly
from equipment manufacturers. In addition, Cingular sells
accessories, such as carrying cases, hands-free devices,
batteries, battery chargers and other items to consumers and to
agents and other third-party distributors for resale.

NETWORK

Licenses

Cingular has access to wireless licenses to
provide voice and data services over cellular/PCS networks in
all 100 of the largest US metropolitan areas, covering an
aggregate of 290 million POPs, or approximately 98% of the
US population. Cingular has also signed numerous roaming
agreements to ensure its customers can receive wireless service
in virtually all areas in the United States where cellular/PCS
service is available. Cingulars cellular/PCS networks are
substantially complete.

Technology

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

Cingular uses both Global System for Mobile
Communication (GSM) and Time Division Multiple Access (TDMA)
technology. These are digital technologies that allow for
numerous advantages over analog service, including extended
battery life, improved voice quality, greater call security and
lower per-minute costs. Digital service also enables enhanced
features and services, such as interactive messaging, facsimile,
e-mail and wireless connections to computer/data networks and
the Internet. Further, GSM offers three to four times the voice
capacity of TDMA digital technology and provides economies of
scale due to its predominant global use. Hardware and software
enhancements, referred to as General Packet Radio Service (GPRS)
and Enhanced Data Rates for GSM Evolution (EDGE), allow
high-speed data communications. Although Cingular offers analog
and digital service in its cellular markets and digital service
in its PCS markets, less than 1% of Cingulars total usage
based on minutes remains on its analog network.


The operation and performance of todays
wireless communication networks and handsets is functionally
identical across all digital technologies, and we believe that
wireless customers are generally unaware of or unconcerned with
the particular technology of their chosen wireless carrier.
Therefore, we believe that Cingulars chosen technology
path is fully capable of supporting its business growth
strategies in this competitive market. Nevertheless, to continue
to advance and potentially differentiate versus the competition,
Cingular is actively deploying a more advanced 3rd generation
(3G) technology.


Although many advances are still underway for
enhanced capacity, performance and features in all of the
deployed technologies, Cingular, through its acquisition of
AT&T Wireless, operates its 3rd generation cellular/PCS
system using the Universal Mobile Telecommunications System
(UMTS) standard in six cities (Dallas, San Francisco, Detroit,
Phoenix, Seattle and San Diego). UMTS, like GSM, is the dominant
world standard that has been accepted and deployed in Europe and
Asia. Cingulars currently deployed 3rd generation UMTS
systems allow user average data download speeds between 220-300
kilobits per second (kbps), providing the capability for a
variety of services such as streaming audio, video, and
simultaneous voice and data applications. Much like
Cingulars EDGE system, UMTS allows for packet data
enabling always on connectivity, which is useful for
receiving email when it arrives versus the need to set aside
time for an email download, allowing billing based on the amount
of data transferred, rather than the amount of time a given
device is connected.


In January 2005, Cingular field tested a higher
speed downlink component of UMTS called High Speed
Downlink Packet Access (HSDPA), which it intends to
offer in all of its UMTS markets. Cingulars successful
field trial of the first phase of HSDPA, which provides up to
3.6 megabits per




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second (mbps) peak speed, demonstrated that HSDPA
is the fastest wide-area wireless high speed data solution
available for consumer access in the US. In the next two years,
HSDPA is expected to have average throughput in the
400-700 kbps range and theoretical speeds of 14 mbps.
Cingular currently expects to deploy HSDPA in 15 to
20 markets in 2005, and to provide UMTS/HSDPA in
substantially all of the top 100 markets by the end of 2006.


Spectrum capacity and
coverage

Cingular currently owns licenses for spectrum in
the 850 MHz and 1900 MHz bands. We expect that the
demand for its wireless services will grow over the next several
years as the demand for both traditional wireless voice services
and wireless data and Internet services increases significantly.
We anticipate that Cingular will need access to additional
spectrum in selected densely populated markets to meet expected
demand for existing services and throughout its network to
provide UMTS/HSDPA. Some of this additional spectrum requirement
was met by the acquisition of AT&T Wireless and the purchase
of 1900 MHz spectrum from NextWave Telecom, Inc. (NextWave).

In order to acquire access to additional
spectrum, Cingular may participate in future FCC auctions and
exchange spectrum with, and lease or purchase spectrum licenses
from, other wireless carriers. On February 15, 2005, the
FCCs most recent auction of wireless spectrum concluded.
Cingular participated in Auction 58 as a non-controlling
equity interest holder in Edge Mobile, LLC (Edge). Edge was the
successful bidder for, and following the filing and review of
the standard applications, expects to be granted
21 licenses. Edges total high bids for the licenses
in which Cingular will have an indirect economic interest
amounted to $181, of which Cingular is obligated to fund $174.
Upon and subject to grant of these licenses by the FCC, Edge
will hold 20 MHz of PCS spectrum in Pittsburgh and
10 MHz in Dayton, Denver, Kansas City, Minneapolis,
Norfolk, Oklahoma City, Richmond and other areas, all of which
are markets where Cingular currently operates. Cingular may also
obtain additional spectrum capacity through mergers and
acquisitions, joint ventures and alliances.


Network integration

The acquisition of AT&T Wireless provided
Cingular with significantly more cell sites covering its
footprint than any other operator in the US. To ensure the
additional cell sites result in improved coverage for its
customers, Cingular has activated home-on-home
roaming between the previous AT&T Wireless and
Cingular systems allowing former AT&T Wireless customers to
roam onto Cingular networks where they did not have AT&T
Wireless coverage and similarly for Cingular customers. Cingular
intends to maintain this improved coverage and to continue
network construction to add a large number of new cell sites to
further bolster its coverage advantage.

Cingular also has opportunities to reduce the
ongoing cost of the business in areas where the former Cingular
and AT&T Wireless had comparable coverage, such as when they
were both co-located on the same cell site. In these situations,
Cingular intends to choose the best cell sites and de-commission
the other cell sites. This process will occur during
integration, when both networks are combined into one commonly
controlled network. Cingular expects to have over 40% of the
networks integrated by the end of 2005, and finalize its network
integration by the end of 2006.


COMPETITION

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

Cingulars competitors are principally the
other largest national providers of cellular, PCS and other
wireless communications services  Verizon
Wireless Inc., Sprint PCS, Nextel Communications Inc. and
T-Mobile, which together with Cingular served over 90% of the
US wireless customers. Cingulars competitors also
include regional carriers, such as U.S. Cellular and Alltel
Corporation, niche carriers, such as MetroPCS and Cricket
Communications Inc. and resellers. Some of the indirect
retailers who sell Cingulars services also sell its
competitors services. Cingular ranks first among the five
national carriers in terms of customers served as of
December 31, 2004, and second in 2004 revenues. Verizon
Wireless ranks second in terms of customers served and first in
terms of revenues for 2004.


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


Consolidation, alliances and business ventures
may increase competition. Consolidation and the formation of
alliances and business ventures within the wireless
communications industry have occurred and Cingular expects that
this trend will continue. Consolidation may create larger,
better-capitalized competitors with substantial financial,
technical, marketing, distribution and other resources to
compete with Cingulars product and service offerings. In
addition, global combinations of wireless carriers 
such as the joint venture between Sprint PCS and Virgin Group
Ltd., Verizon Wireless, which is a joint venture between Verizon
Communications and Vodafone Group Plc, and mergers and
acquisitions, such as the ownership of T-Mobile by Deutsche
Telekom AG and proposed mergers of Sprint Corporation and
Nextel, and Alltel and Western Wireless Corporation 
may give some domestic competitors better access to
international technologies, marketing expertise and strategies
and diversified sources of capital. Other large, national
wireless carriers have affiliations with a number of smaller,
regional wireless carriers that offer wireless services under
the same national brand, thereby expanding the national
carriers perceived national scope.


Cingulars ability to compete successfully
will depend, in part, on the quality of its network, customer
service, and sales and distribution channels, as well as its
marketing efforts and ability to anticipate and respond to
various competitive factors affecting the industry. These
factors include the introduction of new services and
technologies, changes in consumer preferences, demographic
trends,




10 BELLSOUTH
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##### Table of Contents



economic conditions, pricing strategies of
competitors and its ability to take advantage of its
relationship with SBC and BellSouth. As a result of competition,
Cingular has in the past and may in the future be required to:




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

WIRELESS REGULATORY ENVIRONMENT

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




Advertising & Publishing Group

OVERVIEW

We are one of the leading publishers of telephone
directories in the United States. Our Advertising &
Publishing Group publishes more than 500 directories and
distributes approximately 63 million copies to residences,
businesses and government agencies in the Southeast. Revenues
from this group represented approximately 10% of our total
operating revenues in 2004, 2003 and 2002.

We publish alphabetical white page directories of
business and residential telephone subscribers in substantially
all of our wireline telecommunications markets and sell
advertising in and publish classified directories under The
Real Yellow Pages® trademark in the same markets.
The published advertising is made available through our own
RealPages.com site and through partnerships with multiple search
engines.


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


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


We also provide telephone directory and
electronic sales and publishing services for nonaffiliated
telephone companies and receive a portion of the advertising
revenue as a commission. During 2004, we contracted with
101 nonaffiliated telephone companies to sell advertising
in over 549 classified directories in 42 states. We
also act as an agent for national yellow page ad placements in
50 states on behalf of over 413 companies.


BUSINESS STRATEGY

We are committed to remaining the preferred
comprehensive source linking buyers and sellers in the local,
regional and national marketplace. To achieve this objective, we
intend to:



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

COMPETITION

Competition in the yellow pages industry
continues to intensify. Major markets are seeing multiple
competitors, with many different media competing for advertising
revenue. Within the print yellow pages, we compete primarily
with Yellow Book USA, White Publishing, R.H. Donnelly, and
Verizon. Other electronic competitors include Google,
YahooLocal, SuperPages.com and other Internet search engines
that have a small but growing percentage of yellow page-like
searches. Competition for directory sales agency contracts for
the sale of advertising in publications of nonaffiliated
companies also continues to be strong. We continue to respond to
the increasing competition and the dynamic media environment
with investments in product enhancements, multiple delivery
options, local promotions, customer value plans, increased
advertising, and sales execution.




Latin American Group

On March 5, 2004, we signed an agreement
with Telefónica Móviles, S.A., the wireless affiliate
of Telefónica, S.A., to sell all our interests in our Latin
American operations. During October 2004, we closed on the sale
of 8 of the 10 properties: Venezuela, Colombia, Ecuador, Peru,
Guatemala, Nicaragua, Uruguay and Panama. We closed on the sale
of the remaining two properties (Argentina and Chile) in January
2005.



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2004      11




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Intellectual Property

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

In addition to using our intellectual property in
our own operations, BellSouth grants licenses to certain other
companies to use our intellectual property.


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





Research and Development

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




Employees

At December 31, 2004, we employed almost
63,000 individuals. About 67% of BellSouths employees
at December 31, 2004 were represented by the Communications
Workers of America (CWA), which is affiliated with the AFL-CIO.
Collective bargaining agreements with the CWA were last ratified
in September 2004. These five-year contracts, which expire
August 8, 2009, cover approximately 42,000 employees. The
contracts include basic wage increases of 1% in year one, 2% in
year two and annual increases of 2.5% in years three through
five totaling 10.5% over the contract term. The contracts also
provide for a 4% lump-sum payment upon ratification by the
membership. In addition, the agreements provide for a standard
incentive award of 2% in the first three years of the contract
increasing to 3% in years four and five. Other terms of the
agreements include pension band increases and pension plan cash
balance improvements for active employees. We expect the
agreements to continue to give us the workforce planning
flexibility needed to respond to changing marketplace conditions.




Properties

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

|                              |  |      |      |      |  |  |      |  
|----------------------------- |  | ---- | ---- | ---- |  |  | ---- | -
|                              |  | 2003 |      | 2004
|                             
|                             
|Outside plant                 |  |      | 40.5 | %    |  |  | 43.0 | %
|Central office equipment      |  |      | 39.7 |      |  |  | 41.7 |  
|Operating and other equipment |  |      | 7.9  |      |  |  | 3.6  |  
|Land and buildings            |  |      | 7.7  |      |  |  | 7.6  |  
|Furniture and fixtures        |  |      | 3.8  |      |  |  | 3.8  |  
|Plant under construction      |  |      | 0.4  |      |  |  | 0.3  |  
|                             
|                              |  |      | 100  | %    |  |  | 100  | %
|                             

Almost all of these properties are located in our
Communications Group segment.

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


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





Legal Proceedings

EMPLOYMENT CLAIM

On April 29, 2002, five African-American
employees filed a putative class action lawsuit, captioned
Gladys Jenkins et al. v. BellSouth Corporation, against
the Company in the United States District Court for the Northern
District of Alabama. The complaint alleges that BellSouth
discriminated against current and former African-American
employees with respect to compensation and promotions in
violation of Title VII of the Civil Rights Act of 1964 and
42 USC Section 1981. Plaintiffs purport to bring the claims
on behalf of two classes: a class of all African-American hourly
workers employed by BellSouth Telecommunications at any time
since April 29, 1998, and a class of all African-American
salaried workers employed by BellSouth Telecom-



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##### Table of Contents



munications at any time since April 29, 1998
in management positions at or below Job
Grade 59/Level C. The plaintiffs are seeking
unspecified amounts of back pay, benefits, punitive damages and
attorneys fees and costs, as well as injunctive relief. At
this time, the likely outcome of the case cannot be predicted,
nor can a reasonable estimate of the amount of loss, if any, be
made.


SECURITIES AND ERISA CLAIMS

From August through October 2002, several
individual shareholders filed substantially identical class
action lawsuits against BellSouth and three of its senior
officers alleging violations of the federal securities laws. The
cases have been consolidated in the United States District Court
for the Northern District of Georgia and are captioned In re
BellSouth Securities Litigation. Pursuant to the provisions
of the Private Securities Litigation Reform Act of 1995, the
court has appointed a Lead Plaintiff. The Lead Plaintiff filed a
Consolidated and Amended Class Action Complaint in July
2003 on behalf of two putative classes: (1) purchasers of
BellSouth stock during the period November 7, 2000 through
February 19, 2003 (the class period) for alleged violations
of Sections 10(b) and 20 of the Securities Exchange Act of
1934 and (2) participants in BellSouths Direct
Investment Plan during the class period for alleged violations
of Sections 11, 12 and 15 of the Securities Act of 1933.
Four outside directors were named as additional defendants. The
Consolidated and Amended Class Action Complaint alleged
that during the class period, the Company (1) overstated
the unbilled receivables balance of its Advertising &
Publishing subsidiary; (2) failed to properly implement SAB
101 with regard to its recognition of Advertising &
Publishing revenues; (3) improperly billed competitive
local exchange carriers (CLEC) to inflate revenues;
(4) failed to take a reserve for refunds that ultimately
came due following litigation over late payment charges; and
(5) failed to properly write down goodwill of its Latin
American operations. On February 8, 2005, the district
court dismissed the Exchange Act claims, except for those
relating to the writedown of Latin American goodwill. On that
date, the district court also dismissed the Securities Act
claims, except for those relating to the writedown of Latin
American goodwill, the allegations relating to unbilled
receivables of the Companys Advertising &
Publishing subsidiary, the implementation of SAB 101
regarding recognition of Advertising & Publishing
revenues and alleged improper billing of CLECs. The plaintiffs
are seeking an unspecified amount of damages, as well as
attorneys fees and costs. At this time, the likely outcome
of the case cannot be predicted, nor can a reasonable estimate
of loss, if any, be made.

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


In September and October 2002, three
substantially identical class action lawsuits were filed in the
United States District Court for the Northern District of
Georgia against BellSouth, its directors, three of its senior
officers, and other individuals, alleging violations of the
Employee Retirement Income Security Act (ERISA). In January
2004, a fourth ERISA class action lawsuit was filed in the same
court. All the cases have been consolidated and an Amended
Consolidated Complaint was filed on April 2, 2004. The
plaintiffs, who seek to represent a putative class of
participants and beneficiaries of BellSouths 401(k) plans
(the Plans), allege in the Consolidated Complaint that the
company and the individual defendants breached their fiduciary
duties in violation of ERISA, by among other things,
(1) failing to provide accurate information to the
Plans participants and beneficiaries; (2) failing to
ensure that the Plans assets were invested properly;
(3) failing to monitor the Plans fiduciaries;
(4) failing to disregard Plan directives that the
defendants knew or should have known were imprudent and
(5) failing to avoid conflicts of interest by hiring
independent fiduciaries to make investment decisions. The
plaintiffs are seeking an unspecified amount of damages,
injunctive relief, attorneys fees and costs. Certain
underlying factual allegations regarding BellSouths
Advertising & Publishing subsidiary and its former Latin
American operation are substantially similar to the allegations
in the putative securities class action captioned In re
BellSouth Securities Litigation, which is described above.
At this time, the likely outcome of the cases cannot be
predicted, nor can a reasonable estimate of loss, if any, be
made.


ANTITRUST CLAIMS

In December 2002, a consumer class action
alleging antitrust violations of Section 1 of the Sherman
Antitrust Act was filed against BellSouth, Verizon, SBC and
Qwest, captioned William Twombley, et al v. Bell Atlantic
Corp., et al, in Federal Court in the Southern District of
New York. The complaint alleged that defendants conspired to
restrain competition by agreeing not to compete with one
another and otherwise allocating customers and markets to one
another. The plaintiffs are seeking an unspecified amount
of treble damages and injunctive relief, as well as
attorneys fees and expenses. In October 2003, the district
court dismissed the complaint for failure to state a claim and
the case is now on appeal.

In June 2004, the U.S. Court of Appeals for the
11th Circuit affirmed the District Courts
dismissal of most of the antitrust and state law claims brought
by a plaintiff CLEC in a case captioned Covad Communications
Company, et al v. BellSouth Corporation, et al. The
appellate court, however, permitted a price squeeze claim and
certain state tort claims to proceed. At this time, the likely
outcome of the case cannot be predicted, nor can a reasonable
estimate of loss, if any, be made.




BELLSOUTH
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ENVIRONMENTAL MATTERS

We are subject to a number of environmental
matters as a result of our operations and the shared liability
provisions related to the breakup of the Bell System. At
December 31, 2004, our recorded liability related to these
matters was approximately $10 million. We continue to
believe that expenditures in connection with additional remedial
actions under the current environmental protection laws or
related matters will not be material to our results of
operations, financial position or cash flows.

OTHER MATTERS

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




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,
2004.




Additional Information  Description of BellSouth
Stock

GENERAL

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

DIVIDEND RIGHTS

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

VOTING RIGHTS

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

LIQUIDATION RIGHTS

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

DIRECTORS

In 2004, our shareholders approved an amendment
to our By-laws to eliminate the classified Board structure. As a
result, each director is elected annually for a one year term.
The By-laws also provide that shareholders may remove directors
from office only for cause, and can amend the By-laws with
respect to the number of directors or amend the board
classification provisions only by the affirmative vote of the
holders of at least 75% of the outstanding shares entitled to
vote for the election of directors.

PRE-EMPTIVE RIGHTS; CONVERSION RIGHTS;
REDEMPTION

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



14 BELLSOUTH
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PREFERRED STOCK PURCHASE RIGHTS

Each share of common stock outstanding includes
one preferred stock purchase right (Right). Under certain
circumstances, each Right will entitle the holder to purchase
one one-thousandth of a share of Series B Preferred Stock,
$1 par value (Common Equivalent Preferred Stock), which unit is
substantially equivalent in voting and dividend rights to one
whole share of the common stock, at a price of $200 per unit
(the Purchase Price). The Rights are not presently exercisable
and may be exercised only if a person or group (Acquiring
Person) acquires 15% of the outstanding voting stock of
BellSouth without the prior approval of the Board or announces a
tender or exchange offer that would result in ownership of 15%
or more of the common stock.

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


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


BUSINESS COMBINATIONS

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

FAIR PRICE PROVISIONS

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

LIMITATION ON SHAREHOLDERS
PROCEEDINGS

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

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




BELLSOUTH
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Executive Officers

The executive officers of BellSouth Corporation
are listed below:

|                       |  |     |    |        |  |                                                                  |  |        |      |  |  |  |      |  |  | 
|---------------------- |  | --- | -- | ------ |  | ---------------------------------------------------------------- |  | ------ | ---- |  |  |  | ---- |  |  | 
|                       |  |     |    |        |  |                                                                  |  | This   |      | 
|                       |  |     |    |        |  | Officer                                                          |  | Office |      | 
|Name                   |  | Age |    | Office |  | Since                                                            |  | Since  |      | 
|                      
|                      
|F. Duane Ackerman      |  |     | 62 |        |  | Chairman of the Board, President and
    Chief Executive Officer |  |        | 1983 |  |  |  | 1997 |  |  | 
|Richard A. Anderson    |  |     | 46 |        |  | Vice Chairman  Planning and
    Administration                  |  |        | 1993 |  |  |  | 2005 |  |  | 
|Francis A. Dramis, Jr. |  |     | 56 |        |  | Chief Information, E-Commerce and Security Officer               |  |        | 1998 |  |  |  | 2000 |  |  | 
|Ronald M. Dykes        |  |     | 58 |        |  | Chief Financial Officer                                          |  |        | 1988 |  |  |  | 1995 |  |  | 
|Mark L. Feidler        |  |     | 48 |        |  | Chief Operating Officer                                          |  |        | 2004 |  |  |  | 2005 |  |  | 
|Marc Gary              |  |     | 52 |        |  | General Counsel                                                  |  |        | 2004 |  |  |  | 2004 |  |  | 
|Isaiah Harris, Jr.     |  |     | 52 |        |  | President  BellSouth Advertising
    & Publishing Group         |  |        | 1997 |  |  |  | 2005 |  |  | 
|W. Patrick Shannon     |  |     | 42 |        |  | Senior Vice President  Finance and
    Controller               |  |        | 1997 |  |  |  | 2005 |  |  | 
|                      

All of the executive officers of BellSouth, other
than Mr. Feidler and Mr. Gary, have for at least the
past five years held high level management or executive
positions with BellSouth or its subsidiaries. Prior to joining
BellSouth in January 2004, Mr. Feidler had been Chief
Operating Officer of Cingular since October 2000. Prior to that,
he held various senior positions with BellSouths domestic
wireless operations. Prior to his election as General Counsel
effective in October 2004, Mr. Gary was Vice President and
Associate General Counsel since May 2000 and, prior to that, he
was a partner at the law firm of Mayer Brown & Platt.

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





Website Access

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

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


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







PART II







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


The principal market for trading in BellSouth
common stock is the New York Stock Exchange, Inc. (NYSE).
BellSouth common stock is also listed on the London, Frankfurt,
Amsterdam and Swiss exchanges. The ticker symbol for BellSouth
common stock is BLS. At January 31, 2005, there were
688,379 holders of record of BellSouth common stock. Market
price data was obtained from the NYSE Composite Tape, which
encompasses trading on the principal United States stock
exchanges as well as off-board trading. High and low prices
represent the highest and lowest sales prices for the periods
indicated.

|               |  |               |       |           |  |          |       |  |  |   |     | 
|-------------- |  | ------------- | ----- | --------- |  | -------- | ----- |  |  | - | --- | 
|               |  |               |       | Per Share
|               |  | Market Prices |       | Dividends
|               |  | High          |       | Low       |  | Declared
|               |  |              
|               |  |              
|2003           |  |               |       |           |  |          |       |  |  |   |     | 
|First Quarter  |  | $             | 30.00 |           |  | $        | 19.79 |  |  | $ | .21 | 
|Second Quarter |  |               | 27.98 |           |  |          | 21.00 |  |  |   | .23 | 
|Third Quarter  |  |               | 27.92 |           |  |          | 23.15 |  |  |   | .23 | 
|Fourth Quarter |  |               | 28.37 |           |  |          | 22.19 |  |  |   | .25 | 
|              
|2004           |  |               |       |           |  |          |       |  |  |   |     | 
|First Quarter  |  | $             | 31.00 |           |  | $        | 26.13 |  |  | $ | .25 | 
|Second Quarter |  |               | 27.86 |           |  |          | 24.46 |  |  |   | .27 | 
|Third Quarter  |  |               | 27.94 |           |  |          | 25.08 |  |  |   | .27 | 
|Fourth Quarter |  |               | 28.96 |           |  |          | 25.65 |  |  |   | .27 | 



16 BELLSOUTH
2004




---



##### Table of Contents



The following table contains information about
our purchases of equity securities during the fourth quarter of
2004.

Issuer Purchases of Equity
Securities

|                    |  |                     |           |                |  |                        |       |                       |  |  |   |  |  |  |   | 
|------------------- |  | ------------------- | --------- | -------------- |  | ---------------------- | ----- | --------------------- |  |  | - |  |  |  | - | 
|                    |  |                     |           |                |  | Total Number of Shares |       | Approximate Dollar   
|                    |  |                     |           |                |  | Purchased as Part of a |       | Value that May Yet Be
|                    |  | Total Number of     |           | Average Price  |  | Publicly Announced     |       | Purchased Under the  
|Period              |  | Shares Purchased(1) |           | Paid per Share |  | Plan(2)                |       | Plan(2)              
|                   
|                   
|October 1-31, 2004  |  |                     | 76,275    |                |  | $                      | 27.50 |                       |  |  |  |  |  |  |  | 
|November 1-30, 2004 |  |                     | 1,699,800 |                |  | $                      | 27.88 |                       |  |  |  |  |  |  |  | 
|December 1-31, 2004 |  |                     | 62,621    |                |  | $                      | 27.96 |                       |  |  |  |  |  |  |  | 
|                   
|Total               |  |                     | 1,838,696 |                |  |                        |       |                       |  |  |  |  |  |  |  | 
|                   

|    |                                                                                                                                                                                                                                                                                                                                                       
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes 138,896 shares purchased from
    employees to pay taxes related to the vesting of restricted
    shares, at an average price of $27.70, and 1,699,800 shares
    purchased from the external markets, at an average price of
    $27.88. Excludes shares purchased from employees to pay taxes
    related to the exercise of stock options.
|(2) | Our publicly announced stock repurchase
    program expired pursuant to its terms on December 31,
    2003.                                                                                                                                                                                                                                           

Stock Transfer Agent and Registrar

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



BELLSOUTH
2004      17




---



##### Table of Contents






SELECTED FINANCIAL AND OPERATING
DATA


DOLLARS ARE IN MILLIONS, EXCEPT PER SHARE AMOUNTS


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

|                                                                                                                                  |                                                                                                    |      |        |      |  |      |        |      |  |      |        |      |  |   |        |      |  |   |        |      |  |  | 
|--------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------- | ---- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ | ---- |  | - | ------ | ---- |  | - | ------ | ---- |  |  | 
|At December 31 or for the year ended                                                                                              |                                                                                                    | 2000 |        | 2001 |  | 2002 |        | 2003 |  | 2004 |        |     
|                                                                                                                                 
|                                                                                                                                 
|Income Statement Data:                                                                                                            |                                                                                                    |      |        |      |  |      |        |      |  |      |        |      |  |   |        |      |  |   |        |      |  | 
|Operating revenues                                                                                                                |                                                                                                    | $    | 23,245 |      |  | $    | 21,211 |      |  | $    | 20,207 |      |  | $ | 20,341 |      |  | $ | 20,300 |      |  | 
|                                                                                                                                 
|Operating expenses                                                                                                                |                                                                                                    |      | 16,663 |      |  |      | 15,339 |      |  |      | 15,753 |      |  |   | 14,784 |      |  |   | 15,011 |      |  | 
|                                                                                                                                 
|Operating income                                                                                                                  |                                                                                                    |      | 6,582  |      |  |      | 5,872  |      |  |      | 4,454  |      |  |   | 5,557  |      |  |   | 5,289  |      |  | 
|                                                                                                                                 
|Income from continuing operations before
    discontinued operations and cumulative effect of changes in
    accounting principle |                                                                                                    |      | 4,236  |      |  |      | 2,786  |      |  |      | 3,475  |      |  |   | 3,488  |      |  |   | 3,394  |      |  | 
|                                                                                                                                 
|Income (loss) from discontinued operations, net
    of tax                                                                        |                                                                                                    |      | (118   | )    |  |      | (339   | )    |  |      | (867   | )    |  |   | 101    |      |  |   | 1,364  |      |  | 
|                                                                                                                                 
|Income before cumulative effect of changes in
    accounting principle                                                            |                                                                                                    |      | 4,118  |      |  |      | 2,447  |      |  |      | 2,608  |      |  |   | 3,589  |      |  |   | 4,758  |      |  | 
|                                                                                                                                 
|Cumulative effect of changes in accounting
    principle, net of tax                                                              |                                                                                                    |      |       |      |  |      |       |      |  |      | (1,285 | )    |  |   | 315    |      |  |   |       |      |  | 
|                                                                                                                                 
|Net income                                                                                                                        |                                                                                                    |      | 4,118  |      |  |      | 2,447  |      |  |      | 1,323  |      |  |   | 3,904  |      |  |   | 4,758  |      |  | 
|                                                                                                                                 
|Operating income margin                                                                                                           |                                                                                                    |      | 28.3%  |      |  |      | 27.7%  |      |  |      | 22.0%  |      |  |   | 27.3%  |      |  |   | 26.1%  |      |  | 
|                                                                                                                                 
|Diluted earnings per share of common stock:                                                                                       |                                                                                                    |      |        |      |  |      |        |      |  |      |        |      |  |   |        |      |  |   |        |      |  | 
|                                                                                                                                 
|                                                                                                                                  | Income before discontinued operations and
    cumulative effect of changes in accounting principle |      | $      | 2.24 |  |      | $      | 1.48 |  |      | $      | 1.85 |  |   | $      | 1.88 |  |   | $      | 1.85 |  |  | 
|                                                                                                                                 
|                                                                                                                                  | Income before cumulative effect of changes in
    accounting principle                             |      | $      | 2.18 |  |      | $      | 1.30 |  |      | $      | 1.39 |  |   | $      | 1.94 |  |   | $      | 2.59 |  |  | 
|                                                                                                                                 
|                                                                                                                                  | Net income                                                                                         |      | $      | 2.18 |  |      | $      | 1.30 |  |      | $      | 0.71 |  |   | $      | 2.11 |  |   | $      | 2.59 |  |  | 
|                                                                                                                                 
|                                                                                                                                 
|Other Financial Data:                                                                                                             |                                                                                                    |      |        |      |  |      |        |      |  |      |        |      |  |   |        |      |  |   |        |      |  | 
|                                                                                                                                 
|Diluted weighted-average shares of common
    stock
    outstanding (millions)                                                    |                                                                                                    |      | 1,893  |      |  |      | 1,888  |      |  |      | 1,876  |      |  |   | 1,852  |      |  |   | 1,836  |      |  | 
|                                                                                                                                 
|Dividends declared per share of common stock                                                                                      |                                                                                                    | $    | 0.76   |      |  | $    | 0.76   |      |  | $    | 0.79   |      |  | $ | 0.92   |      |  | $ | 1.06   |      |  | 
|                                                                                                                                 
|Total assets                                                                                                                      |                                                                                                    | $    | 50,925 |      |  | $    | 52,046 |      |  | $    | 49,479 |      |  | $ | 49,702 |      |  | $ | 59,496 |      |  | 
|                                                                                                                                 
|Long-term debt                                                                                                                    |                                                                                                    |      | 12,463 |      |  |      | 15,014 |      |  |      | 12,283 |      |  |   | 11,489 |      |  |   | 15,108 |      |  | 
|                                                                                                                                 
|Shareholders equity                                                                                                              |                                                                                                    |      | 16,993 |      |  |      | 18,758 |      |  |      | 17,906 |      |  |   | 19,712 |      |  |   | 23,066 |      |  | 
|                                                                                                                                 

|                                              |  |   |         |  |  |   |        |  |  |   |        |  |  |   |        |  |  |   |        |  |  | 
|--------------------------------------------- |  | - | ------- |  |  | - | ------ |  |  | - | ------ |  |  | - | ------ |  |  | - | ------ |  |  | 
|Construction and capital expenditures         |  | $ | 6,169   |  |  | $ | 5,495  |  |  | $ | 3,536  |  |  | $ | 2,926  |  |  | $ | 3,193  |  |  | 
|                                             
|Book value per common share                   |  | $ | 9.08    |  |  | $ | 9.99   |  |  | $ | 9.63   |  |  | $ | 10.77  |  |  | $ | 12.60  |  |  | 
|                                             
|Ratio of earnings to fixed charges            |  |   | 5.36    |  |  |   | 3.98   |  |  |   | 5.03   |  |  |   | 5.68   |  |  |   | 6.00   |  |  | 
|                                             
|Debt ratio                                    |  |   | 54.0    |  |  |   | 51.7   |  |  |   | 49.2   |  |  |   | 43.1   |  |  |   | 47.1   |  |  | 
|                                             
|                                             
|Operating Data:                               |  |   |         |  |  |   |        |  |  |   |        |  |  |   |        |  |  |   |        |  |  | 
|                                             
|Access lines in service (in thousands)        |  |   | 24,546  |  |  |   | 23,824 |  |  |   | 23,005 |  |  |   | 22,263 |  |  |   | 21,356 |  |  | 
|                                             
|Retail long distance customers (in thousands) |  |   |        |  |  |   |       |  |  |   | 1,002  |  |  |   | 3,960  |  |  |   | 6,130  |  |  | 
|                                             
|DSL customers (in thousands)                  |  |   | 215     |  |  |   | 621    |  |  |   | 1,021  |  |  |   | 1,462  |  |  |   | 2,096  |  |  | 
|                                             
|Cingular Wireless customers (in thousands)    |  |   | 18,555  |  |  |   | 21,596 |  |  |   | 21,925 |  |  |   | 24,027 |  |  |   | 49,109 |  |  | 
|                                             
|Number of employees                           |  |   | 103,916 |  |  |   | 87,875 |  |  |   | 77,020 |  |  |   | 75,743 |  |  |   | 62,564 |  |  | 
|                                             

See Managements Discussion and
Analysis of Financial Condition and Results of
Operations  Consolidated Results of Operations
for a discussion of unusual items affecting the results for
2002, 2003 and 2004.



18 BELLSOUTH
2004




---



##### Table of Contents






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


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


BELLSOUTH CORPORATION

Overview

We are a Fortune 100 company with annual
revenues of over $20 billion. Our core business is wireline
communications and our largest customer segment is the retail
consumer. We have interests in wireless communications through
our ownership of approximately 40% of Cingular Wireless
(Cingular), the nations largest wireless company based on
number of customers. We also operate one of the largest
directory advertising businesses in the United States. The great
majority of our revenues are generated based on monthly
recurring services.

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


INDUSTRY DYNAMICS

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

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


REGULATION AND COMPETITION

Our wireless and wireline business are subject to
vigorous competition. In addition, both are subject to
regulation.

Because of changes to federal law in the early
1990s, our wireless business is now subject to somewhat more
rational regulation than our wireline business. The legal
changes generally preempted states from exercising any entry or
rate regulation on commercial mobile services, while allowing
states to regulate other terms and conditions. Our wireline
business is subject to dual state and federal regulation. The
Telecommunication Act of 1996 produced additional regulation of
our wireline business. Since its passage, the FCC has pursued a
course of sharing (unbundling) of our network with competitors,
and has prescribed a pricing policy (TELRIC) that does not
permit fair cost recovery. The unbundling rules have been
invalidated by the courts on three separate occasions, but not
before the unbundling required by its invalid policies had been
generally implemented in our contracts with competitors.


We expect the FCCs recent decision to end
the unbundled network elements platform (UNE-P) to restore some
rationality to the wireline mass market. Other parts of the FCC
decision governing the unbundling of high capacity loops and
transport that competitors use to provide services to business
customers provide relief in a small number of locations, but do
not recognize the substantial competition we face for business
customers in many other areas. Our states generally continue to
exercise economic regulation over most of the revenue generated
by intrastate telecommunications services. In recent years, we
have achieved some success in rebalancing state
telecommunication rates and in gaining some freedom from state
regulation of our broadband services.


We also obtained some broadband freedom through a
recent FCC decision not to require unbundling of installations
that bring fiber optic technology within 500 feet of a
customers premises. We equipped more than 100,000 homes
with this technology in 2004, and expect to continue deployments
in 2005.


Despite these successes, our wireline business
remains more regulated than competing businesses that use cable
or wireless technologies. We will accordingly continue to
encourage regulatory reform in every appropriate forum.


ACQUISITIONS AND DISPOSITIONS

On October 26, 2004, Cingular completed its
previously announced acquisition of AT&T Wireless. With the
close of the transaction, Cingular management moved immediately
to begin integrating the two companies. Key focus areas included
customer communications, immediate training for all sales and
service personnel, relaunch of the Cingular brand, transitioning
to a common order system, and beginning the work that over time
will integrate support systems and network functions. This
acquisition will substantially increase BellSouths
participation in the domestic wireless industry.

On March 5, 2004, we signed an agreement
with Telefónica Móviles, S.A., the wireless affiliate
of Telefónica, S.A., to sell all our interests in our Latin
American operations. During October 2004, we closed on the sale
of 8 of the 10 properties: Venezuela, Colombia, Ecuador, Peru,
Guatemala, Nicaragua, Uruguay and Panama. During




BELLSOUTH
2004      19




---



##### Table of Contents



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


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


BELLSOUTH CORPORATION

January 2005, we closed on the sale of the
remaining properties in Argentina and Chile.

HIGHLIGHTS AND OUTLOOK

Consolidated revenues for 2004 were down slightly
compared to 2003 reflecting top line pressures caused by the
loss of 1.2 million retail access lines to UNE-P
competitors and technology substitution, primarily wireless.
Revenue contraction due to line loss and pricing pressures was
substantially offset by revenue growth from long distance and
DSL services. During 2004 we added approximately
2.2 million long distance customers to total
6.1 million at December 31, 2004, while net new DSL
subscriber additions of 634 thousand brought our total to
2.1 million. We anticipate a continuation of these trends
in 2005.

Our cost structure is heavily weighted towards
labor and fixed asset related costs. In order to sustain
margins, we have to adjust our workforce as market share of
access lines shifts. Since the beginning of 2001, we have
reduced our domestic workforce by almost 18,000 employees, or
22%. In 2004, we announced additional force reductions of nearly
1,400 employees reflecting continued pressures on access lines.
Maintaining current operating margin levels going forward will
be challenging as competition intensifies and we are forced to
achieve continued increases in productivity. This challenge was
evident during 2004 as margins were down from 2003. While there
have been some encouraging developments on the regulatory front,
there will be other events such as healthcare costs, continued
losses of lines to wireless substitution and the roll-out of
Voice over Internet Protocol (VoIP) telephony by cable providers
that are likely to continue to put pressure on margins.


BellSouth differentiates itself from its
competition through its commitment to customer service. Our
customers depend on us, especially when disaster strikes. In the
fall of 2004, BellSouths customer service met the
challenges presented by the most active and destructive Atlantic
hurricane season in years. During 2004, we incurred
approximately $164 of incremental labor and material costs
related to service restoration and network repairs due to the
four major hurricanes that hit during the third quarter.


In September 2004, the Communications Workers of
America (CWA) ratified BellSouths new contracts. The
agreements, which cover approximately 42,000 BellSouth employees
and expire August 8, 2009, are expected to continue to give
us the workforce planning flexibility needed to respond to
changing marketplace conditions.


Operating free cash flow from continuing
operations (cash flow from operating activities less capital
expenditures) of $3.6 billion for 2004 is down compared to
2003 primarily due to higher income tax payments. In the next
few years, operating cash flow will continue to be negatively
impacted by higher cash taxes as we see a reversal of the
benefit derived in recent years associated with legislated tax
incentives that provided for accelerated depreciation deductions
that expired at the end of 2004.




20 BELLSOUTH
2004




---



##### Table of Contents












Consolidated Results of Operations

Key financial and operating data for the three
years ended December 31, 2002, 2003 and 2004 are set forth
below. All references to earnings per share are on a diluted
basis. The following consolidated Managements Discussion
and Analysis of Financial Condition and Results of Operations
should be read in conjunction with results by segment directly
following this section.

Following generally accepted accounting
principles (GAAP), our financial statements reflect results for
the Latin American operations as Discontinued Operations. The
operational results and other activity associated with the Latin
American segment have been presented on one line item in the
income statement separate from Continuing Operations.

|                                                                                                                                                            |                                                   |                          |        |       |        |      |        |                |        |          |        |       |        |  |       |       |      |   |       |       |     | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------- | ------------------------ | ------ | ----- | ------ | ---- | ------ | -------------- | ------ | -------- | ------ | ----- | ------ |  | ----- | ----- | ---- | - | ----- | ----- | --- | 
|                                                                                                                                                            |                                                   |                          |        |       |        |      |        |               
|                                                                                                                                                            |                                                   |                          |        |       |        |      |        | Percent Change
|                                                                                                                                                            |                                                   |                          |        |       |        |      |        |               
|                                                                                                                                                            |                                                   |                          |        |       |        |      |        | 2003 vs.       |        | 2004 vs.
|                                                                                                                                                            |                                                   | 2002                     |        | 2003  |        | 2004 |        | 2002           |        | 2003    
|                                                                                                                                                           
|                                                                                                                                                           
|Results of operations:                                                                                                                                     
|                                                                                                                                                           
|                                                                                                                                                           
|Operating revenues                                                                                                                                          |                                                   | $                        | 20,207 |       |        | $    | 20,341 |                |        | $        | 20,300 |       |        |  | 0.7   |       |      |   | (0.2  | )    
|Operating expenses                                                                                                                                          |                                                   |                          |        |       |        |      |        |                |        |          |        |       |        |  |       |       |      |   |       |      
|                                                                                                                                                            | Cost of services and products                     |                          |        | 6,670 |        |      |        | 6,991          |        |          |        | 7,520 |        |  |       | 4.8   |      |   |       | 7.6   |    
|                                                                                                                                                            | Selling, general, and administrative expenses     |                          |        | 3,891 |        |      |        | 3,777          |        |          |        | 3,816 |        |  |       | (2.9  | )    |   |       | 1.0   |    
|                                                                                                                                                            | Depreciation and amortization                     |                          |        | 4,202 |        |      |        | 3,811          |        |          |        | 3,636 |        |  |       | (9.3  | )    |   |       | (4.6  | )  
|                                                                                                                                                            | Provision for restructuring and asset impairments |                          |        | 990   |        |      |        | 205            |        |          |        | 39    |        |  |       | (79.3 | )    |   |       | (81.0 | )  
|                                                                                                                                                            |                                                   |                          |        |       |        |      |        |                |        |          |        |       |        |  |       |       |      |   |       |      
|                                                                                                                                                            |                                                   | Total operating expenses |        |       | 15,753 |      |        |                | 14,784 |          |        |       | 15,011 |  |       |       | (6.2 | ) |       |       | 1.5 | 
|Operating income                                                                                                                                            |                                                   |                          | 4,454  |       |        |      | 5,557  |                |        |          | 5,289  |       |        |  | 24.8  |       |      |   | (4.8  | )    
|Interest expense                                                                                                                                            |                                                   |                          | 1,066  |       |        |      | 947    |                |        |          | 916    |       |        |  | (11.2 | )     |      |   | (3.3  | )    
|Net (losses) earnings of equity affiliates                                                                                                                  |                                                   |                          | 542    |       |        |      | 452    |                |        |          | 68     |       |        |  | (16.6 | )     |      |   | (85.0 | )    
|Gain on sale of operations                                                                                                                                  |                                                   |                          | 1,335  |       |        |      |       |                |        |          | 462    |       |        |  | *     |       |      |   | *     |      
|Other income (expense), net                                                                                                                                 |                                                   |                          | 102    |       |        |      | 362    |                |        |          | 283    |       |        |  | 254.9 |       |      |   | (21.8 | )    
|                                                                                                                                                            |                                                   |                          |        |       |        |      |        |                |        |          |        |       |        |  |       |       |      |   |       |      
|Income from continuing operations before income
    taxes, discontinued operations and cumulative effect of changes
    in accounting principle, net of tax |                                                   |                          | 5,367  |       |        |      | 5,424  |                |        |          | 5,186  |       |        |  | 1.1   |       |      |   | (4.4  | )    
|Provision for income taxes                                                                                                                                  |                                                   |                          | 1,892  |       |        |      | 1,936  |                |        |          | 1,792  |       |        |  | 2.3   |       |      |   | (7.4  | )    
|                                                                                                                                                            |                                                   |                          |        |       |        |      |        |                |        |          |        |       |        |  |       |       |      |   |       |      
|Income from continuing operations before
    discontinued operations and cumulative effect of changes in
    accounting principle                           |                                                   |                          | 3,475  |       |        |      | 3,488  |                |        |          | 3,394  |       |        |  | 0.4   |       |      |   | (2.7  | )    
|Income (loss) from discontinued operations, net
    of tax                                                                                                  |                                                   |                          | (867   | )     |        |      | 101    |                |        |          | 1,364  |       |        |  | 111.6 |       |      |   | *     |      
|                                                                                                                                                            |                                                   |                          |        |       |        |      |        |                |        |          |        |       |        |  |       |       |      |   |       |      
|Income before cumulative effect of changes in
    accounting principle                                                                                      |                                                   |                          | 2,608  |       |        |      | 3,589  |                |        |          | 4,758  |       |        |  | 37.6  |       |      |   | 32.6  |      
|Cumulative effect of changes in accounting
    principle, net of tax                                                                                        |                                                   |                          | (1,285 | )     |        |      | 315    |                |        |          |       |       |        |  | 124.5 |       |      |   | *     |      
|                                                                                                                                                            |                                                   |                          |        |       |        |      |        |                |        |          |        |       |        |  |       |       |      |   |       |      
|                                                                                                                                                            | Net income                                        |                          | $      | 1,323 |        |      | $      | 3,904          |        |          |        | 4,758 |        |  |       | 195.1 |      |   |       | 21.9  |    

|                                            |  |  |       |   |  |  |       |  |  |  |       |  |  |  |       |  |  |  |      | 
|------------------------------------------- |  |  | ----- | - |  |  | ----- |  |  |  | ----- |  |  |  | ----- |  |  |  | ---- | 
|                                           
|                                           
|Summary results of discontinued operations:
|                                           
|                                           
|Operating revenues                          |  |  | 2,233 |   |  |  | 2,294 |  |  |  | 2,459 |  |  |  | 2.7   |  |  |  | 7.2  | 
|Operating Income                            |  |  | 292   |   |  |  | 349   |  |  |  | 647   |  |  |  | 19.5  |  |  |  | 85.4 | 
|Income (loss) from discontinued operations  |  |  | (867  | ) |  |  | 101   |  |  |  | 1,364 |  |  |  | 111.6 |  |  |  | *    | 

* Not meaningful

2004 compared to 2003

OPERATING REVENUES

Consolidated revenues declined $41 in 2004 as
compared to 2003. Communications group revenues decreased $16
compared to 2003 reflecting the impact of revenue declines
associated with competitive line losses and related pricing
pressures substantially offset by growth in DSL and long
distance products. Revenues from DSL and long distance combined
increased $893 in 2004 compared to 2003. In addition, 2004 was
negatively affected by a $50 customer refund accrual associated
with a settlement agreement with the South Carolina Consumer
Advocate. A decline in revenue for the exit of the payphone
business was offset by higher revenues from the sale of
wholesale long distance. Advertising & Publishing group
revenues were down $28 in 2004 compared to 2003 because of a
reduction in print revenues due to lower overall spending by our
advertisers. Revenue trends are discussed in more detail in the
Communications group and Advertising & Publishing group
segment results sections.



BELLSOUTH
2004      21




---



##### Table of Contents



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


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


BELLSOUTH CORPORATION

OPERATING EXPENSES

Total operating expenses increased $227 in 2004
as compared to the prior year. The most significant expense
change driver was increased labor costs of $464, which includes
incremental overtime related to service restoration and network
repairs due to the four major hurricanes that hit during the
third quarter of 2004, higher expense associated with pension
and postretirement benefit plans (pension and retiree medical
costs) driven by changes associated with the recent contract
agreement with the CWA. The most significant changes were the
change in the calculation of the obligation for non-management
retiree medical costs as if there were no caps and lower
contractual limits on life insurance coverage, increases in
annual salary and wage rates, higher incentive compensation and
adjustments to workers compensation and long-term disability
accruals partially offset by lower average employees due to
continued workforce reductions. In addition to higher labor
costs, costs of goods sold increased $213 primarily for the
provision of long distance services associated with the growth
in subscribers and information technology expenses and contract
services increased $63 in connection with more project-related
spending.

These increases were partially offset by lower
depreciation and amortization expense of $175 attributable to
lower depreciation rates, lower uncollectible expense of $139
driven by improved economic conditions and improved collection
processes and lower access fees of $95 driven by CLEC
interconnect volume declines. The $166 decline in restructuring
charges and asset impairments is attributable to incrementally
smaller workforce reductions and a $52 asset impairment charge
related to an abandoned software project in 2003.


INTEREST EXPENSE

|                         |                |      |        |     |      |   |        |        |  |   |       |       |   |  | 
|------------------------ | -------------- | ---- | ------ | --- | ---- | - | ------ | ------ |  | - | ----- | ----- | - |  | 
|                         |                |      |        |    
|For the Year Ended       |                |      |        |     |     
|December 31,             |                |      |        |     |     
|                        
|                         |               
|                         |                | 2003 |        |     | 2004 |   |        | Change |  |   |      
|                        
|                         |               
|Interest expense  debt  |                | $    | 836    |     |      | $ | 864    |        |  | $ | 28    |       |   | 
|Interest expense  other |                |      | 111    |     |      |   | 52     |        |  |   | (59   | )     |   | 
|                        
|                         | Total interest |      | $      | 947 |      |   | $      | 916    |  |   | $     | (31   | ) |  | 
|                        
|Average debt balances(1) |                | $    | 14,193 |     |      | $ | 15,458 |        |  | $ | 1,265 |       |   | 
|                        
|Effective rate           |                |      | 5.9    | %   |      |   | 5.6    | %      |  |   | (30   | ) bps |   | 
|                        



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

Interest expense decreased $31 in 2004 compared
to 2003. Interest expense associated with interest-bearing debt
was up $28 for 2004 compared to 2003 reflecting higher average
debt balances impacted by higher incremental borrowings
associated with our equity contributions to Cingular to fund its
acquisition of AT&T Wireless. The lower effective interest
rate is due to our interest rate swap program and refinancing
higher-rate debt with lower-rate debt, offset partially by an
increase in commercial paper rates. The change in interest
expense-other relates primarily to the reversal of interest
accruals related to tax contingencies based on audit settlements.

NET EARNINGS (LOSSES) OF EQUITY
AFFILIATES

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

Earnings from Cingular in the 2004 periods were
lower compared to the same periods in 2003 primarily due to
impacts of the AT&T Wireless acquisition, which included
integration costs and higher depreciation expense associated
with increased capital investments and a reduction in the useful
life of TDMA assets.

GAIN (LOSS) ON SALE OF OPERATIONS

The gain on sale of operations in 2004 relates to
the sale of our interest in Danish wireless provider, Sonofon,
for 3.68 billion Danish Kroner to Telenor ASA. As a result
of the sale, we recorded a gain of $462, or $295 net of
tax, which included the recognition of cumulative foreign
currency translation gains of $13.

OTHER INCOME (EXPENSE), NET

|                                            |  |      |     |   |      |   |     |        |  |   |     |   |  | 
|------------------------------------------- |  | ---- | --- | - | ---- | - | --- | ------ |  | - | --- | - |  | 
|                                            |  |      |     |  
|For the Year Ended                          |  |      |     |   |     
|December 31,                                |  |      |     |   |     
|                                           
|                                            | 
|                                            |  | 2003 |     |   | 2004 |   |     | Change |  |   |    
|                                           
|                                            | 
|Interest Income                             |  | $    | 316 |   |      | $ | 300 |        |  | $ | (16 | ) |  | 
|Foreign currency transaction gains (losses) |  |      | 39  |   |      |   | (1  | )      |  |   | (40 | ) |  | 
|Loss on early extinguishment of debt        |  |      | (18 | ) |      |   | (14 | )      |  |   | 4   |   |  | 
|Other, net                                  |  |      | 25  |   |      |   | (2  | )      |  |   | (27 | ) |  | 
|                                           
|Total Other Income (Expense), net           |  | $    | 362 |   |      | $ | 283 |        |  | $ | (79 | ) |  | 
|                                           

The decrease in interest income reflects a lower
rate on our advance to Cingular and to a lesser extent the loss
of income on an advance to Dutch telecommunications provider
Royal KPN N.V. (KPN) due to early repayment in 2003.
Foreign currency transaction gains in 2003 relate primarily to
the advance to KPN.


During 2003, we recognized $33 in gains related
to the sale of our interests in two real estate partnerships and
the sale of a building. In addition, we recognized a $9 loss on
the sales and impairments of cost-method investments.




22 BELLSOUTH
2004




---



##### Table of Contents







PROVISION FOR INCOME TAXES

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

The effective tax rates in 2004 were reduced by a
favorable permanent difference for the Medicare Part D
subsidy and an adjustment to taxes payable associated with
divested operations.


INCOME (LOSS) FROM DISCONTINUED OPERATIONS,
NET OF TAX

Income (loss) from discontinued operations, net
of tax, increased $1,263 in 2004 compared to the same period in
2003 primarily due to the sale of eight of the ten Latin
American properties, which resulted in a $850 gain, net of tax.
Other net income increases include a $336 tax benefit related to
excess tax basis over book basis in our Latin America
investments, $177 for the cessation of depreciation beginning in
the second quarter of 2004, a $234 loss on the sale of our
interests in two Brazilian wireless companies in 2003, and
higher revenues. Partially offsetting the increases to net
income were the $190 charge related to the settlement of
arbitration in Venezuela, foreign exchange gain decreases of
$99, and a $33 loss in the second quarter of 2004 related to the
purchase of additional ownership share in Argentina.

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


CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING
PRINCIPLE

Asset retirement obligations

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

Revenue recognition for publishing
revenues

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

2003 compared to 2002

OPERATING REVENUES

Consolidated revenues increased $134 in 2003 as
compared to 2002. The increase in total operating revenues is
attributable to revenue growth in long distance and DSL, which
together generated nearly $800 in new revenue in 2003. Growth
from these new products was substantially offset by lower voice
revenues caused by the loss of 1.5 million retail access
lines to UNE-P competitors and technology substitution. Voice
revenues were also impacted by pricing strategies in our effort
to remain competitive. Revenues from the sale of wholesale data
transport services, including long distance and Competitive
Local Exchange Carriers, declined 7.8% in 2003 primarily due to
reductions in leased circuits by large inter-exchange carriers
as they rationalized their capacity needs in relation to current
demand. The exit from our payphone business and the elimination
of certain products within the wholesale long distance portfolio
also negatively impacted year-over-year comparisons.

Although Advertising & Publishing Group
revenues were up nearly 6%, the year-over-year comparison was
significantly impacted by a one-time reduction of $163 in 2002
for the correction of an error.


OPERATING EXPENSES

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



| |   |                                                                                                                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | $785 in lower charges related to restructuring
    and asset impairments as we rationalized our business in 2002;                                                                                                                                                                             
| |  | $391 of lower depreciation expense associated
    with the declines in capital expenditures and a change in
    accounting for plant retirements;                                                                                                                                             
| |  | $272 of improvements in uncollectibles expense
    due to a steadily improving economy, lower bankruptcy rates and
    operational improvements;                                                                                                                                              
| |  | $86 of lower cost of goods related to equipment
    sales in the Communications Group due to a change in the
    presentation for drop shipments from gross to net, which had no
    impact on operating margin, and paging and equipment costs
    decreased $53 driven by lower volumes; and
| |  | $121 in lower labor related costs in the
    Communications Group due to a nearly 12% reduction in our
    workforce since the beginning of 2002 driven by weak demand and
    increased productivity.                                                                                        



BELLSOUTH
2004      23




---



##### Table of Contents



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


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


BELLSOUTH CORPORATION

These decreases were partially offset by:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | $379 of incremental expense associated with
    pension and postretirement benefits plans (pension and retiree
    medical costs) driven by rising health care costs, unfavorable
    returns on pension assets due to weak capital markets over the
    past few years, changes to plan assumptions regarding expected
    asset returns, and a lower discount rate used to calculate
    service and interest cost;
| |  | $350 of customer acquisition costs related to
    competitive response in the Communications Group; and                                                                                                                                                                                                                                                                                                              
| |  | $108 of variable cost of goods for the provision
    of long distance service in the Communications Group.                                                                                                                                                                                                                                                                                                           

We have made adjustments to our business model to
address changes in our economic, regulatory, and competitive
environment, and as a result we have incurred charges in each of
the years presented. The provision for restructuring and asset
impairments of $205 in 2003 includes $153 of charges associated
with workforce reductions (including $47 of pension settlement
losses) and a $52 charge for an abandoned software project. The
provision of $990 in 2002 includes $635 of charges associated
with workforce reductions (including $167 of pension settlement
losses) and a $221 charge for the impairment of MMDS spectrum
license and charges of $134 associated with the elimination of
certain services including wholesale long distance and
e-business services.

INTEREST EXPENSE

|                         |                |      |        |       |  |        |        |     |  |   |        |      |   |  | 
|------------------------ | -------------- | ---- | ------ | ----- |  | ------ | ------ | --- |  | - | ------ | ---- | - |  | 
|                         |                |      |        |      
|For the Year Ended       |                |      |        |       | 
|December 31,             |                |      |        |       | 
|                        
|                        
|                         |                | 2002 |        | 2003  |  | Change |        |    
|                        
|                        
|Interest expense  debt  |                | $    | 953    |       |  | $      | 836    |     |  | $ | (117   | )    |   | 
|Interest expense  other |                |      | 113    |       |  |        | 111    |     |  |   | (2     | )    |   | 
|                        
|                         | Total interest |      | $      | 1,066 |  |        | $      | 947 |  |   | $      | (119 | ) |  | 
|                        
|Average debt balances(1) |                | $    | 16,525 |       |  | $      | 14,193 |     |  | $ | (2,332 | )    |   | 
|                        
|Effective rate           |                |      | 5.8    | %     |  |        | 5.9    | %   |  |   | 10 bps |      |   | 
|                        

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

Interest expense declined $119 in comparison to
the prior year, reflecting reductions in average debt of
approximately $2.4 billion, as rates were relatively stable.


GAIN ON SALE OF OPERATIONS

The gain in 2002 of $1,335 related to the sale of
our investment in E-Plus, a German wireless carrier.

NET EARNINGS (LOSSES) OF EQUITY
AFFILIATES

|                       |  |      |     |      |  |        |     |  |  |   |     |   |  | 
|---------------------- |  | ---- | --- | ---- |  | ------ | --- |  |  | - | --- | - |  | 
|                       |  |      |     |     
|For the Year Ended     |  |      |     |      | 
|December 31,           |  |      |     |      | 
|                      
|                      
|Equity in Earnings     |  | 2002 |     | 2003 |  | Change |     | 
|                      
|                      
|Cingular               |  | $    | 497 |      |  | $      | 408 |  |  | $ | (89 | ) |  | 
|Other equity investees |  |      | 45  |      |  |        | 44  |  |  |   | (1  | ) |  | 
|                      
|Total                  |  | $    | 542 |      |  | $      | 452 |  |  | $ | (90 | ) |  | 
|                      

Earnings from Cingular in 2003 declined compared
to 2002 primarily due to significant growth in customers and the
costs related to that growth and due to slightly lower average
revenue per customer. See Managements Discussion and
Analysis of Financial Condition and Results of
Operations  Results by Segment  Domestic
Wireless for further discussion of Cingular results.

OTHER INCOME (EXPENSE), NET

|                                                                     |          |   |      |      |   |   |      |     |  |   |      |     |  |  | 
|-------------------------------------------------------------------- | -------- | - | ---- | ---- | - | - | ---- | --- |  | - | ---- | --- |  |  | 
|                                                                     |          |   |      |     
|For the Year Ended                                                   |          |   |      |      |  
|December 31,                                                         |          |   |      |      |  
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|Gain (loss) on sales and impairments of cost
    method investments: |          |   |      |      |   |   |      |     |  |   |      |     |  | 
|                                                                    
|Qwest                                                                |          | $ | (336 | )    |   | $ |     |     |  | $ | 336  |     |  | 
|Other                                                                |          |   |     |      |   |   | (9)  |     |  |   | (9   | )   |  | 
|                                                                    
|                                                                     | Subtotal |   |      | (336 | ) |   |      | (9) |  |   |      | 327 |  |  | 
|                                                                    
|Interest Income                                                      |          |   | 460  |      |   |   | 316  |     |  |   | (144 | )   |  | 
|Loss on early extinguishment of debt                                 |          |   | (40  | )    |   |   | (18) |     |  |   | 22   |     |  | 
|Foreign currency gain/loss                                           |          |   | 16   |      |   |   | 39   |     |  |   | 23   |     |  | 
|Other                                                                |          |   | 2    |      |   |   | 34   |     |  |   | 32   |     |  | 
|                                                                    
|Total Other Income (Expense), net                                    |          | $ | 102  |      |   | $ | 362  |     |  | $ | 260  |     |  | 
|                                                                    

During 2002 we recorded other than temporary
impairments to reduce the carrying value of our Qwest investment
driven by continued weak market conditions, particularly in
technology and communications stocks. We also incurred losses on
sales of our Qwest investment. As of December 31, 2003, we
no longer hold any interest in Qwest.


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


During 2003, we recognized $33 in gains related
to the sale of our interests in two real estate partnerships and
the sale of a building.


PROVISION FOR INCOME TAXES

|                           |  |      |       |      |  |        |       |   |  |   |        |  |  | 
|-------------------------- |  | ---- | ----- | ---- |  | ------ | ----- | - |  | - | ------ |  |  | 
|                           |  |      |       |     
|For the Year Ended         |  |      |       |      | 
|December 31,               |  |      |       |      | 
|                          
|                          
|                           |  | 2002 |       | 2003 |  | Change |       |  
|                          
|                          
|Provision for income taxes |  | $    | 1,892 |      |  | $      | 1,936 |   |  | $ | 44     |  |  | 
|Effective tax rate         |  |      | 35.3  | %    |  |        | 35.7  | % |  |   | 40 bps |  |  | 
|                          

The effective tax rate increased slightly to
35.7% in 2003 from 35.3% in 2002, primarily driven by state
income tax activity. A reconciliation of the statutory federal
income



24 BELLSOUTH
2004




---



##### Table of Contents







tax rate to the effective income tax rate for
each period is included in Note J to our consolidated
financial statements.

INCOME (LOSS) FROM DISCONTINUED OPERATIONS,
NET OF TAX

Income (loss) from discontinued operations, net
of tax, improved $968 in comparison to the prior year
principally driven by foreign currency transaction activity and
a $263 after-tax loss recorded in 2002 related to the
recognition of other-than-temporary impairments related to our
Brazilian wireless affiliate. Currency gains were recorded in
2003 for the improvement in the Argentine Peso and the Chilean
Peso. For 2002, the devaluation of the Argentine Peso resulted
in losses of $584. During 2003, we recognized a loss of $234 on
the sale of our interests in two Brazilian wireless companies.
During 2002, we recognized a loss of $51 on the sale of Listel,
our Brazilian advertising and publishing company. Additionally,
Latin America experienced a nearly 3% growth in revenue in 2003
driven by the addition of over 1.5 million net customers
and steady average revenue per customer. Operating expenses
remained flat.




Results by Segment

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



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

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

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




BELLSOUTH
2004      25




---



##### Table of Contents



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


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


BELLSOUTH CORPORATION






COMMUNICATIONS GROUP


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

During 2003 and 2004, the Communications Group
emphasized interLATA long distance and BellSouth®
FastAccess® DSL, encouraging customers to purchase
packages containing multiple communications services. We
continue to experience retail access line market share loss due
to competition and technology substitution, and we expect these
trends to continue into 2005.

|                                                        |                                               |                                  |                           |                                             |        |        |        |                |        |          |        |        |        |        |        |       |       |      |       |       |       |      |      |  
|------------------------------------------------------- | --------------------------------------------- | -------------------------------- | ------------------------- | ------------------------------------------- | ------ | ------ | ------ | -------------- | ------ | -------- | ------ | ------ | ------ | ------ | ------ | ----- | ----- | ---- | ----- | ----- | ----- | ---- | ---- | -
|                                                        |                                               |                                  |                           |                                             |        |        |        |               
|                                                        |                                               |                                  |                           |                                             |        |        |        | Percent Change
|                                                        |                                               |                                  |                           |                                             |        |        |        |               
|                                                        |                                               |                                  |                           |                                             |        |        |        |               
|                                                        |                                               |                                  |                           |                                             |        |        |        | 2003 vs.       |        | 2004 vs.
|                                                        |                                               | 2002                             |                           | 2003                                        |        | 2004   |        | 2002           |        | 2003    
|                                                       
|                                                       
|Segment operating revenues:                             |                                               |                                  |                           |                                             |        |        |        |                |        |          |        |        |        |        |        |       |       |      |       |      
|                                                        | Voice                                         |                                  | $                         | 12,559                                      |        |        | $      | 12,702         |        |          | $      | 12,609 |        |        |        | 1.1   |       |      |       | (0.7  | )    
|                                                        | Data                                          |                                  |                           | 4,269                                       |        |        |        | 4,353          |        |          |        | 4,518  |        |        |        | 2.0   |       |      |       | 3.8   |      
|                                                        | Other                                         |                                  |                           | 1,661                                       |        |        |        | 1,393          |        |          |        | 1,325  |        |        |        | (16.1 | )     |      |       | (4.9  | )    
|                                                        |                                               | Total segment operating revenues |                           |                                             | 18,489 |        |        |                | 18,448 |          |        |        | 18,452 |        |        |       | (0.2  | )    |       |       | 0.0   |     
|Segment operating expenses:                             |                                               |                                  |                           |                                             |        |        |        |                |        |          |        |        |        |        |        |       |       |      |       |      
|                                                        | Cost of services and products                 |                                  |                           | 6,464                                       |        |        |        | 6,755          |        |          |        | 7,108  |        |        |        | 4.5   |       |      |       | 5.2   |      
|                                                        | Selling, general, and administrative expenses |                                  |                           | 2,948                                       |        |        |        | 3,079          |        |          |        | 3,123  |        |        |        | 4.4   |       |      |       | 1.4   |      
|                                                        | Depreciation and amortization                 |                                  |                           | 4,161                                       |        |        |        | 3,771          |        |          |        | 3,593  |        |        |        | (9.4  | )     |      |       | (4.7  | )    
|                                                        |                                               | Total segment operating expenses |                           |                                             | 13,573 |        |        |                | 13,605 |          |        |        | 13,824 |        |        |       | 0.2   |      |       |       | 1.6   |     
|Segment operating income                                |                                               |                                  | 4,916                     |                                             |        |        | 4,843  |                |        |          | 4,628  |        |        |        | (1.5   | )     |       |      | (4.4  | )    
|                                                       
|Segment net income                                      |                                               | $                                | 2,751                     |                                             |        | $      | 2,829  |                |        | $        | 2,727  |        |        |        | 2.8    |       |       |      | (3.6  | )    
|                                                       
|                                                       
|Segment net income including unusual items              |                                               | $                                | 2,237                     |                                             |        | $      | 3,505  |                |        | $        | 2,567  |        |        |        | 56.7   |       |       |      | (26.8 | )    
|                                                       
|                                                       
|Key Indicators:(000s except where
    noted)            |                                               |                                  |                           |                                             |        |        |        |                |        |          |        |        |        |        |        |       |       |      |       |      
|                                                       
|Switched Access lines:                                  |                                               |                                  |                           |                                             |        |        |        |                |        |          |        |        |        |        |        |       |       |      |       |      
|                                                        | Residence retail:                             |                                  |                           |                                             |        |        |        |                |        |          |        |        |        |        |        |       |       |      |       |       |      
|                                                        |                                               | Primary                          |                           |                                             | 13,242 |        |        |                | 12,466 |          |        |        | 11,771 |        |        |       | (5.9  | )    |       |       | (5.6  | )   
|                                                        |                                               | Additional                       |                           |                                             | 1,926  |        |        |                | 1,601  |          |        |        | 1,346  |        |        |       | (16.9 | )    |       |       | (15.9 | )   
|                                                       
|                                                        |                                               |                                  | Total Retail Residence    |                                             |        | 15,168 |        |                |        | 14,067   |        |        |        | 13,117 |        |       |       | (7.3 | )     |       |       | (6.8 | )   
|                                                       
|                                                        | Residential wholesale:                        |                                  |                           |                                             |        |        |        |                |        |          |        |        |        |        |        |       |       |      |       |       |      
|                                                        |                                               | Resale                           |                           |                                             | 342    |        |        |                | 177    |          |        |        | 116    |        |        |       | (48.2 | )    |       |       | (34.5 | )   
|                                                        |                                               | UNE-P                            |                           |                                             | 934    |        |        |                | 1,696  |          |        |        | 1,972  |        |        |       | 81.6  |      |       |       | 16.3  |     
|                                                       
|                                                        |                                               |                                  | Total Wholesale Residence |                                             |        | 1,276  |        |                |        | 1,873    |        |        |        | 2,088  |        |       |       | 46.8 |       |       |       | 11.5 |     
|                                                       
|Total residence                                         |                                               |                                  | 16,444                    |                                             |        |        | 15,940 |                |        |          | 15,205 |        |        |        | (3.1   | )     |       |      | (4.6  | )    
|                                                       
|                                                        | Business retail                               |                                  |                           | 5,687                                       |        |        |        | 5,417          |        |          |        | 5,245  |        |        |        | (4.7  | )     |      |       | (3.2  | )    
|                                                       
|                                                        | Business wholesale:                           |                                  |                           |                                             |        |        |        |                |        |          |        |        |        |        |        |       |       |      |       |       |      
|                                                        |                                               | Resale                           |                           |                                             | 85     |        |        |                | 73     |          |        |        | 58     |        |        |       | (14.1 | )    |       |       | (20.5 | )   
|                                                        |                                               | UNE-P                            |                           |                                             | 607    |        |        |                | 686    |          |        |        | 750    |        |        |       | 13.0  |      |       |       | 9.3   |     
|                                                       
|                                                        |                                               |                                  |                           | Total wholesale business                    |        |        | 692    |                |        |          | 759    |        |        |        | 808    |       |       |      | 9.7   |       |       |      | 6.5  |  
|                                                       
|Total business                                          |                                               |                                  | 6,379                     |                                             |        |        | 6,176  |                |        |          | 6,053  |        |        |        | (3.2   | )     |       |      | (2.0  | )    
|                                                       
|Other retail/wholesale lines (primarily public)         |                                               |                                  | 182                       |                                             |        |        | 147    |                |        |          | 98     |        |        |        | (19.2  | )     |       |      | (33.3 | )    
|                                                       
|                                                        |                                               |                                  |                           | Total switched access lines                 |        |        | 23,005 |                |        |          | 22,263 |        |        |        | 21,356 |       |       |      | (3.2  | )     |       |      | (4.1 | )
|ISDN line equivalents                                   |                                               |                                  |                           |                                             |        |        |        |                |        |          |        |        |        |        |        |       |       |      |       |      
|                                                        | Residence                                     |                                  |                           | 18                                          |        |        |        | 13             |        |          |        | 9      |        |        |        | (27.8 | )     |      |       | (30.8 | )    
|                                                        | Business                                      |                                  |                           | 1,580                                       |        |        |        | 1,453          |        |          |        | 1,459  |        |        |        | (8.0  | )     |      |       | 0.4   |      
|                                                       
|                                                        |                                               |                                  |                           | Total ISDN Adjusted Access Lines in Service |        |        | 24,603 |                |        |          | 23,729 |        |        |        | 22,824 |       |       |      | (3.6  | )     |       |      | (3.8 | )
|DSL customers (retail and wholesale)                    |                                               |                                  | 1,021                     |                                             |        |        | 1,462  |                |        |          | 2,096  |        |        |        | 43.2   |       |       |      | 43.4  |      
|Retail long distance customers                          |                                               |                                  | 1,002                     |                                             |        |        | 3,960  |                |        |          | 6,130  |        |        |        | 295.2  |       |       |      | 54.8  |      
|Switched access and local minutes of use
    (millions) |                                               |                                  | 96,755                    |                                             |        |        | 82,101 |                |        |          | 70,061 |        |        |        | (15.1  | )     |       |      | (14.7 | )    
|Retail long distance minutes of use                     |                                               |                                  | 1,816                     |                                             |        |        | 10,039 |                |        |          | 21,109 |        |        |        | *      |       |       |      | 110.3 |      
|                                                       
|Total access minutes of use (millions)                  |                                               |                                  | 98,571                    |                                             |        |        | 92,141 |                |        |          | 91,170 |        |        |        | (6.5   | )     |       |      | (1.1  | )    
|                                                       
|                                                       
|Capital expenditures                                    |                                               | $                                | 3,337                     |                                             |        | $      | 2,824  |                |        | $        | 3,018  |        |        |        | (15.4  | )     |       |      | 6.9   |      
|                                                       



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



26 BELLSOUTH
2004




---



##### Table of Contents







2004 compared to 2003

SEGMENT OPERATING REVENUES

Voice

Voice revenues decreased $93 during 2004 compared
to 2003 driven primarily by continued access line loss offset by
the growth in interLATA long distance. Total switched access
lines declined 907,000, or 4.1%, for the period with retail line
losses being slightly offset by increases in wholesale lines.
The access line decline was the result of continued share loss
and technology substitution, primarily wireless.

Wholesale lines, which consist primarily of
unbundled network element  platform (UNE-P) lines,
totaled almost 3.0 million at December 31, 2004, up
276,000 lines year over year. The vast majority of the UNE-P
additions were residential. When lines over which we provide
retail services are converted to UNE-P, we lose revenue and
margin. On average, the revenue from our provision of UNE-P does
not permit us to recover the fully allocated costs we incur to
provide it. To mitigate this loss, we have been actively seeking
reform of the pricing rules that regulators use to set UNE-P
prices. As previously discussed under the heading
Overview, a judicial decision that became effective
in June 2004 invalidated certain FCC rules that governed the
provision of wholesale access to our network by local service
competitors. We believe this change in the regulatory
environment influenced the loss in UNE-P lines that we
experienced in the second half of 2004.


In efforts to combat share loss, we continue to
grow our package services. BellSouth Answers® is our
signature residential package offering, which combines various
wireline, wireless, Internet services and/or
DIRECTV® digital satellite television services. The
package combines the Complete Choice calling plan of local
service and multiple convenience calling features with BellSouth
Long Distance, BellSouth® FastAccess®
DSL or dial-up Internet, and Cingular Wireless services. During
2004, we began offering DIRECTV® digital satellite
television service through all sales channels as part of the
BellSouth Answers® portfolio. This agency
relationship with DIRECTV® provides us with a key
competitive product with insignificant cost or capital
requirements. With the addition of video, the BellSouth
Answers® package is one of the most comprehensive
and competitively priced bundles in our markets today. We ended
2004 with almost 4.4 million residential packages,
representing a 37% penetration of our retail primary line
residence base. Almost 84% of Answers customers have long
distance in their package and almost 45% have either DSL or
BellSouth dial-up Internet.


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


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


Data

Data revenues increased $165 in 2004 when
compared to 2003. Data revenues were driven by strong growth
from the sale of BellSouth® FastAccess® DSL service
partially offset by decreases in revenue from other data
products. Combined wholesale and retail DSL revenues were up
$241 in 2004 when compared to 2003 due primarily to a larger
customer base. As of December 31, 2004, we had almost
2.1 million DSL customers, an increase of 634 thousand
customers compared to December 31, 2003.

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




BELLSOUTH
2004      27




---



##### Table of Contents



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


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


BELLSOUTH CORPORATION

designed to increase long-term market
penetration. Retail FastAccess customer additions were offset
somewhat by wholesale DSL disconnects as we continue to see a
shift in customer mix to retail. Revenue from other retail data
products was flat for 2004 when compared to 2003.

Revenues from the sale of wholesale data
transport services and wholesale DSL to other communications
providers, including long distance companies and CLECs, declined
4.3% in 2004 when compared to 2003, primarily due to the
lingering impacts of soft enterprise market segment demand and
continued network grooming and consolidation by large
inter-exchange carriers.


Other

Other revenues decreased $68 in 2004 when
compared to 2003. This decrease reflects decreases in revenues
from the payphone business of $77 and billing and late payment
fees of $29, partially offset by increases in equipment revenues
of $33 and increases in wholesale long distance revenues of $12.
Increases in equipment revenues reflect increased demand due to
improved economic conditions and customer upgrades to newer
technology.

SEGMENT OPERATING EXPENSES

Cost of services and products

Cost of services and products of $7,108 in 2004
increased $353 from 2003. The cost of services increase was
impacted by: increases of $213 in costs of goods sold
principally driven by increases in the provision of long
distance service volumes; increases of $104 in labor costs
impacted by pay increases driven by union contract raises and
higher costs from retiree and medical benefits slightly offset
by lower average workforce; increases of $39 in contract
services related to network planning projects and equipment
installations; and increases in materials and supplies of $39
associated with increased utilities usage, partially offset by
decreases of $95 in access fees due to volume declines,
settlements and significant reductions in charges associated
with access to other carriers customer name databases; and by
decreases in rent of $22 related to real estate consolidation.

Selling, general, and administrative
expenses

Selling, general, and administrative expenses of
$3,123 in 2004 increased $44 from 2003. The selling, general,
and administrative expense reflected represents an increase of
$133 in labor costs driven by higher costs from retiree and
medical benefits, incentive awards, reduced use of contractors
and pay increases partially offset by lower headcount. Also
included in the labor increase was a $38 increase in an annual
adjustment to the workers compensation and long-term disability
accruals. In addition to labor increases, information technology
costs increased $24 during 2004 compared to 2003.

This increase was partially offset by a decrease
in uncollectibles expense of $90 driven by continued
improvements in the collection process and improved economic
conditions, and decreases of $23 in outside sales commissions,
fees and other various expenditures.


Depreciation and amortization

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

UNUSUAL ITEMS EXCLUDED FROM SEGMENT NET
INCOME

Unusual items that were excluded from this
segments net income consisted of the following: for 2004,
unusual items of $(160) for the South Carolina regulatory
settlement, lease termination fees, severance and
hurricane-related costs; for 2003, unusual items of $676 for the
cumulative effect of change in accounting principle related to
the adoption of FAS 143 offset by restructuring charges,
costs associated with the early extinguishment of debt, and an
asset impairment.

2003 compared to 2002

SEGMENT OPERATING REVENUES

Voice

Voice revenues increased $143 driven by
significant growth in interLATA long distance substantially
offset by continued access line share loss and conversion to
wholesale lines. Total switched access lines declined 3.6% with
retail line losses being partially offset by increases in
wholesale lines. The access line decline was the result of share
loss, technology substitution and a continued weak economy.

Wholesale lines consist primarily of unbundled
network element  platform (UNE-P) lines. The UNE-P
lines totaled approximately 2.4 million at
December 31, 2003, up 864,000 lines from the prior
year. The vast majority of the UNE-P additions were residential.
Business UNE-P line adds of 79,000 fell slightly from the prior
year while other wholesale UNE-P lines, primarily payphone,
increased by 23,000 in 2003.


As of the end of 2003, we had more than
3 million residential packages designated as Answers
customers, which represents a 24.1% penetration of our retail
primary line residence base. As of December 31, 2003, over
75% of Answers customers had long distance in their package and
over 40% had either DSL or BellSouth dial-up Internet.


InterLATA long distance voice revenues increased
$573 compared to 2002. Substantial interLATA growth reflects our
receipt of regulatory relief to provide interLATA services




28 BELLSOUTH
2004




---



##### Table of Contents







in the nine southeastern states we serve. At
December 31, 2003, we had nearly 4 million long
distance customers, a penetration rate of 28% of primary
residential access lines and 39% of mass-market small business
accounts. Earlier in 2003, we began offering unlimited long
distance to reduce competitive churn and increase retention and
reacquisition of residential customers. We recorded $71 in
complex long distance revenue in 2003 compared to $3 in 2002.
Revenue from wholesale long-distance services provided to
Cingular increased $47 in 2003. This increase was caused by
higher volumes associated with the proliferation of wireless
long distance plans.

Switched access revenues declined $195 in 2003
when compared to 2002 due to volume and rate decreases. Our
entry into interLATA long distance shifted switched access
minutes from other carriers to our service resulting in a
transfer from wholesale switched access revenues to retail long
distance revenue. Switched access and local minutes of use
declined 15.1% compared to 2002. The decrease is due to the
impact of our entry into interLATA long distance, access line
losses including the shift to UNE-P lines and alternative
communications services, primarily wireless and email. Switched
access rates were lower in 2003 due to effects of the CALLS
program, an FCC access charge reform initiative. The decline in
rates, however, is substantially offset by higher subscriber
line charges that are also included in voice revenues.


Data

Data revenues increased $84 in 2003. The overall
growth was driven by revenues from the sale of
BellSouth® FastAccess® DSL service.
Combined wholesale and retail DSL revenues were up $248 in 2003
due to a larger customer base. As of December 31, 2003, we
had over 1.46 million DSL customers, an increase of 441,000
customers compared to December 31, 2002.

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


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


Other

Other communications revenue decreased $268
primarily due to a decline of $123 in sales to second and third
tier long distance carriers due to our decision to eliminate
certain products within the wholesale long distance portfolio
and due to the continuing phase-out of our payphone business
which created a decline of $59. We completed our exit of the
payphone business as of December 31, 2003. Other revenues
decreased $86 due to a change in the presentation for drop
shipments of equipment from gross to net, which lowered both
revenues and expenses.

SEGMENT OPERATING EXPENSES

Cost of services and products

Cost of services and products increased $291
compared to the same periods in 2002. The increase reflects
higher pension and retiree medical costs of $315. Costs of
service associated with providing retail interLATA long distance
increased $183 driven by higher volumes related to more
customers while costs associated with the provision of long
distance services to Cingular increased $34 driven by higher
volumes. In addition, installation and activation expense
increased $239 as compared to the prior period reflecting lower
expense deferrals related to lower installation and activation
service revenue.

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


Selling, general, and administrative
expenses

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

These increases were partially offset by
decreases in uncollectible expenses of $116. Prior year periods
included the impact of higher bankruptcies and non-pay accounts
driving the decrease in 2003.




BELLSOUTH
2004      29




---



##### Table of Contents



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


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


BELLSOUTH CORPORATION

Depreciation and amortization

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

UNUSUAL ITEMS EXCLUDED FROM SEGMENT NET
INCOME

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




Domestic Wireless

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

On October 26, 2004, Cingular completed the
acquisition of AT&T Wireless, creating the largest wireless
carrier in the United States based on number of customers. Data
revenue played an increasingly important role in revenue
composition in 2003 and 2004 and those impacts are expected to
increase in 2005. Further, competition continues to be intense,
with up to five competitors in most of Cingulars
significant markets.


|                                                                                    |                                               |                                  |        |       |       |      |        |                |       |          |        |       |       |  |       |      |     |  |       |      |      |  |  | 
|----------------------------------------------------------------------------------- | --------------------------------------------- | -------------------------------- | ------ | ----- | ----- | ---- | ------ | -------------- | ----- | -------- | ------ | ----- | ----- |  | ----- | ---- | --- |  | ----- | ---- | ---- |  |  | 
|                                                                                    |                                               |                                  |        |       |       |      |        |                |       |         
|                                                                                    |                                               |                                  |        |       |       |      |        | Percent Change |       |         
|                                                                                    |                                               |                                  |        |       |       |      |        |               
|                                                                                    |                                               |                                  |        |       |       |      |        |               
|                                                                                    |                                               |                                  |        |       |       |      |        | 2003 vs.       |       | 2004 vs. |        |      
|                                                                                    |                                               | 2002                             |        | 2003  |       | 2004 |        | 2002           |       | 2003     |        |      
|                                                                                   
|                                                                                   
|Segment operating revenues:                                                         |                                               |                                  |        |       |       |      |        |                |       |          |        |       |       |  |       |      |     |  |       |      |      | 
|                                                                                    | Service revenues                              |                                  | $      | 5,569 |       |      | $      | 5,689          |       |          | $      | 6,989 |       |  |       | 2.2  |     |  |       | 22.9 |      |  | 
|                                                                                    | Equipment revenues                            |                                  |        | 392   |       |      |        | 504            |       |          |        | 785   |       |  |       | 28.6 |     |  |       | 55.8 |      |  | 
|                                                                                    |                                               | Total segment operating revenues |        |       | 5,961 |      |        |                | 6,193 |          |        |       | 7,774 |  |       |      | 3.9 |  |       |      | 25.5 |  |  | 
|Segment operating expenses:                                                         |                                               |                                  |        |       |       |      |        |                |       |          |        |       |       |  |       |      |     |  |       |      |      | 
|                                                                                    | Cost of services and products                 |                                  |        | 1,965 |       |      |        | 2,273          |       |          |        | 2,980 |       |  |       | 15.7 |     |  |       | 31.1 |      |  | 
|                                                                                    | Selling, general, and administrative expenses |                                  |        | 2,170 |       |      |        | 2,170          |       |          |        | 2,826 |       |  |       | 0.0  |     |  |       | 30.2 |      |  | 
|                                                                                    | Depreciation and amortization                 |                                  |        | 740   |       |      |        | 835            |       |          |        | 1,232 |       |  |       | 12.8 |     |  |       | 47.5 |      |  | 
|                                                                                    |                                               | Total segment operating expenses |        |       | 4,875 |      |        |                | 5,278 |          |        |       | 7,038 |  |       |      | 8.3 |  |       |      | 33.3 |  |  | 
|Segment operating income                                                            |                                               |                                  | 1,086  |       |       |      | 915    |                |       |          | 736    |       |       |  | (15.7 | )    |     |  | (19.6 | )    |      | 
|                                                                                   
|Segment net income                                                                  |                                               | $                                | 357    |       |       | $    | 261    |                |       | $        | 129    |       |       |  | (26.9 | )    |     |  | (50.6 | )    |      | 
|                                                                                   
|Segment net income including unusual items                                          |                                               | $                                | 301    |       |       | $    | 261    |                |       |          | 20     |       |       |  | (13.3 | )    |     |  | (92.3 | )    |      | 
|                                                                                   
|                                                                                   
|Key Indicators (100% Cingular):                                                     |                                               |                                  |        |       |       |      |        |                |       |          |        |       |       |  |       |      |     |  |       |      |      | 
|                                                                                   
|Cellular/PCS Customers (000s)                                                       |                                               |                                  | 21,925 |       |       |      | 24,027 |                |       |          | 49,109 |       |       |  | 9.6   |      |     |  | 104.4 |      |      | 
|Wireless average monthly revenue per
    user 
    Cellular/PCS (whole dollars)(a) |                                               | $                                | 52     |       |       | $    | 51     |                |       | $        | 49     |       |       |  | (1.9  | )    |     |  | (3.9  | )    |      | 
|Capital Expenditures                                                                |                                               | $                                | 3,085  |       |       | $    | 2,734  |                |       | $        | 3,449  |       |       |  | (11.4 | )    |     |  | 26.2  |      |      | 
|                                                                                   



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



30 BELLSOUTH
2004




---



##### Table of Contents







2004 compared to 2003

SEGMENT OPERATING REVENUES

Cingular had 49.1 million cellular/PCS
customers at December 31, 2004, representing growth of
25.1 million in its cellular/PCS customer base from a year
ago. This growth was primarily due to a 21.7 million
cellular/ PCS customer base increase, related to Cingulars
acquisition of AT&T Wireless in October 2004. Additionally,
for 2004, Cingulars cellular/ PCS customer net additions
were 3.4 million, up from 2.1 million a year ago, with
1.7 million of the current years cellular/ PCS
customer net additions occurring in the fourth quarter of the
year. This fourth quarter increase represents the highest
cellular/ PCS customer net additions total ever when compared
with the combined historical results of Cingular and AT&T
Wireless. The strong performance in cellular/ PCS customer net
additions during the fourth quarter was driven by the re-launch
of the Cingular brand, the offering of new common rate plans and
the larger distribution network of the newly combined Cingular/
AT&T Wireless company subsequent to the acquisition. Also
favorably impacting customer net additions throughout 2004 were
the promotion and success of Cingulars new GSM service
offerings and the continued promotion of its FamilyTalk®
service offering and its Rollover® rate plans. Excluding
the impact to the prepaid customer base due to the AT&T
Wireless acquisition, the prepaid customer count was reduced
from the prior year, in part due to the successful promotion of
the postpaid FamilyTalk® plan, which competes for customers
at a similar price point but with enhanced services. The
increase in reseller customer net additions compared with the
prior year can be attributed to continued growth by
Cingulars primary reseller.

The monthly cellular/ PCS churn rate of 2.7% in
2004, which included the results of AT&T Wireless since its
acquisition, was flat compared with the churn rate in the prior
year as a lower churn rate in Cingulars postpaid customer
base was offset by higher churn rates in the prepaid and
reseller customer bases. During the fourth quarter of 2004,
Cingular experienced a significant improvement in its postpaid
customer base churn rate compared with prior periods, as
customers responded positively to the launch of the new
Cingular, its broad network coverage and its attractive GSM
service offerings. Also, during the fourth quarter of 2004,
conformity issues related to the calculation of churn for
Cingular and AT&T Wireless reduced churn subsequent to the
acquisition by 13 basis points. Beginning in the first quarter
of 2005, Cingular will adopt a new reseller churn calculation
methodology that is consistent with its primary competitor.
Cingular currently includes gross reseller disconnects in the
churn calculation. In the future, Cingular will base the
calculations on total reseller net customer reductions. To date,
Cingular does not believe that wireless local number portability
has materially impacted the customer churn rate.


Total operating revenues, consisting of service
revenue and equipment sales, increased $1,581 in 2004. The
primary driver behind the year over year increases in almost
every component of total operating revenues was Cingulars
acquisition of AT&T Wireless in late October 2004 and the
inclusion of 67 days of AT&T Wireless operating
results. Additionally, total operating revenues continue to be
favorably impacted by growth in service revenue as a result of a
higher average cellular/PCS customer base and the continued
growth in data revenues. Equipment sales contributed $281 to the
increase in total operating revenues, driven by both strong
customer growth and handset upgrade activity.


Service revenues

Service revenue, comprised of local voice and
data services, roaming, long distance and other revenue,
increased $1,300 in 2004 compared to 2003. The local service
component of total service revenue includes recurring monthly
access charges, airtime usage, including prepaid service, and
charges for optional features and services, such as voice mail,
mobile-to-mobile calling, roadside assistance, caller ID,
handset insurance and data services. It also includes billings
to customers for the Universal Service Fund (USF) and other
regulatory fees. The primary driver of the increase in local
service revenue for 2004 was the inclusion of the former
AT&T Wireless operating results as a result of
Cingulars acquisition in late October 2004. Aside from
this impact, increases in local service revenue are a function
of the higher average customer base partially offset by the
impact of a lower Average Revenue Per User (ARPU). Strong growth
in data revenue, including the impact of the AT&T wireless
acquisition, continues to favorably impact local service revenue
driven primarily by increased data service penetration and usage
of text messaging and other data services by cellular/PCS
customers. Incollect and outcollect roaming revenues were
essentially flat, when compared with the corresponding prior
year. Roaming revenue continues to be unfavorably impacted by
the bundling of free roaming minutes with
all-inclusive regional and national rate plans and lower
negotiated rates with Cingulars roaming partners. Prior to
the acquisition, AT&T Wireless was Cingulars largest
national roaming partner. Effective with the acquisition,
Cingulars consolidated outcollect revenue reflects
elimination of roaming revenue between the now combined Cingular
and former AT&T Wireless properties along with a
corresponding elimination of incollect roaming costs. Although
net income neutral, this elimination will significantly reduce
the new combined company outcollect revenue when compared to the
combination of prior historical stand-alone results. The
increase in long distance revenue compared with 2003 was
primarily related to the incremental impact of the additional
long distance revenue contributed as a result of the AT&T
Wireless acquisition. Higher international long distance revenue
in 2004 also contributed, to a lesser extent, to the overall
increase compared with the prior year.



BELLSOUTH
2004      31




---



##### Table of Contents



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


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


BELLSOUTH CORPORATION

Cellular/ PCS ARPU for 2004 was $49.30, a
decrease of $2.02, or 3.9%, compared with $51.32 for 2003.
Although the contribution of a higher ARPU for the AT&T
Wireless customer base for the last 67 days of 2004 had a
slightly positive impact on overall 2004 ARPU when compared with
2003, the main drivers of the changes in ARPU remained
consistent with prior periods. Continued increases in ARPU
related to higher customer usage and increased data revenue and
regulatory fee revenue were more than offset by the impact of a
larger embedded customer base of postpaid customers on lower
ARPU FamilyTalk® rate plans and on all-inclusive rate plans
that include more free minutes, thereby reducing
overages and other chargeable airtime. Also exerting downward
pressure on ARPU compared with the prior year is a change in the
mix of the cellular/PCS customer base to include a higher
percentage of lower ARPU reseller customers and decreases in
roaming revenue, largely as a result of the acquisition of
AT&T Wireless. Additionally, as former AT&T Wireless
customers migrate to the popular Rollover rate plans, Cingular
expects higher revenue deferrals related to unused rollover
minutes to have an unfavorable impact on reported ARPU. This
effect may be partially offset by the addition of higher ARPU
AT&T Wireless subscribers to the customer base.

Equipment revenues

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

SEGMENT OPERATING EXPENSES

Cost of services and products

The cost of services and products increase of
$707 for 2004 compared to 2003 was due to increases in local
network system costs and in third party system costs
(i.e., roaming and long distance costs). Over half of the
increase in local network system costs can be attributed to the
incremental costs related to the acquired AT&T Wireless
network. Excluding this impact, the overall drivers of increased
local network costs are primarily related to increased network
system usage and associated network system expansion costs.
Increased local network system costs in 2004 versus the prior
year attributable to historical pre-merger Cingular activities
included increased costs billed to its customers related to
payments into the USF and certain other regulatory funds and
higher costs related to its handset insurance program due to
increased claims. For 2004, third party network system costs
were lower as continued decreases in incollect roaming costs
were partially offset by higher long distance costs. Lower
incollect roaming costs were a result of lower negotiated
roaming rates with Cingulars roaming partners, which more
than offset increased volumes of roaming minutes. Also, as a
result of the AT&T Wireless acquisition, Cingulars
consolidated incollect expenses reflect elimination of
intra-company incollect roaming costs between the now combined
Cingular and former AT&T Wireless properties along with a
corresponding elimination of outcollect revenue. Although net
income neutral, this elimination will significantly reduce the
new combined company incollect roaming expenses when compared to
the combination of prior historical stand-alone results. The
increase in long distance costs was primarily volume driven,
impacted by the inclusion of free long distance in
many of Cingulars regional and national rate plan
offerings. In addition, approximately one-third of the increase
in long distance costs versus 2003 was related to the
incremental long distance expenses incurred as a result of the
AT&T Wireless acquisition. For 2004, the cost of equipment
sales increased, primarily driven by overall higher handset
sales including the impact of a significant increase in customer
gross additions and customer migration to Cingular rate plans
due to the acquisition of AT&T Wireless.

Selling, general, and administrative
expenses

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



32 BELLSOUTH
2004




---



##### Table of Contents







Depreciation and amortization

Depreciation expense increased by $249 in 2004,
compared to 2003, and included an incremental $130 related to
assets acquired from AT&T Wireless. Other increases in
depreciation expense were primarily due to on-going capital
spending, including the GSM/ GPRS/ EDGE network overlay, in
addition to increased depreciation on TDMA assets in 2004 as a
result of a further review of estimated service lives.
Amortization expense increased by $148 in 2004 compared to 2003,
and included an incremental $166 in amortization expense as a
result of the AT&T Wireless acquisition, primarily related
to the amortization of the customer relationship intangible
asset. This increase was partially offset by certain historical
Cingular finite-lived intangible assets becoming fully amortized
during 2004.

UNUSUAL ITEMS EXCLUDED FROM SEGMENT NET
INCOME

Unusual items which were excluded from this
segments results consisted of the following: in 2004,
$(109) related to wireless merger integration costs, fair value
adjustment and lease accounting adjustments; in 2003, no unusual
items were excluded.

2003 compared to 2002

SEGMENT OPERATING REVENUES

Cellular/PCS customers increased 9.6% during
2003. Net cellular/PCS additions in 2003 increased 1.8 million
compared to 2002. Improvement in customer additions was
attributable to several business initiatives Cingular
implemented earlier in 2003: (1) reorganization of
Cingulars marketing, sales and operations activities from
a national to a regional basis to more effectively address local
market needs; (2) introduction of a more meaningful brand
message; (3) increased emphasis on Cingulars
affiliation with its parents and co-branding and more
effectively utilizing the parents sales channels in those
areas where Cingulars wireless markets overlap with the
parents wireline markets; and (4) more effective
marketing execution such as the Family Talk rate
plan offer introduced in the third quarter of 2003. Prepaid
subscriber growth was impacted positively in 2003 by the KIC
(Keep in Contact) prepaid plan launched in the fourth quarter of
2002. The reseller subscriber base was higher due to aggressive
growth by Cingulars primary reseller during 2003 and to a
loss of 371,000 MCI reseller customers in 2002, principally when
MCI made the decision to exit the wireless reseller business in
the second half of 2002. The cellular/PCS churn rate was 2.7% in
2003 compared with a 2.8% churn rate in 2002.

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

Service revenues increased $120 in 2003, driven
by the 3.6% increase in the average subscriber base, a 14.4%
increase in local minutes of use, and a $64 increase over prior
year of revenues related to billings to Cingulars
customers for the USF and other regulatory fees. Other increases
were a result of an increase in data revenues from 2002,
reflective of higher penetration and usage of SMS short
messaging data services with cellular/PCS customers as well as
increased revenue per customer related to the Mobitex data
business. Partially offsetting these increases were a decrease
in wireless Average Revenue Per User (ARPU), declines in roaming
and long distance revenues reflecting the migration of customers
to regional and national rate plans and a reduction in roaming
rates with major roaming partners to support all-inclusive rate
plans. Additionally, the increase was offset partially by the
effects of Emerging Issues Task Force Issue No. 00-21
(EITF 00-21), Revenue Arrangements with Multiple
Deliverables, adopted July 1, 2003. Implementation of EITF
00-21 resulted in a reclassification of certain direct channel
activation revenues from service revenues to equipment revenues
on a prospective basis only. As a result, service revenue growth
was reduced by approximately $14 for the year.

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


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




BELLSOUTH
2004      33




---



##### Table of Contents



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


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


BELLSOUTH CORPORATION

SEGMENT OPERATING EXPENSES

Cost of services and products

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

Selling, general, and administrative
expenses

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

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


Depreciation and amortization

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

UNUSUAL ITEMS EXCLUDED FROM SEGMENT NET
INCOME

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




Advertising & Publishing Group

Our Advertising & Publishing Group is
comprised of companies in the US that publish, print, sell
advertising in and perform related services concerning
alphabetical and classified telephone directories and electronic
product offerings. In November 2004, BellSouth and SBC
created an online Internet yellow pages joint venture that
acquired the online directory publisher www.yellowpages.com.
This venture is expected to allow us to expand the national
advertising base and expand traffic relationships.

As discussed more fully in Note C to our
consolidated financial statements, effective January 1,
2003, we changed our method for recognizing revenues and
expenses related to our directory publishing business from the
publication and delivery method (issue basis) to the deferral
method (deferral basis). For BellSouths consolidated
results, this change was treated as a prospective change and
prior year consolidated results were not restated. However, to
align internal reporting, the 2002 segment results for the
Advertising & Publishing Group were recast to reflect the
change. Under the issue basis, we recognized 100% of revenues
and direct expenses at the time the directories were published
and delivered. Under the deferral basis, we amortize, or
recognize ratably, revenues and direct expenses over the life of
the related print directory, generally 12 months. When
compared to the issue-basis method, the deferral method causes
trends in current-period operating results to be recognized in
the income statement over a longer period of time and to cross
fiscal years.




34 BELLSOUTH
2004




---



##### Table of Contents







In 2003 and early 2004, our Advertising &
Publishing Group was negatively affected by weak economic
conditions and competition. We expect an improving economy,
combined with the execution of our business strategies, to
result in moderate revenue growth in 2005.

|                                           |                                               |      |     |       |  |      |     |                |  |          |     |       |  |  |       |       |   |  |      |      |  
|------------------------------------------ | --------------------------------------------- | ---- | --- | ----- |  | ---- | --- | -------------- |  | -------- | --- | ----- |  |  | ----- | ----- | - |  | ---- | ---- | -
|                                           |                                               |      |     |       |  |      |     |               
|                                           |                                               |      |     |       |  |      |     | Percent Change
|                                           |                                               |      |     |       |  |      |     |               
|                                           |                                               |      |     |       |  |      |     | 2003 vs.       |  | 2004 vs.
|                                           |                                               | 2002 |     | 2003  |  | 2004 |     | 2002           |  | 2003    
|                                          
|                                          
|Segment operating revenues                 |                                               |      |     |       |  |      |     |                |  |          |     |       |  |  |       |       |   |  |      |     
|                                           | Advertising & Publishing revenues             |      | $   | 2,010 |  |      | $   | 1,906          |  |          |     | 1,878 |  |  |       | (5.2  | ) |  |      | (1.5 | )
|                                           | Commission revenues                           |      |     | 147   |  |      |     | 144            |  |          |     | 141   |  |  |       | (2.0  | ) |  |      | (2.1 | )
|                                           | Total segment operating revenues              |      |     | 2,157 |  |      |     | 2,050          |  |          |     | 2,019 |  |  |       | (5.0  | ) |  |      | (1.5 | )
|Segment operating expenses:                |                                               |      |     |       |  |      |     |                |  |          |     |       |  |  |       |       |   |  |      |     
|                                           | Cost of services and products                 |      |     | 351   |  |      |     | 345            |  |          |     | 353   |  |  |       | (1.7  | ) |  |      | 2.3  |  
|                                           | Selling, general, and administrative expenses |      |     | 879   |  |      |     | 706            |  |          |     | 684   |  |  |       | (19.7 | ) |  |      | (3.1 | )
|                                           | Depreciation and amortization                 |      |     | 29    |  |      |     | 26             |  |          |     | 28    |  |  |       | (10.3 | ) |  |      | 7.7  |  
|                                           | Total segment operating expenses              |      |     | 1,259 |  |      |     | 1,077          |  |          |     | 1,065 |  |  |       | (14.5 | ) |  |      | (1.1 | )
|Segment operating income                   |                                               |      | 898 |       |  |      | 973 |                |  |          | 954 |       |  |  | 8.4   |       |   |  | (2.0 | )   
|                                          
|Segment net income                         |                                               | $    | 545 |       |  | $    | 600 |                |  |          | 583 |       |  |  | 10.1  |       |   |  | (2.8 | )   
|                                          
|Segment net income including unusual items |                                               | $    | 428 |       |  | $    | 96  |                |  |          | 583 |       |  |  | (77.6 | )     |   |  | *    |     
|                                          
|Capital Expenditures                       |                                               | $    | 29  |       |  | $    | 28  |                |  |          | 29  |       |  |  | (3.4  | )     |   |  | 3.6  |     
|                                          

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

2004 compared to 2003

SEGMENT OPERATING REVENUES

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

The print revenue decline between periods was
primarily driven by the amortization of revenues from
directories issued in the latter half of 2003. The decline in
revenues from 2003 directories was attributable to the lingering
effects of weak economic conditions in 2003 that affected the
directory advertising environment, and the continued impact of
online and offline media competition. These factors also caused
revenues from directories issued in the first half of 2004 to be
flat when compared to their 2003 issues. Revenues from
directories issued in the second half of 2004, however, achieved
positive growth as a result of expanded product offerings,
increased distribution, successful sales execution, growth in
Internet sales, and an improving economy. Based on recent
directory sales volumes, revenues from directories to be issued
2005 are also expected to show moderate positive growth over
their previous issues.


The $3 decline in sales agency commission
revenues was the result of the discontinuance of a line of
business, partially offset by growth in core sales.


SEGMENT OPERATING EXPENSES

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

UNUSUAL ITEMS EXCLUDED FROM SEGMENT NET
INCOME

Unusual items that were excluded from this
segments net income consisted of the following: in 2004
there were no unusual items; in 2003, unusual items of $(504)
included the cumulative effect of change in accounting principle
and severance and pension costs.

2003 compared to 2002

SEGMENT OPERATING REVENUES

Segment operating revenues decreased $107 from
2002 to 2003. The decrease included a reduction in print
revenues due to lower overall spending by our advertisers. The
decline in print revenue was partially offset by an increase in
revenues from electronic media offerings, resulting from
increased penetration of the print customer base. Sales agency
commission revenues decreased slightly as the result of a
discontinued line of business.

Because of the accounting convention used for
publishing revenue, the revenue decline during 2003 was
primarily driven by the amortization of revenues from
directories issued in 2002, and to a lesser extent from those
issued in 2003. Revenues from directories issued in 2003 also de-




BELLSOUTH
2004      35




---



##### Table of Contents



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


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


BELLSOUTH CORPORATION

clined when compared to their 2002 issues
attributable to the factors discussed previously. Approximately
50% of the decline was recognized in the segments 2003
income statement, with the remainder to be recognized in 2004.

SEGMENT OPERATING EXPENSES

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

UNUSUAL ITEMS EXCLUDED FROM SEGMENT NET
INCOME

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




Liquidity and Financial Condition

DESCRIPTION OF CASH FLOWS

|                                 |                      |      |    |        |   |      |     |                |   |          |      |         |   |  |   |      |   |  |   |       |  
|-------------------------------- | -------------------- | ---- | -- | ------ | - | ---- | --- | -------------- | - | -------- | ---- | ------- | - |  | - | ---- | - |  | - | ----- | -
|                                 |                      |      |    |        |   |      |     |               
|                                 |                      |      |    |        |   |      |     | Percent Change
|                                 |                      |      |    |        |   |      |     |               
|                                 |                      |      |    |        |   |      |     |               
|                                 |                      |      |    |        |   |      |     | 2003 vs.       |   | 2004 vs.
|Net cash provided by (used for): |                      | 2002 |    | 2003   |   | 2004 |     | 2002           |   | 2003    
|                                
|                                
|Continuing Operations            |                      |      |    |        |   |      |     |                |   |          |      |         |   |  |   |      |   |  |   |      
|                                 | Operating activities |      | $  | 7,712  |   |      | $   | 7,883          |   |          | $    | 6,801   |   |  |   | 2.2  |   |  |   | (13.7 | )
|                                 | Investing activities |      |    | (1,912 | ) |      |     | (2,706         | ) |          |      | (13,560 | ) |  |   | *    |   |  |   | *     |  
|                                 | Financing activities |      |    | (4,443 | ) |      |     | (4,679         | ) |          |      | 5,071   |   |  |   | (5.3 | ) |  |   | *     |  
|Discontinued Operations          |                      |      | 72 |        |   |      | 428 |                |   |          | (579 | )       |   |  | * |      |   |  | * |      
|                                

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

Continuing Operations

NET CASH PROVIDED BY OPERATING
ACTIVITIES

Cash generated by operations decreased $1,082 in
2004 compared to the prior year due primarily to a $601 increase
in income tax payments in 2004, a previously accrued payment of
approximately $81 to MCI related to its bankruptcy settlement, a
$77 payment associated with the ratification of our contract
with CWA, $160 of cash expenses due to the hurricanes in 2004,
and lower operating margins before depreciation and amortization
in the Communications group. Operating income excluding
depreciation and amortization in the Communications group
decreased $393 in 2004 compared to the prior year. Partially
offsetting these increased payments were decreases over prior
year of $141 in other postretirement benefit funding and $45 in
severance payments.

Cash generated by operations increased $171
during 2003 compared to the prior year. The increase was driven
primarily by lower severance payments and better receivables
collections. Severance payments of $125 in 2003 declined $369 as
compared to $494 of payments in 2002. During 2003, we enhanced
our processes with respect to receivable collection management
resulting in improved collections. Decreases in interest income,
due to lower rates on our advance to Cingular and the loss of
income on an advance to KPN were substantially offset by lower
interest expense due to lower borrowings.


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


NET CASH USED FOR INVESTING
ACTIVITIES

Capital expenditures

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

Our capital expenditures for continuing
operations for 2000 through 2004 were as follows:


|     |  |          |       |              |  |  |      |  |  | 
|---- |  | -------- | ----- | ------------ |  |  | ---- |  |  | 
|     |  | Millions |       | % of Revenue |  | 
|    
|    
|2000 |  | $        | 6,169 |              |  |  | 26.5 |  |  | 
|2001 |  | $        | 5,495 |              |  |  | 25.9 |  |  | 
|2002 |  | $        | 3,536 |              |  |  | 17.5 |  |  | 
|2003 |  | $        | 2,926 |              |  |  | 14.4 |  |  | 
|2004 |  | $        | 3,193 |              |  |  | 15.7 |  |  | 
|    

The trend in capital spending levels over the
past five years reflects targeted capital deployment and better
unit pricing due to technological advances. The trend in
spending for capitalized software has increased over the period
driven by system enhancements to increase efficiencies and
introduce new products. While spending levels




36 BELLSOUTH
2004




---



##### Table of Contents







are expected to remain relatively flat as a
percent of revenue, we expect a slight shift in the mix of
capital expenditures toward broadband and other next-generation
technologies, such as fiber optics and DSL.

We expect expenditures for 2005 to be financed
substantially through internal sources and, to the extent
necessary, from external financing sources.


Other investing activities

During 2004, we contributed $14,410 to Cingular
to fund its acquisition of AT&T Wireless. In addition, we
loaned Cingular $666 under a revolving credit agreement to fund
higher cash needs associated with the initial integration of
AT&T Wireless. We received net proceeds of $3,020 in
connection with the sale of eight of our Latin American
operations. The sale of our investment in Sonofon resulted in
proceeds of $634, including the repayment of a shareholder loan.
Purchases and sales of short-term investments resulted in a cash
inflow of $1,593. Purchases and sales of equity securities,
primarily in our grantor trust, resulted in a net cash outlay of
$492.

Other 2003 investing activities include net
proceeds of $1,458 resulting from an early repayment by KPN of
the entire outstanding balance of the loan we had extended to
them and the settlement of related currency swaps. In June 2003,
we sold our entire interest in two real estate partnerships for
net proceeds of $26. In conjunction with the sale, we received
proceeds of $97 for the repayment of loans we had extended to
the partnerships. During 2003, we purchased $194 in debt and
equity securities and made net short-term investment purchases
of $1,148.


Other 2002 investing activities include receipt
of $2,268 in proceeds from the sale of shares in Qwest and KPN
as well as proceeds from a principal payment related to a loan
to KPN. In addition, we contributed a total of $210 to equity
affiliates, including $200 to Cingular. The $200 contribution
related to income tax benefits realized by BellSouth associated
with our investment in Cingular. We also made net purchases of
short-term investments of $461.


NET CASH USED FOR FINANCING
ACTIVITIES

Net borrowings of short-term and long-term debt
of $7,057 during 2004 increased $9,337 over 2003, primarily due
to financing our share of the purchase price of Cingulars
acquisition of AT&T Wireless. Cash used for the purchase of
treasury shares declined $712 due to the expiration of the
Companys stock repurchase program in December 2003.
Dividend payments increased $293 as compared to 2003 due to an
increase in the annual dividend rate to $1.04 per share from
$.87 per share in 2003. In December 2004, we called $400 of
debt, which was redeemed in January 2005.

Our debt to total capitalization ratio of 47.1%
at December 31, 2004 increased from 43.1% at
December 31, 2003, reflecting the net issuance of
short-term and long-term debt, partially offset by a decrease in
debt related to our discontinued operations and an increase in
equity.


Cash used for financing activities increased $236
during 2003 compared to 2002 due primarily to an increase in
dividends paid of $148 and an increase in purchases of treasury
shares of $267, partially offset by a reduction in debt pay
downs of $176. During 2003, we paid dividends of $.87 per share
totaling $1,608 and purchased 35.0 million shares of our
common stock for $858. During 2002, we paid dividends of $.78
per share totaling $1,460 and purchased 22.3 million shares
of our common stock for $591.


We utilized cash in 2003 to pay down short-term
borrowings by $431 and long-term notes by $1,849. Our debt to
total capitalization ratio of 43.1% at December 31, 2003
decreased from 49.2% at December 31, 2002, reflecting both
the $2.4 billion debt pay down for both short-term and
long-term notes as well as an increase in equity due to earnings
partially offset by dividends declared.


Discontinued Operations

The following table includes cash flows from our
discontinued operations:

|                                              |  |      |      |      |  |      |      |   |  |   |      |   |  | 
|--------------------------------------------- |  | ---- | ---- | ---- |  | ---- | ---- | - |  | - | ---- | - |  | 
|                                              |  | 2002 |      | 2003 |  | 2004 |      |  
|                                             
|                                             
|Cash flows from operating activities          |  | $    | 534  |      |  | $    | 646  |   |  | $ | 561  |   |  | 
|Cash flows from investing activities          |  |      | (256 | )    |  |      | (140 | ) |  |   | (997 | ) |  | 
|Cash flows from financing activities          |  |      | (206 | )    |  |      | (78  | ) |  |   | (143 | ) |  | 
|                                             
|Total cash flows from discontinued operations |  | $    | 72   |      |  | $    | 428  |   |  | $ | (579 | ) |  | 
|                                             

Operating Activity Cash flows from operations declined
during 2004 impacted by working capital changes and to a lesser
extent by foreign currency translation rate changes on cash
balances. Cash flows from operations improved during 2003
reflecting improved margins compared to 2002 driven by growth in
Ecuador, Colombia, and the currency recovery in Argentina.

Investing Activity  Capital expenditures from our
discontinued operations were $249 in 2002, $274 in 2003 and $225
in 2004. In addition to capital expenditures, 2004 investing
activity included $793 in expenditures related to the purchase
of interests and other rights of minority partners in Argentina,
Colombia, Ecuador, and Venezuela. Investing activity in 2003
includes proceeds of $35 from the sale of our Colombian debt
securities, $70 for the sale of two Brazilian operations, and
$37 for the sale of equity securities. In addition to capital
expenditures, 2002 investing activity includes a $94 payment
related to a guarantee payment on a Brazilian loan offset by $90
of proceeds on sales of our investment in TCO.


Financing Activity  Payments on outstanding borrowings
were $158 in 2002, $78 in 2003, and $63 in 2004. Financing
activity also included net payments to minority partners of $48
in 2002 and $80 in 2004.




BELLSOUTH
2004      37




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##### Table of Contents



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


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


BELLSOUTH CORPORATION

ANTICIPATED SOURCES AND USES OF
FUNDS

General

The Communications group and
Advertising & Publishing group generate substantially
all of our consolidated cash provided by operating activities.
These segments generate sufficient cash flow to fund their
investing and financing activities. Should other investing
opportunities arise, we believe we are well positioned to raise
capital in the public debt markets.

Our Board of Directors considers the cash
dividend on a quarterly basis. Their objective is to maintain a
competitive dividend balanced with an evaluation of projected
free cash flow.


At December 31, 2004, our long-term debt
rating was A2 from Moodys Investor Service and A from
Standard and Poors. Our short-term debt rating at
December 31, 2004 was P-1 from Moodys and A-1 from
Standard and Poors. During 2004, Moodys reduced our
long-term debt rating from A1 to A2. Moodys indicated the
rating was reduced because of the loss of financial flexibility
due to the significantly increased debt levels associated with
Cingulars acquisition of AT&T Wireless, increasing
competition that continues to erode profitability and the
ability to generate free cash flow, and increasing capital
expenditures associated with network upgrades which will
negatively impact our ability to reduce debt over the near term.
Moodys outlook on both our short and long-term ratings
remains negative. The reasons cited were our expanded
competitive challenges in the wireline business which could
erode our ability to reduce debt levels as planned and the
possibility of lower earnings and cash flow at Cingular if the
AT&T Wireless integration is more expensive and time
consuming than anticipated. Standard and Poors also has a
negative outlook on our long-term debt rating. The reasons given
are increasing competition in our wireline business from the
cable television companies, which could drive down pricing and
squeeze operating margins, and near term pressures from the
integration of AT&T Wireless.


Our authorized commercial paper program as of
December 31, 2004 was $10.5 billion, with
$3.2 billion outstanding. We believe that we have ready
access to the commercial paper market in the event funding in
excess of our operating cash flows is needed. We also have a
registration statement on file with the SEC under which
$3.1 billion of long-term debt securities could be issued.
Our sources of funds  primarily from operations and,
to the extent necessary, from readily available external
financing arrangements  are sufficient to meet all
current obligations on a timely basis. We believe that these
sources of funds will be sufficient to meet the operating needs
of our business for at least the next twelve months.


Domestic wireless

The Domestic Wireless segment, which consists
entirely of our equity investment in Cingular, historically has
not relied on BellSouth for funding its operations and capital
program but has relied upon the debt capital markets. Effective
August 1, 2004, BellSouth and SBC have agreed to finance
our respective pro rata shares of Cingulars capital and
operating cash requirements based upon Cingulars budget
and forecasted cash needs. Cingular also terminated its bank
credit facilities and ceased issuing commercial paper and
long-term debt. As of December 31, 2004, we had outstanding
advances under the line of credit of $666 to fund cash needs
associated with the initial integration of AT&T Wireless.
During 2005, we expect Cingular to pay down this advance
and to distribute additional cash to its parent companies.

Cash management

BellSouths primary source of cash flow is
dividends from its subsidiaries. Generally, we do not permit our
subsidiaries to accumulate cash, requiring them to pay out
either net income or cash flow available in the form of
dividends. Any funding requirements for wholly owned domestic
subsidiaries are fulfilled by BellSouth Corporation.

Debt instruments

PUBLICLY HELD INDEBTEDNESS

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

On October 4, 2004, we entered into a
syndicated credit agreement that provides for lender commitments
in the aggregate principal amount of $9.0 billion. As of
December 31, 2004, aggregate lender commitments under that
agreement had been reduced to approximately $2.0 billion.
Of this amount, $1.0 billion expires on April 29, 2005
and the remaining amount expires on October 3, 2005. The
agreement acts as a backup facility for our commercial paper
program. In addition, we have a syndicated line of credit
(together with the credit agreement, the credit
facilities) in the amount of $1.5 billion. If the
line of credit is not drawn and the term conversion is not
exercised, the line of credit will expire on April 29,
2005. We expect to enter into a new syndicated line of credit on
substantially similar terms. We do not have any balances
outstanding under the line of credit.


Except as described in this paragraph, the credit
facilities contain no financial covenants or requirements for
compensating balances. Further, the credit facilities do not
contain any provisions that are tied to the ratings assigned




38 BELLSOUTH
2004




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##### Table of Contents







to us or our affiliates by an external debt
rating agency. At our election, any outstanding borrowings may
be converted to a one-year term loan, in which case the debt of
the Company and its consolidated subsidiaries is not permitted
to exceed 300% of consolidated earnings before interest, taxes,
depreciation and amortization for the preceding four quarters.
In addition, the credit facilities prohibit the Company and its
significant subsidiaries from permitting liens to be placed on
their properties or assets except in specified circumstances. If
BellSouth or any of our subsidiaries defaults on any outstanding
debt in excess of $200, an event of default will occur under the
line of credit.

DISCONTINUED OPERATIONS

As of December 31, 2004, BellSouth
Enterprises, a subsidiary of BellSouth, had guaranteed our
Chilean operations $180 syndicated loan facility. This
guarantee was terminated in January 2005 when we sold our
Chilean operations to Telefónica Móviles.




Off-Balance Sheet Arrangements and Aggregate Contractual
Obligations

OFF-BALANCE SHEET ARRANGEMENTS

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

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

CONTRACTUAL OBLIGATIONS

The following table discloses aggregate
information about our contractual obligations as of
December 31, 2004 and the periods in which payments are due:

|                                      |                                    |           |        |                        |  |           |        |           |        |            |        |          |         |  | 
|------------------------------------- | ---------------------------------- | --------- | ------ | ---------------------- |  | --------- | ------ | --------- | ------ | ---------- | ------ | -------- | ------- |  | 
|                                      |                                    |           |        |                        |  |          
|                                      |                                    |           |        | Payments Due by Period |  |          
|                                     
|                                     
|                                      |                                    | Less than |        |                       
|                                      |                                    | Total     |        | 1 year                 |  | 2006-2008 |        | 2009-2011 |        | After 2011 |        |         
|                                     
|                                     
|Debt maturing within 1 year           |                                    | $         | 5,475  |                        |  | $5,475    |        | $        |        | $         |        | $       |         | 
|Long-term debt(1)                     |                                    |           | 15,453 |                        |  |          |        | 2,872     |        | 3,877      |        | 8,704    |         | 
|Interest on long-term debt            |                                    |           | 21,365 |                        |  | 943       |        | 2,626     |        | 2,085      |        | 15,711   |         | 
|Operating leases                      |                                    |           | 691    |                        |  | 136       |        | 256       |        | 99         |        | 200      |         | 
|Unconditional purchase obligations(2) |                                    |           | 3,102  |                        |  | 723       |        | 1,599     |        | 780        |        |         |         | 
|Interest rate swaps(3)                |                                    |           | (2     | )                      |  | (8)       |        | 2         |        | 4          |        |         |         | 
|                                     
|                                      | Total contractual cash obligations |           | $      | 46,084                 |  |           | $7,269 |           | $7,355 |            | $6,845 |          | $24,615 |  | 
|                                     



|    |  |                                                                                                                                                                                                                                                                                                                                                                            
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) |  | The long-term debt amount above excludes $(77)
    of unamortized discounts and premiums included in long-term debt
    on the balance sheet as of December 31, 2004. Payments
    after the year 2011 include the final principal amount of $500
    for the Zero-to-Full Debentures due in 2095, which have a
    carrying value of $232 as of December 31, 2004.        
|(2) |  | The total unconditional purchase obligation
    includes $472 related to agreements with Qwest and Accenture
    that do not stipulate annual minimum purchases. The agreement
    with Qwest expires in 2010 and the Accenture agreement expires
    in 2007. Of this amount, $6 is included in the 2006 - 2008
    column and $466 is included in the 2009 - 2011 column.
|(3) |  | The amounts due for the interest rate swaps
    and forward contracts are based on market valuations at
    December 31, 2004. Actual payments, if any, may differ at
    settlement date.                                                                                                                                                                                 

Pensions and other retiree
benef its

As of December 31, 2004, our defined benefit
pension plans were fully funded. Therefore, we do not currently
anticipate any cash funding needs to meet minimum required
funding thresholds. Over the past three years, funding for other
retiree benefits was $493 in 2002, $563 in 2003, and $422 in
2004. We currently expect funding in 2005 to be in the range of
$450 to $500.

OTHER POTENTIAL OBLIGATIONS

Several issues of long-term debt included in the
table above contain embedded options which may require us to



BELLSOUTH
2004      39




---



##### Table of Contents



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


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


BELLSOUTH CORPORATION

repurchase the debt or which may alter the
interest rate associated with that debt. Please refer to
Note I to our consolidated financial statements for further
information on these instruments. Those issues, their amounts
and the date of the related options, are as follows:

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

RELATED PARTY TRANSACTIONS

We own an approximate 40% interest in Cingular.
See Note E to our consolidated financial statements for a
description of our relationship with Cingular.

Quantitative and Qualitative Disclosure About Market Risk

DESCRIPTION OF RISK

We are exposed to various types of market risk in
the normal course of business, including the impact of interest
rate changes, changes in equity investment prices and foreign
currency exchange rate fluctuations. To manage this exposure, we
employ risk management strategies including the use of
derivatives such as interest rate swap agreements, foreign
currency forwards and currency swap agreements. We do not hold
derivatives for trading purposes.

Interest rate risk

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

Risk sensitivity

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

The following table provides information, by
maturity date, about our interest rate sensitive financial
instruments, which consist of fixed and variable rate debt
obligations and related interest rate derivatives. Fair values
for the majority of our long-term debt obligations are based on
quotes from dealers.

|                          |                   |                        |   |       |     |      |   |       |     |      |   |            |     |       |   |       |     |   |   |       |     |   |   |        |     |   |   |        |     |   |   |        |   | 
|------------------------- | ----------------- | ---------------------- | - | ----- | --- | ---- | - | ----- | --- | ---- | - | ---------- | --- | ----- | - | ----- | --- | - | - | ----- | --- | - | - | ------ | --- | - | - | ------ | --- | - | - | ------ | - | 
|                          |                   |                       
|                          |                   | Expected Maturity Date
|                         
|                         
|                          |                   | Fair                  
|                          |                   | 2005                   |   | 2006  |     | 2007 |   | 2008  |     | 2009 |   | Thereafter |     | Total |   | Value
|                         
|                         
|Liabilities               |                   |                        |   |       |     |      |   |       |     |      |   |            |     |       |   |       |     |   |   |       |     |   |   |        |     |   |   |        |     |   |   |       
|Long-term debt:           |                   |                        |   |       |     |      |   |       |     |      |   |            |     |       |   |       |     |   |   |       |     |   |   |        |     |   |   |        |     |   |   |       
|                          | Fixed Rate        |                        | $ | 1.867 |     |      | $ | 1,299 |     |      | $ | 19         |     |       | $ | 621   |     |   | $ | 1,872 |     |   | $ | 10,434 |     |   | $ | 16,112 |     |   | $ | 17,149 |  
|                          |                   | Average interest rate  |   |       | 3.1 | %    |   |       | 5.2 | %    |   |            | 6.3 | %     |   |       | 5.7 | % |   |       | 4.5 | % |   |        | 6.4 | % |   |        | 5.7 | % |   |        |   | 
|                          | Variable Rate     |                        | $ | 335   |     |      | $ | 410   |     |      | $ | 500        |     |       |   |      |     |   |   |      |     |   |   |       |     |   | $ | 1,245  |     |   | $ | 1,245  |  
|                          |                   | Average interest rate  |   |       | 2.7 | %    |   |       | 2.9 | %    |   |            | 3.7 | %     |   |       |     |   |   |       |     |   |   |        |     |   |   |        | 3.2 | % |   |        |   | 
|                         
|Interest Rate Derivatives |                   |                        |   |       |     |      |   |       |     |      |   |            |     |       |   |       |     |   |   |       |     |   |   |        |     |   |   |        |     |   |   |       
|Interest Rate Swaps:      |                   |                        |   |       |     |      |   |       |     |      |   |            |     |       |   |       |     |   |   |       |     |   |   |        |     |   |   |        |     |   |   |       
|                          | Variable to Fixed |                        | $ | 1,000 |     |      | $ |      |     |      | $ |           |     |       | $ |      |     |   | $ |      |     |   | $ |       |     |   | $ | 1,000  |     |   | $ | (29    | )
|                          |                   | Average pay rate       |   |       | 5.9 | %    |   |       |     |      |   |            |     |       |   |       |     |   |   |       |     |   |   |        |     |   |   |        | 5.9 | % |   |        |   | 
|                          |                   | Average receive rate   |   |       | 3.0 | %    |   |       |     |      |   |            |     |       |   |       |     |   |   |       |     |   |   |        |     |   |   |        | 3.0 | % |   |        |   | 
|                          | Fixed to Variable |                        |   |      |     |      |   |      |     |      |   |           |     |       | $ | 600   |     |   | $ | 800   |     |   |   |       |     |   | $ | 1,400  |     |   | $ | 5      |  
|                          |                   | Average pay rate       |   |       |     |      |   |       |     |      |   |            |     |       |   |       | 5.5 | % |   |       | 4.8 | % |   |        |     |   |   |        | 5.1 | % |   |        |   | 
|                          |                   | Average receive rate   |   |       |     |      |   |       |     |      |   |            |     |       |   |       | 5.8 | % |   |       | 4.8 | % |   |        |     |   |   |        | 5.2 | % |   |        |   | 
|                         

PROPORTIONAL DEBT

We own an approximate 40% interest in Cingular
Wireless, and share joint control of the venture with SBC and,
therefore, do not consolidate these operations. Our proportional
debt, including our share of the face value of Cingulars
non-affiliate debt and capitalized leases at December 31,
2004, is shown in the table below.

|                           |  |   |        |  |  | 
|-------------------------- |  | - | ------ |  |  | 
|                          
|Consolidated debt          |  | $ | 20,583 |  |  | 
|Plus: 40% of Cingular debt |  |   | 5,099  |  |  | 
|Proportional debt          |  | $ | 25,682 |  |  | 
|                          



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Operating Environment

DOMESTIC ECONOMIC TRENDS

On average, the economy of our nine-state region
tends to closely track the US economy. Real gross domestic
product (GDP) grew at an average annual rate of 4.4 percent in
2004, compared with an increase of 3.0 percent in 2003. The
improvement in the economy was marked by gains in personal
consumption expenditures, residential construction, business
investment in equipment and software, federal government
spending, and exports. These gains were partly offset by an
increase in imports. Nonagricultural employment increased 2.2
million during the year and the unemployment rate dipped to 5.4
percent in December from 5.7 percent a year earlier. The
nations economic growth is expected to slow in 2005 to
near 3.5 percent. Employment gains are expected to again exceed
2 million with the unemployment rate receding further to 5.2
percent in 2005.

Nonagricultural employment in our nine-state
region grew 1.4 percent during the year, and we anticipate a
gain of 2.0 percent in 2005. Employment in the region has
historically been closely correlated with various measures of
BellSouths business performance. Residential construction
activity has been very strong in the region and the nation.
Through the third quarter of 2004, housing starts were on pace
to reach 588 thousand, exceeding the 533 thousand
reached in 2003. We expect a more moderate pace of construction
activity for 2005.


WIRELINE REGULATORY ENVIRONMENT

The FCC regulates rates and other aspects of our
provision of interstate telecommunications services, including
international rates and interstate access charges. State
regulatory commissions have jurisdiction over our provision of
intrastate telecommunications services, including local and long
distance rates and network access services. Access charges are
designed to compensate our wireline subsidiaries for the use of
their networks by other carriers. Our future operations and
financial results will be substantially influenced by
developments in a number of federal and state regulatory
proceedings. Adverse results in these proceedings could
materially affect our revenues, expenses and ability to compete
effectively against other telecommunications carriers.

Regulatory Reform

Because traditional telecommunications providers
such as BellSouth are subject to significantly more regulatory
requirements than our competitors, we will encourage reform
efforts before legislatures and regulatory agencies. As
competition increases, our need for regulatory requirements
whose burdens more nearly equal those of our competitors
increases. We have encouraged both state and federal legislators
and regulators to adopt reforms that prevent greater rate and
service quality regulation of our services than is imposed on
our competitors. In various dockets before the FCC, we have
urged it to accord our broadband and Internet Protocol offerings
a regulatory treatment more nearly like that it accords
broadband offerings by the cable industry, and to forebear from
old requirements, such as the Computer Inquiry requirements that
require us to tariff and offer separately the telecommunications
service portion of any information service we offer and that
assume our telecommunications business is a monopoly.

We expect significant regulatory reform debate in
the jurisdictions where we provide traditional
telecommunications service. We cannot predict the outcome of
reform efforts. The continued imposition of unequal regulatory
burdens could have an adverse effect on the results of
operations.


Federal Regulatory Matters

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

FCC INTERCONNECTION, UNBUNDLING AND PRICING
RULES

Under the 1996 Act, the FCC is required to
consider the extent to which we must make elements of our
network available to other providers of local service. The FCC
can require access to proprietary network elements only when
necessary. For non-proprietary network elements, the
FCC can order access only when failure to do so will impair the
ability of the requesting carrier to provide services. The
elements provided under these requirements are known as
unbundled network elements, or UNEs. The FCC also
establishes the pricing policy for elements. The policy
currently in effect is TELRIC (an acronym for Total Element
Long-Run Incremental Cost), which assumes a hypothetical, lowest
costs, most efficient network for purposes of establishing
prices for elements. The states have set prices for elements
under this policy since 1996. The FCCs unbundling and
pricing requirements have caused us to provide service to
competitors at deeply discounted artificial prices, often below
actual costs.

The FCC adopted UNE rules in 1996, 1999 and 2003.
On each occasion, the rules required significant unbundling of
our loop, switching and transmission facilities. Although we
implemented the unbundling requirements as they were adopted, we
also participated in appeals that challenged




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


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


BELLSOUTH CORPORATION

their validity, and the courts generally
invalidated the unbundling requirements on each occasion.

Because we implemented the rules before the
courts found them invalid, we still have many contracts under
which we continue to provide UNEs, including the unbundled
network element platform, or UNE-P. As the rules were
invalidated, we pursued the options provided by law and our
contracts to reform our UNE offerings. In response to the most
recent invalidation and in addition to pursuing legal options,
we also have offered competitors commercial and tariffed
services that would replace the services required by the
invalidated rules. These offerings have market-based prices and
require longer term commitments. We currently have approximately
45 commercial contracts with CLEC customers through which our
former UNE-P service is replaced with a mutually acceptable
commercial offering.


The most recent invalidation of the FCC rules
became effective on June 16, 2004. The FCC in August issued
an interim order that required incumbent local carriers such as
BellSouth to continue operating under the terms of their
interconnection contracts until new rules were adopted or March
2005, whichever occurs first. The FCC announced new rules in
December 2004 and, in February 2005, released its order with the
new rules. Its action effectively relieves us of the obligation
to accept new UNE-P orders after March 10, 2005, and
provides a 12-month transition period to phase out existing
UNE-P service. The order also generally requires us to offer as
UNEs certain high capacity loop and transport services that
competitors use to serve business customers. The obligation to
provide the services as UNEs does not apply if the wire centers
we use to provide the service meet certain thresholds. However,
only a very small percentage of BellSouths wire centers
meet these thresholds. The FCCs action also permits
competitors to convert qualifying higher priced special access
tariff services they currently use to the lower-priced UNE
services. Depending on the extent to which competitors can and
do choose to order these UNEs or convert existing tariff
services to UNEs, we could experience a material adverse effect
on operations.


We believe the action requiring unbundling of
high-capacity loop and transport services is a violation of
earlier court orders, and we, along with other incumbent
carriers, have challenged the action in the D.C. Circuit
Court of Appeals. The Court has not set a schedule for
considering the case. Other parties may challenge other
provisions of the order through appeal or requests for
reconsideration. If the outcome of those actions requires us to
increase the number or scope of UNEs we must provide or allows
competitors greater ability to substitute UNEs for special
access services, or contains other negative findings, we could
experience a material adverse effect on revenues and results of
operations.


In its 2003 unbundling decision, the FCC refused
to require incumbents to unbundle the packet switching
facilities used to provide broadband service, and also declined
to require unbundling of newly constructed fiber loops that
connect at the customer premises. In October, in response to a
BellSouth request, the FCC adopted a new rule that also frees
certain fiber to the curb (FTTC) installations from
unbundling requirements. Under the new rule, where BellSouth and
other incumbent companies install fiber optic technology within
500 feet of a residential customers premises, the
installation is not subject to the FCCs unbundling rules.


The FCC has established a proceeding to consider
modification of TELRIC. We are participating in the proceeding
and encouraging the adoption of a methodology that allows
appropriate recovery of the costs of operating an actual
network. To the extent the rules resulting from the proceeding
do not allow recovery of the costs of operating an actual
network, we will continue to experience an adverse effect on
revenues and results of operations.


On January 31, 2005, the FCC released a
notice of proposed rulemaking addressing its special access
pricing flexibility rules and criteria to obtain relief, as well
as regulation of special access services under federal price cap
regulation. Potential revenue loss from an adverse decision
could be material.


PRICE REGULATION

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

ACCESS CHARGE REFORM

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

We continue to participate in FCC examinations of
further access reform. The FCC has undertaken a comprehensive
examination of intercarrier compensation  the
payments among telecommunications carriers resulting from use of
their respective interconnecting networks. In general, there are
two classes of intercarrier compensation: (1) reciprocal
compensation that applies to local calls; and (2) access
charges that apply to long distance calls. The objective of the
FCCs comprehensive examination is to examine existing
rules pertaining to intercarrier compensation and explore
alternative forms of intercarrier compensation. This




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examination could lead to permanent changes in
the way carriers compensate one another and in the way carriers
receive compensation from their end-user customer. In February,
the FCC announced that it would consider seven policy models
submitted by various commenters, each of which would
significantly reform intercarrier compensation. We expect the
FCC will also reconsider its methodology and rates for
reciprocal compensation as part of this comprehensive
intercarrier compensation reform. See
 Reciprocal Compensation below.

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


UNIVERSAL SERVICE

In 1998, the FCCs universal service order
established funding mechanisms for high-cost and low-income
service areas. Telecommunications companies are required to pay
a specific percentage of their interstate and international
revenues into the Universal Service Fund to support the four
established programs. All long distance companies, local
telephone companies, paging companies, payphone providers and
wireless telephone companies must contribute to the Universal
Service Fund. We began contributing to the new funds in 1998.
During 2004, our wireline operations contributed $307 to the
Universal Service Fund. The FCC does not require contributing
companies to recover their contributions directly from
customers. Like many other companies, however, BellSouth has
chosen to recover universal costs directly from end-users.

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


The universal service order also established
significant discounts to be provided to eligible schools and
libraries for all telecommunications services, internal
connections and Internet access. Further, it established support
for rural health care providers so that they may pay rates
comparable to those that urban health care providers pay for
similar services. Industry-wide annual costs of the entire
universal service program, estimated at approximately
$6 billion, are to be funded out of the federal universal
service fund.


RECIPROCAL COMPENSATION

Following the enactment of the 1996 Act, our
telephone company subsidiary, BST, and various competitive local
exchange carriers entered into interconnection agreements
providing for, among other things, the payment of reciprocal
compensation for local calls initiated by the customers of one
carrier that are completed on the network of the other carrier.
These agreements were the subject of litigation before various
regulatory commissions. After an FCC ruling in April 2001
prescribing new rates, BellSouth settled its claims with
competitors for traffic occurring through mid-June 2001, and
entered into agreements that contained the FCC rates for traffic
occurring from mid-June 2001 forward. The District of Columbia
Circuit Court of Appeals, in the second quarter of 2002,
remanded the ruling to the FCC to implement a rate methodology
consistent with the Courts opinion. Although it has not
issued an order responding to the Courts 2002 opinion, the
FCC, in October 2004, granted a request by a competitor to
forbear from applying certain compensation caps and new market
rules required by its April 2001 decision. We expect that the
FCC will reconsider the rates and methodology for reciprocal
compensation as part of its comprehensive evaluation of
intercarrier compensation, and we do not currently expect any
change in reciprocal compensation rates to have a material
effect on results of operations.

BROADBAND REGULATION

The FCC has pending dockets in which it is
considering the regulatory classification of broadband service.
Specifically, it is looking at whether broadband service should
be deemed a regulated telecommunications service or a
non-regulated information service. The FCC and various state
public service commissions are considering what rules and
regulations should apply to voice over Internet protocol (VoIP)
services. We are unable to predict the outcome of these
proceedings. Because wireline telephony is transitioning toward
broadband services, the materiality of the outcome of these
proceedings to us is increasing over time.

SECTION 272 CLAIM

In December 2004, the FCC partially granted and
otherwise dismissed July 2004 claims of AT&T that two
optional discount special access tariffs violated various
provisions of the Communications Act. The FCC held that one of
the tariffs, the Transport Savings Plan, was unlawful under
Section 272 of the Act, which governs dealings between BST
and our long distance affiliate. That tariff, originally filed
in 1999, provided an overlay discount for carriers that accepted
its terms, which included a five year commitment, a commitment
for a defined amount of spending on special access, and
shortfall charges if commitments were not met. The FCC held that
the discount structure in the tariff was insufficiently related
to cost, and unduly favored a class of carriers (including our
long distance affiliate) with relatively lower volume special
access spending, and discriminated against carriers with
relatively higher volumes. The FCC dismissed the other claims
associated with the Transport Savings Plan, and dismissed all
claims associated with the second tariff. We do not agree with
the FCCs finding, and appealed its decision to the
D.C. Circuit Court of Appeals. We do not believe that
AT&T has suffered any damages, and we



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


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


BELLSOUTH CORPORATION

believe that any such claims would be barred in
whole or in part by various provisions of law. At this time,
however, neither the likely outcome of the appeal nor
AT&Ts potential damages claim can be predicted, and
therefore no reasonable estimate of loss, if any, can be made.

State Regulatory Matters

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

PRICE REGULATION

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

While some plans are not subject to either review
or renewal, other plans contain specified termination dates
and/or review periods. Upon review or renewal, a regulatory
commission could attempt to require substantial modifications to
prices and other terms of these plans. During 2004, our plans in
Alabama, Kentucky and Mississippi were updated without material
modification. A review of our North Carolina plan is pending.


Beginning in 1996, we operated under a price
regulation plan approved by the South Carolina Public Service
Commission (PSC) under existing state laws. In April 1999,
however, the South Carolina Supreme Court invalidated this price
regulation plan. In July 1999, we elected to be regulated under
a new state statute, adopted subsequent to the PSCs
approval of the earlier plan. The new statute allows telephone
companies in South Carolina to operate under price regulation
without obtaining approval from the PSC. The election became
effective during August 1999. The South Carolina Consumer
Advocate petitioned the PSC seeking review of the level of our
earnings during the 1996-1998 period when we operated under the
subsequently invalidated price regulation plan. The PSC
dismissed the petition in November 1999 and issued orders
confirming the vote in February and June of 2000. In July 2000,
the Consumer Advocate appealed the PSCs dismissal of the
petition. In January 2004, the court hearing the appeal affirmed
the PSCs decision. An appeal of this decision to the South
Carolina Supreme Court was filed in March 2004. In April 2004,
BellSouth entered into agreements that completely terminated the
litigation. Under the terms of the settlement, BellSouth
refunded $50 to its South Carolina end user customers in 2004.
BellSouth agreed to settle the case to avoid further expensive
litigation and uncertainty relating to the outcome of the
litigation. The settlement is not an admission of liability.


OTHER STATE REGULATORY MATTERS

In each of our states, we are subject to
performance measurement plans that measure our service
performance to competitors against certain benchmarks and our
own retail performance. When we do not meet the relevant
standards, we make payments to the competitors or the
States treasury. In some states, if we continuously fail
to meet certain criteria, we also would suspend our marketing
and sale of long distance services. We made immaterial payments
in all states in 2003 and 2004, and likely will make immaterial
payments in 2005. The plans are reviewed regularly for necessary
changes.

WIRELESS REGULATORY ENVIRONMENT

Overview

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

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


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

Licenses are issued for only a fixed period of
time, typically 10 years. Consequently, Cingular must
periodically seek renewal of those licenses. The FCC will award
a renewal expectancy to a wireless licensee that has provided
substantial service during its past license term and has
substantially complied with applicable FCC rules and policies
and the Communications Act. The FCC has routinely renewed
wireless licenses in the past. However,




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the Communications Act provides that licenses may
be revoked for cause and license renewal applications denied if
the FCC determines that a renewal would not serve the public
interest. Violations of FCC rules may also result in monetary
penalties or other sanctions. FCC rules provide that
applications competing with a license renewal application may be
considered in comparative hearings and establish the
qualifications for competing applications and the standards to
be applied in hearings.

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


Recent Regulatory
Developments

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

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


The FCC has established federal universal service
requirements that affect commercial mobile radio service
operators. Under the FCCs rules, commercial mobile radio
service providers are potentially eligible to receive universal
service subsidies for the first time; however, they are also
required to contribute to the federal universal service fund and
may be required to contribute to state universal service funds.
Contributions into the federal fund are based on the interstate
and international revenues generated by the properties owned by
a commercial mobile radio service provider. For 2004, Cingular
had payment obligations into the federal universal service fund
of approximately $415. Because the amount that Cingular is
required to pay into the fund is based on revenues generated by
its properties, we anticipate that this amount should continue
to increase over time. Cingular recovers most of this expense
from its customers. Many states also are moving forward to
develop state universal service fund programs. A number of these
state funds require contributions, varying greatly from state to
state, from commercial mobile radio service providers. If these
programs expand they will impose a correspondingly growing
expense on Cingulars business. As mentioned, commercial
mobile radio service providers are now eligible to receive
universal service subsidies if federal and state conditions are
met. Cingular is planning to pursue this funding in states where
the corresponding regulatory burdens do not exceed the benefits
of the subsidies.


In November 2003, the FCCs rules on
wireless local number portability became operative, enabling
wireless customers to keep their wireless number when switching
to another carrier. These rules have increased competition,
costs and customer churn across the industry.


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


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




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##### Table of Contents



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


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


BELLSOUTH CORPORATION

State Regulation and Local
Approvals

With the rapid growth and penetration of wireless
services has come a commensurate surge of interest on the part
of state legislatures and state public utility commissions and
local governmental authorities in regulating the domestic
wireless industry. This interest has taken the form of efforts
to regulate customer billing, termination of service
arrangements, advertising, filing of informational
tariffs, certification of operation, use of handsets when
driving, service quality, sales practices, and many other areas.
We anticipate that this trend will continue. It will require
Cingular to devote legal and other resources to working with the
states to respond to their concerns while minimizing any new
regulation that could increase Cingulars costs of doing
business.

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


Several states have invoked this terms and
conditions authority to impose or propose various consumer
protection regulations on the wireless industry.
Californias recently enacted rules are potentially quite
costly. States also may impose their own universal service
support requirements on wireless and other communications
carriers, similar to the requirements that have been established
by the FCC. At the local level, wireless facilities typically
are subject to zoning and land use regulation. Neither local nor
state governments may categorically prohibit the construction of
wireless facilities in any community or take actions, such as
indefinite moratoria, which have the effect of prohibiting
construction. Nonetheless, securing state and local government
approvals for new tower sites has been and is likely to continue
to be difficult, lengthy and costly.


In addition, state commissions continue their
efforts to conserve telephone numbering resources. These efforts
may impact wireless service providers disproportionately by
imposing additional costs or limiting access to numbering
resources. Examples of state conservation methods include number
pooling, number rationing and code sharing. In many non-top 100
markets, the supply of new numbers is inadequate to meet growing
customer demands, but states have been and continue to be
reluctant to deploy new area codes.


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


COMPETITION

There are many competitive forces that impact our
businesses. The Telecommunications Act of 1996 removed the
regulatory barriers to local service competition in the wireline
market and required incumbent carriers such as us to open our
networks to other carriers.

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


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


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


| |   |                                                                                       
| | - | --------------------------------------------------------------------------------------
| |  | increase its spending to retain customers;                                            
| |  | restructure its service packages to include more
    compelling products and services;
| |  | further upgrade its network infrastructure and
    the handsets Cingular offers; and  



46 BELLSOUTH
2004




---



##### Table of Contents









| |   |                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------
| |  | increase its advertising, promotional spending,
    commissions and other customer acquisition costs.

TECHNOLOGY

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

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


LEGAL MATTERS

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

NEW ACCOUNTING PRONOUNCEMENTS

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




Critical Accounting Policies

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

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


DEPRECIATION OF PROPERTY, PLANT AND
EQUIPMENT

See Note H to our consolidated financial
statements for more information regarding costs and assumptions
for property, plant and equipment.

Nature of estimates required

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

Sensitivity analysis

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

|                                     |  |                           |       |  
|------------------------------------ |  | ------------------------- | ----- | -
|                                     |  | 2005 Depreciation Expense
|                                     |  | Higher/(Lower)           
|                                    
|                                    
|Increasing economic life by one year |  |                           | $(290 | )
|Decreasing economic life by one year |  |                           | 360   |  

PENSIONS

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

Nature of estimates required

The measurement of our pension obligations, costs
and liabilities is dependent on a variety of assumptions
including estimates of the present value of projected future
pension payments to plan participants, consideration of the
likelihood of potential future events such as salary increases
and demographic experience. These assumptions may have an effect
on the amount and timing of future contributions, if any.
Additionally, the plan trustee conducts an independent valuation
of the fair value of pension plan assets.

Assumptions and approach used

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



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



BELLSOUTH
2004      47




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##### Table of Contents



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


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


BELLSOUTH CORPORATION

The discount rate enables us to state expected
future cash flows at a present value on the measurement date. We
are required to select a rate that represents the market rate
for high-quality fixed income investments and considers the
timing and amounts of our expected future benefit payments. A
lower discount rate increases the present value of benefit
obligations and usually increases expense. However, the expense
impact for our plans currently has an opposite impact (lower
discount rate decreases expense). This impact occurs because our
plan is currently within the specified corridor that under
accounting rules does not require us to amortize the discount
rate assumption change as it relates to the obligation but we do
receive the benefit of lower interest rates in calculating the
current period interest component of net periodic pension cost.
Our inflation assumption is based on an evaluation of external
market indicators. The salary growth assumptions reflect our
long-term actual experience, the near-term outlook and assumed
inflation. The expected return on plan assets reflects asset
allocations, investment strategy and the views of investment
managers and other large pension plan sponsors. For 2003, we
reduced our estimated return on plan assets to 8.5% reflecting
lower expected long-term market returns. Retirement and
mortality rates are based primarily on actual plan experience.
The effects of actual results differing from our assumptions are
accumulated and amortized into the income statement in future
periods in accordance with the pension accounting rules.

Sensitivity analysis

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

|                          |  |              |  |                   |  |                |           |  
|------------------------- |  | ------------ |  | ----------------- |  | -------------- | --------- | -
|                          |  | Percentage   |  | December 31, 2004 |  |               
|                          |  | Point        |  | Obligation        |  | 2005 Expense  
|Assumption                |  | Change       |  | Higher/(Lower)    |  | Higher/(Lower)
|                         
|                         
|Discount rate             |  | +/- 0.5 pts. |  | $(454)/$472       |  |                | $18/$(21  | )
|Expected return on assets |  | +/- 1.0 pts. |  |                  |  |                | (151)/151 |  

OTHER POSTRETIREMENT BENEFITS

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

Nature of estimates required

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

Assumptions and approach used

Our contract with the CWA provides for
contractual limits on the company-funded portion of retiree
medical costs (referred to as caps). We have waived
the premiums in excess of the caps during the current and past
contract periods and, therefore have not collected contributions
from those non-management retirees in effect creating a
substantive plan. Based on this past practice, we determine the
future obligation based on this substantive plan. Accordingly,
we calculate the obligation for non-management retiree medical
costs as if there were no caps.

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




| |   |                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------
| |  | Discount rates                                                                                             
| |  | Health care cost trends                                                                                    
| |  | Inflation                                                                                                  
| |  | Expected return on plan assets                                                                             
| |  | Retirement rates                                                                                           
| |  | Mortality rates                                                                                            
| |  | Actuarial equivalence for purposes of the
    Medicare Prescription Drug, Improvement and Modernization Act

The discount rate enables us to state expected
future cash flows at a present value on the measurement date. We
are required to select a rate that represents the market rate
for high-quality fixed income investments and considers the
timing and amounts of our expected future benefit payments. A
lower discount rate increases the present value of benefit
obligations and expense. Our health care cost trend assumptions
are developed based on historical cost data, the near-term
outlook, and an assessment of likely long-term trends. Our
inflation assumption is based on an evaluation of external
market indicators. The expected return on plan assets reflects
asset allocations, investment strategy and the views of
investment managers and other large plan sponsors. Retirement
and mortality rates are based primarily on actual plan
experience. Actuarial equivalence was based on comparing the
Medicare Part D standard drug coverage and premiums to
BellSouths retiree prescription drug coverage and
premiums. We calculated the actuarial values based on our
specific experience combined with published nationwide
statistics. The effects of actual results differing from our
assumptions are accumulated and amortized into the income
statement in future periods in



48 BELLSOUTH
2004




---



##### Table of Contents







accordance with the other postretirement benefits
accounting rules.

Sensitivity analysis

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

|                       |  |              |  |                   |              |                |  |  |           |  
|---------------------- |  | ------------ |  | ----------------- | ------------ | -------------- |  |  | --------- | -
|                       |  | Percentage   |  | December 31, 2004 |              |               
|                       |  | Point        |  | Obligation        |              | 2005 Expense  
|Assumption             |  | Change       |  | Higher/(Lower)    |              | Higher/(Lower)
|                      
|                      
|Discount rate          |  | +/- 0.5 pts. |  |                   | $(648)/$693  |                |  |  | $(42)/$43 |  
|Health care cost trend |  | +/- 1.0 pts. |  |                   | 1,251/(1,030 | )              |  |  | 187/(143  | )

OTHER LOSS CONTINGENCIES

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

OTHER SIGNIFICANT ACCOUNTING
POLICIES

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




Cautionary Language Concerning 
 Forward-Looking Statements

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

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


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




| |   |                                                                                                                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a change in economic conditions in the markets
    where we operate or have material investments which could affect
    demand for our services;                                                                                                                                              
| |  | the impact and the success of Cingular Wireless,
    our wireless joint venture with SBC, including marketing and
    product development efforts, technological changes and financial
    capacity;                                                                                          
| |  | Cingular Wireless failure to realize, in
    the amounts and within the timeframe contemplated, the capital
    and expense synergies and other financial benefits expected from
    its acquisition of AT&T Wireless as a result of technical,
    logistical, regulatory and other factors;
| |  | changes in laws or regulations, or in their
    interpretations, which could result in the loss, or reduction in
    value, of our licenses, concessions or markets, or in an
    increase in competition, compliance costs or capital
    expenditures;                                      
| |  | continued pressures on the telecommunications
    industry from a financial, competitive and regulatory
    perspective;                                                                                                                                                                      
| |  | the intensity of competitive activity and its
    resulting impact on pricing strategies and new product offerings;                                                                                                                                                                           
| |  | changes in the federal and state regulations
    governing the terms on which we offer retail and wholesale
    services;                                                                                                                                                                     
| |  | continued successful penetration of the interLATA
    long distance market;                                                                                                                                                                                                                   
| |  | the impact on our business of consolidation in
    the wireline and wireless industries in which we operate;                                                                                                                                                                                  
| |  | the issuance by the Financial Accounting
    Standards Board or other accounting bodies of new accounting
    standards or changes to existing standards;                                                                                                                                     
| |  | changes in available technology that increase the
    impacts of technology substitution;                                                                                                                                                                                                     
| |  | higher than anticipated start-up costs or
    significant up-front investments associated with new business
    initiatives;                                                                                                                                                                  
| |  | the outcome of pending litigation; and                                                                                                                                                                                                                                                        
| |  | unanticipated higher capital spending from, or
    delays in, the deployment of new technologies.                                                                                                                                                                                             



BELLSOUTH
2004      49




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##### Table of Contents



CONSOLIDATED STATEMENTS OF INCOME


BELLSOUTH CORPORATION






|                                                                                                                                                |                                                                                                                                   |                                  |        |        |        |      |       |        |        |   |       |        |        |  |  | 
|----------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------- | -------------------------------- | ------ | ------ | ------ | ---- | ----- | ------ | ------ | - | ----- | ------ | ------ |  |  | 
|                                                                                                                                                |                                                                                                                                   |                                  |        |       
|                                                                                                                                                |                                                                                                                                   | For the years ended December 31, |        |       
|                                                                                                                                                |                                                                                                                                   |                                 
|                                                                                                                                                |                                                                                                                                   |                                 
|(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)                                                                                                         |                                                                                                                                   | 2002                             |        | 2003   |        | 2004 |       |       
|                                                                                                                                               
|                                                                                                                                               
|Operating Revenues:                                                                                                                             |                                                                                                                                   |                                  |        |        |        |      |       |        |        |   |       |        |        | 
|                                                                                                                                                | Communications Group                                                                                                              |                                  | $      | 18,226 |        |      | $     | 18,255 |        |   | $     | 18,239 |        |  | 
|                                                                                                                                                | Advertising & Publishing Group                                                                                                    |                                  |        | 1,921  |        |      |       | 2,033  |        |   |       | 2,005  |        |  | 
|                                                                                                                                                | All other                                                                                                                         |                                  |        | 60     |        |      |       | 53     |        |   |       | 56     |        |  | 
|                                                                                                                                               
|                                                                                                                                                |                                                                                                                                   | Total Operating Revenues         |        |        | 20,207 |      |       |        | 20,341 |   |       |        | 20,300 |  |  | 
|                                                                                                                                               
|Operating Expenses:                                                                                                                             |                                                                                                                                   |                                  |        |        |        |      |       |        |        |   |       |        |        | 
|                                                                                                                                                | Cost of services and products (excludes
    depreciation
    and amortization shown separately below)                             |                                  |        | 6,670  |        |      |       | 6,991  |        |   |       | 7,520  |        |  | 
|                                                                                                                                                | Selling, general, and administrative expenses                                                                                     |                                  |        | 3,891  |        |      |       | 3,777  |        |   |       | 3,816  |        |  | 
|                                                                                                                                                | Depreciation and amortization                                                                                                     |                                  |        | 4,202  |        |      |       | 3,811  |        |   |       | 3,636  |        |  | 
|                                                                                                                                                | Provisions for restructuring and asset impairments                                                                                |                                  |        | 990    |        |      |       | 205    |        |   |       | 39     |        |  | 
|                                                                                                                                               
|                                                                                                                                                |                                                                                                                                   | Total Operating Expenses         |        |        | 15,753 |      |       |        | 14,784 |   |       |        | 15,011 |  |  | 
|                                                                                                                                               
|Operating income                                                                                                                                |                                                                                                                                   |                                  | 4,454  |        |        |      | 5,557 |        |        |   | 5,289 |        |        | 
|Interest expense                                                                                                                                |                                                                                                                                   |                                  | 1,066  |        |        |      | 947   |        |        |   | 916   |        |        | 
|Net earnings of equity affiliates                                                                                                               |                                                                                                                                   |                                  | 542    |        |        |      | 452   |        |        |   | 68    |        |        | 
|Gain (loss) on sale of operations                                                                                                               |                                                                                                                                   |                                  | 1,335  |        |        |      |      |        |        |   | 462   |        |        | 
|Other income (expense), net                                                                                                                     |                                                                                                                                   |                                  | 102    |        |        |      | 362   |        |        |   | 283   |        |        | 
|                                                                                                                                               
|Income from Continuing Operations Before Income
    Taxes, Discontinued Operations and Cumulative Effect of Changes
    in Accounting Principle |                                                                                                                                   |                                  | 5,367  |        |        |      | 5,424 |        |        |   | 5,186 |        |        | 
|Provision for Income Taxes                                                                                                                      |                                                                                                                                   |                                  | 1,892  |        |        |      | 1,936 |        |        |   | 1,792 |        |        | 
|                                                                                                                                               
|Income from Continuing Operations Before
    Discontinued Operations and Cumulative Effect of Changes in
    Accounting Principle               |                                                                                                                                   |                                  | 3,475  |        |        |      | 3,488 |        |        |   | 3,394 |        |        | 
|Income (Loss) from Discontinued Operations, Net
    of Tax                                                                                      |                                                                                                                                   |                                  | (867   | )      |        |      | 101   |        |        |   | 1,364 |        |        | 
|Income Before Cumulative Effect of Changes in
    Accounting Principle                                                                          |                                                                                                                                   |                                  | 2,608  |        |        |      | 3,589 |        |        |   | 4,758 |        |        | 
|Cumulative Effect of Changes in Accounting
    Principle, Net of Tax                                                                            |                                                                                                                                   |                                  | (1,285 | )      |        |      | 315   |        |        |   |      |        |        | 
|                                                                                                                                               
|                                                                                                                                                |                                                                                                                                   | Net Income                       |        | $      | 1,323  |      |       | $      | 3,904  |   |       | $      | 4,758  |  |  | 
|                                                                                                                                               
|Weighted-Average Common Shares Outstanding:                                                                                                     |                                                                                                                                   |                                  |        |        |        |      |       |        |        |   |       |        |        | 
|                                                                                                                                                | Basic                                                                                                                             |                                  |        | 1,870  |        |      |       | 1,848  |        |   |       | 1,832  |        |  | 
|                                                                                                                                                | Diluted                                                                                                                           |                                  |        | 1,876  |        |      |       | 1,852  |        |   |       | 1,836  |        |  | 
|Basic Earnings Per Share:                                                                                                                       |                                                                                                                                   |                                  |        |        |        |      |       |        |        |   |       |        |        | 
|                                                                                                                                                | Income from Continuing Operations Before
    Discontinued Operations and Cumulative Effect of Changes in
    Accounting Principle |                                  | $      | 1.86   |        |      | $     | 1.89   |        |   | $     | 1.85   |        |  | 
|                                                                                                                                                | Discontinued Operations, net of tax                                                                                               |                                  | $      | (.46   | )      |      | $     | .05    |        |   | $     | .74    |        |  | 
|                                                                                                                                                | Cumulative Effect of Accounting Changes, net of
    tax                                                                           |                                  | $      | (.69   | )      |      | $     | .17    |        |   | $     |       |        |  | 
|                                                                                                                                                | Net Income                                                                                                                        |                                  | $      | .71    |        |      | $     | 2.11   |        |   | $     | 2.60   |        |  | 
|Diluted Earnings Per Share:                                                                                                                     |                                                                                                                                   |                                  |        |        |        |      |       |        |        |   |       |        |        | 
|                                                                                                                                                | Income from Continuing Operations Before
    Discontinued Operations and Cumulative Effect of Changes in
    Accounting Principle |                                  | $      | 1.85   |        |      | $     | 1.88   |        |   | $     | 1.85   |        |  | 
|                                                                                                                                                | Discontinued Operations, net of tax                                                                                               |                                  | $      | (.46   | )      |      | $     | .05    |        |   | $     | .74    |        |  | 
|                                                                                                                                                | Cumulative Effect of Accounting Changes, net of
    tax                                                                           |                                  | $      | (.68   | )      |      | $     | .17    |        |   | $     |       |        |  | 
|                                                                                                                                                | Net Income*                                                                                                                       |                                  | $      | .71    |        |      | $     | 2.11   |        |   | $     | 2.59   |        |  | 
|Dividends Declared Per Common Share                                                                                                             |                                                                                                                                   | $                                | .79    |        |        | $    | .92   |        |        | $ | 1.06  |        |        | 



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

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



50 BELLSOUTH
2004




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##### Table of Contents



CONSOLIDATED BALANCE SHEETS


BELLSOUTH CORPORATION






|                                                                                                   |  |              |        |      |  |   |        |   |  | 
|-------------------------------------------------------------------------------------------------- |  | ------------ | ------ | ---- |  | - | ------ | - |  | 
|                                                                                                   |  |             
|                                                                                                   |  | December 31,
|                                                                                                   |  |             
|(IN MILLIONS)                                                                                      |  | 2003         |        | 2004 |  |  
|                                                                                                  
|                                                                                                  
|ASSETS                                                                                             |  |              |        |      |  |   |        |   |  | 
|Current Assets:                                                                                    |  |              |        |      |  |   |        |   |  | 
|Cash and cash equivalents                                                                          |  | $            | 2,947  |      |  | $ | 680    |   |  | 
|Short-term investments                                                                             |  |              | 1,609  |      |  |   | 16     |   |  | 
|Accounts receivable, net of
    allowance for uncollectibles of $496 and $317                      |  |              | 2,870  |      |  |   | 2,559  |   |  | 
|Material and supplies                                                                              |  |              | 375    |      |  |   | 321    |   |  | 
|Other current assets                                                                               |  |              | 1,048  |      |  |   | 1,055  |   |  | 
|Assets of discontinued
    operations                                                              |  |              |       |      |  |   | 1,068  |   |  | 
|                                                                                                  
|Total current
    assets                                                                           |  |              | 8,849  |      |  |   | 5,699  |   |  | 
|                                                                                                  
|                                                                                                  
|Investments in and advances to Cingular                                                            |  |              | 7,679  |      |  |   | 22,771 |   |  | 
|Property, plant and equipment, net                                                                 |  |              | 23,807 |      |  |   | 22,039 |   |  | 
|Other assets                                                                                       |  |              | 6,977  |      |  |   | 7,400  |   |  | 
|Intangible assets, net                                                                             |  |              | 2,297  |      |  |   | 1,587  |   |  | 
|Goodwill                                                                                           |  |              | 93     |      |  |   |       |   |  | 
|                                                                                                  
|                                                                                                  
|Total assets                                                                                       |  | $            | 49,702 |      |  | $ | 59,496 |   |  | 
|                                                                                                  
|                                                                                                  
|LIABILITIES AND SHAREHOLDERS
    EQUITY                                                           |  |              |        |      |  |   |        |   |  | 
|Current Liabilities:                                                                               |  |              |        |      |  |   |        |   |  | 
|Debt maturing within one year                                                                      |  | $            | 3,491  |      |  | $ | 5,475  |   |  | 
|Accounts payable                                                                                   |  |              | 1,339  |      |  |   | 1,047  |   |  | 
|Other current liabilities                                                                          |  |              | 3,628  |      |  |   | 3,018  |   |  | 
|Liabilities of discontinued
    operations                                                         |  |              |       |      |  |   | 830    |   |  | 
|                                                                                                  
|                                                                                                  
|Total current
    liabilities                                                                      |  |              | 8,458  |      |  |   | 10,370 |   |  | 
|                                                                                                  
|                                                                                                  
|Long-term debt                                                                                     |  |              | 11,489 |      |  |   | 15,108 |   |  | 
|                                                                                                  
|                                                                                                  
|Noncurrent liabilities:                                                                            |  |              |        |      |  |   |        |   |  | 
|Deferred income taxes                                                                              |  |              | 5,349  |      |  |   | 6,492  |   |  | 
|Other noncurrent liabilities                                                                       |  |              | 4,694  |      |  |   | 4,460  |   |  | 
|                                                                                                  
|                                                                                                  
|Total
    noncurrent liabilities                                                                   |  |              | 10,043 |      |  |   | 10,952 |   |  | 
|                                                                                                  
|                                                                                                  
|Shareholders equity:                                                                              |  |              |        |      |  |   |        |   |  | 
|Common stock, $1 par value
    (8,650 shares authorized;   1,830 and 1,831
    shares outstanding) |  |              | 2,020  |      |  |   | 2,020  |   |  | 
|Paid-in capital                                                                                    |  |              | 7,729  |      |  |   | 7,840  |   |  | 
|Retained earnings                                                                                  |  |              | 16,540 |      |  |   | 19,267 |   |  | 
|Accumulated other comprehensive
    income (loss)                                                  |  |              | (585   | )    |  |   | (157   | ) |  | 
|Shares held in trust and
    treasury                                                              |  |              | (5,992 | )    |  |   | (5,904 | ) |  | 
|                                                                                                  
|                                                                                                  
|Total
    shareholders equity                                                                     |  |              | 19,712 |      |  |   | 23,066 |   |  | 
|                                                                                                  
|                                                                                                  
|Total
    liabilities and shareholders equity                                                     |  | $            | 49,702 |      |  | $ | 59,496 |   |  | 
|                                                                                                  

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



BELLSOUTH
2004      51




---



##### Table of Contents



CONSOLIDATED STATEMENTS OF CASH
FLOWS


BELLSOUTH CORPORATION






|                                                                                                                                  |                                                                          |                                  |        |        |   |      |        |        |   |   |         |         |   |  | 
|--------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------ | -------------------------------- | ------ | ------ | - | ---- | ------ | ------ | - | - | ------- | ------- | - |  | 
|                                                                                                                                  |                                                                          |                                  |        |       
|                                                                                                                                  |                                                                          | For the years ended December 31, |        |       
|                                                                                                                                  |                                                                          |                                 
|                                                                                                                                  |                                                                          |                                 
|(IN MILLIONS)                                                                                                                     |                                                                          | 2002                             |        | 2003   |   | 2004 |        |       
|                                                                                                                                 
|                                                                                                                                 
|Cash Flows from Operating
    Activities:                                                                                         |                                                                          |                                  |        |        |   |      |        |        |   |   |         |         |   | 
|Income from continuing operations before
    discontinued operations and cumulative effect of changes in
    accounting principle |                                                                          | $                                | 3,475  |        |   | $    | 3,488  |        |   | $ | 3,394   |         |   | 
|Adjustments to reconcile income to cash provided
    by operating activities from continuing operations:                          |                                                                          |                                  |        |        |   |      |        |        |   |   |         |         |   | 
|                                                                                                                                  | Depreciation and amortization                                            |                                  |        | 4,202  |   |      |        | 3,811  |   |   |         | 3,636   |   |  | 
|                                                                                                                                  | Provision for uncollectibles                                             |                                  |        | 795    |   |      |        | 523    |   |   |         | 384     |   |  | 
|                                                                                                                                  | Net losses (earnings) of equity affiliates                               |                                  |        | (542   | ) |      |        | (452   | ) |   |         | (68     | ) |  | 
|                                                                                                                                  | Deferred income taxes and investment tax credits                         |                                  |        | 1,330  |   |      |        | 788    |   |   |         | 1,081   |   |  | 
|                                                                                                                                  | Pension income                                                           |                                  |        | (825   | ) |      |        | (534   | ) |   |         | (484    | ) |  | 
|                                                                                                                                  | Pension settlement losses                                                |                                  |        | 167    |   |      |        | 47     |   |   |         |        |   |  | 
|                                                                                                                                  | Stock-based compensation expense                                         |                                  |        | 161    |   |      |        | 124    |   |   |         | 116     |   |  | 
|                                                                                                                                  | (Gain) loss on sale of operations                                        |                                  |        | (1,335 | ) |      |        |       |   |   |         | (462    | ) |  | 
|                                                                                                                                  | Net losses (gains) on sale or impairment of
    equity securities        |                                  |        | 370    |   |      |        | 7      |   |   |         | 4       |   |  | 
|                                                                                                                                  | Curtailment and termination benefit charges                              |                                  |        | 60     |   |      |        |       |   |   |         |        |   |  | 
|                                                                                                                                  | Unbilled receivable adjustment                                           |                                  |        | 163    |   |      |        |       |   |   |         |        |   |  | 
|                                                                                                                                  | Asset impairments                                                        |                                  |        | 302    |   |      |        | 52     |   |   |         |        |   |  | 
|Net change in:                                                                                                                    |                                                                          |                                  |        |        |   |      |        |        |   |   |         |         |   | 
|                                                                                                                                  | Accounts receivable and other current assets                             |                                  |        | (261   | ) |      |        | (81    | ) |   |         | (419    | ) |  | 
|                                                                                                                                  | Accounts payable and other current liabilities                           |                                  |        | (360   | ) |      |        | 55     |   |   |         | (680    | ) |  | 
|                                                                                                                                  | Deferred charges and other assets                                        |                                  |        | 46     |   |      |        | 299    |   |   |         | (79     | ) |  | 
|                                                                                                                                  | Other liabilities and deferred credits                                   |                                  |        | 10     |   |      |        | (276   | ) |   |         | 159     |   |  | 
|Other reconciling items, net                                                                                                      |                                                                          |                                  | (46    | )      |   |      | 32     |        |   |   | 219     |         |   | 
|                                                                                                                                 
|                                                                                                                                  | Net cash provided by operating activities from
    continuing operations |                                  |        | 7,712  |   |      |        | 7,883  |   |   |         | 6,801   |   |  | 
|                                                                                                                                 
|Cash Flows from Investing
    Activities:                                                                                         |                                                                          |                                  |        |        |   |      |        |        |   |   |         |         |   | 
|Capital expenditures                                                                                                              |                                                                          |                                  | (3,536 | )      |   |      | (2,926 | )      |   |   | (3,193  | )       |   | 
|Purchase of short-term investments                                                                                                |                                                                          |                                  | (1,302 | )      |   |      | (3,439 | )      |   |   | (3,770  | )       |   | 
|Proceeds from sale of short-term investments                                                                                      |                                                                          |                                  | 841    |        |   |      | 2,291  |        |   |   | 5,363   |         |   | 
|Proceeds from sale of operations                                                                                                  |                                                                          |                                  |       |        |   |      |       |        |   |   | 3,392   |         |   | 
|Proceeds from sale of debt and equity securities                                                                                  |                                                                          |                                  | 1,383  |        |   |      | 27     |        |   |   | 286     |         |   | 
|Investments in debt and equity securities                                                                                         |                                                                          |                                  | (36    | )      |   |      | (194   | )      |   |   | (632    | )       |   | 
|Proceeds from repayment of loans and advances                                                                                     |                                                                          |                                  | 885    |        |   |      | 1,899  |        |   |   | 129     |         |   | 
|Net short term advances to Cingular                                                                                               |                                                                          |                                  |       |        |   |      |       |        |   |   | (666    | )       |   | 
|Settlement of derivatives on advances                                                                                             |                                                                          |                                  | 85     |        |   |      | (352   | )      |   |   | (17     | )       |   | 
|Investments in and advances to equity affiliates                                                                                  |                                                                          |                                  | (210   | )      |   |      |       |        |   |   | (14,445 | )       |   | 
|Other investing activities, net                                                                                                   |                                                                          |                                  | (22    | )      |   |      | (12    | )      |   |   | (7      | )       |   | 
|                                                                                                                                 
|                                                                                                                                  | Net cash used for investing activities from
    continuing operations    |                                  |        | (1,912 | ) |      |        | (2,706 | ) |   |         | (13,560 | ) |  | 
|                                                                                                                                 
|Cash Flows from Financing
    Activities:                                                                                         |                                                                          |                                  |        |        |   |      |        |        |   |   |         |         |   | 
|Net borrowings (repayments) of short-term debt                                                                                    |                                                                          |                                  | (1,307 | )      |   |      | (431   | )      |   |   | 1,738   |         |   | 
|Proceeds from the issuance of long-term debt                                                                                      |                                                                          |                                  |       |        |   |      |       |        |   |   | 6,078   |         |   | 
|Repayments of long-term debt                                                                                                      |                                                                          |                                  | (1,149 | )      |   |      | (1,849 | )      |   |   | (759    | )       |   | 
|Dividends paid                                                                                                                    |                                                                          |                                  | (1,460 | )      |   |      | (1,608 | )      |   |   | (1,901  | )       |   | 
|Purchase of treasury shares                                                                                                       |                                                                          |                                  | (591   | )      |   |      | (858   | )      |   |   | (146    | )       |   | 
|Other financing activities, net                                                                                                   |                                                                          |                                  | 64     |        |   |      | 67     |        |   |   | 61      |         |   | 
|                                                                                                                                 
|                                                                                                                                  | Net cash used in financing activities from
    continuing operations     |                                  |        | (4,443 | ) |      |        | (4,679 | ) |   |         | 5,071   |   |  | 
|                                                                                                                                 
|Net (decrease) increase in cash and cash
    equivalents from continuing operations                                               |                                                                          |                                  | 1,357  |        |   |      | 498    |        |   |   | (1,688  | )       |   | 
|Net (decrease) increase in cash and cash
    equivalents from discontinued operations                                             |                                                                          |                                  | 72     |        |   |      | 428    |        |   |   | (579    | )       |   | 
|                                                                                                                                 
|Net (decrease) increase in cash and cash
    equivalents                                                                          |                                                                          |                                  | 1,429  |        |   |      | 926    |        |   |   | (2,267  | )       |   | 
|Cash and cash equivalents at beginning of period                                                                                  |                                                                          |                                  | 592    |        |   |      | 2,021  |        |   |   | 2,947   |         |   | 
|                                                                                                                                 
|Cash and cash equivalents at end of period                                                                                        |                                                                          | $                                | 2,021  |        |   | $    | 2,947  |        |   | $ | 680     |         |   | 
|                                                                                                                                 

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



52 BELLSOUTH
2004




---



##### Table of Contents



CONSOLIDATED STATEMENTS OF
SHAREHOLDERS


EQUITY AND COMPREHENSIVE INCOME


BELLSOUTH CORPORATION






|                                                              |  |                  |       |             |  |        |      |         |  |          |       |        |  |             |       |         |  |       |        |   |  |   |      |   |  |   |        |   |  |   |      |   |  |   |        |   |  | 
|------------------------------------------------------------- |  | ---------------- | ----- | ----------- |  | ------ | ---- | ------- |  | -------- | ----- | ------ |  | ----------- | ----- | ------- |  | ----- | ------ | - |  | - | ---- | - |  | - | ------ | - |  | - | ---- | - |  | - | ------ | - |  | 
|                                                              |  |                  |       |             |  |       
|                                                              |  | Number of Shares |       | Amount      |  |       
|                                                              |  |                  |       |            
|                                                              |  |                  |       |            
|                                                              |  |                  |       |             |  | Accum. |      |        
|                                                              |  |                  |       |             |  | Other  |      |        
|                                                              |  |                  |       | Shares      |  |        |      | Compre- |  | Shares   |       | Guar-  |  |            
|                                                              |  |                  |       | Held in     |  |        |      | hensive |  | Held in  |       | antee  |  |            
|                                                              |  | Common           |       | Trust and   |  | Common |      | Paid-in |  | Retained |       | Income |  | Trust and   |       | of ESOP |  |      
|(IN MILLIONS)                                                 |  | Stock            |       | Treasury(a) |  | Stock  |      | Capital |  | Earnings |       | (Loss) |  | Treasury(a) |       | Debt    |  | Total |        |  
|                                                             
|                                                             
|Balance at December 31, 2001                                  |  |                  | 2,020 |             |  |        | (143 | )       |  | $        | 2,020 |        |  | $           | 7,368 |         |  | $     | 14,805 |   |  | $ | (294 | ) |  | $ | (4,996 | ) |  | $ | (145 | ) |  | $ | 18,758 |   |  | 
|                                                             
|Net Income                                                    |  |                  |       |             |  |        |      |         |  |          |       |        |  |             |       |         |  |       | 1,323  |   |  |   |      |   |  |   |        |   |  |   |      |   |  |   | 1,323  |   |  | 
|Other comprehensive income, net of tax                        |  |                  |       |             |  |        |      |         |  |          |       |        |  |             |       |         |  |       |        |   |  |   | (446 | ) |  |   |        |   |  |   |      |   |  |   | (446   | ) |  | 
|                                                              |  |                  |       |             |  |        |      |         |  |          |       |        |  |             |       |         |  |       |        |   |  |   |      |   |  |   |        |   |  |   |      |   |  |  
|Total comprehensive income                                    |  |                  |       |             |  |        |      |         |  |          |       |        |  |             |       |         |  |       |        |   |  |   |      |   |  |   |        |   |  |   |      |   |  |   | 877    |   |  | 
|Dividends declared                                            |  |                  |       |             |  |        |      |         |  |          |       |        |  |             |       |         |  |       | (1,477 | ) |  |   |      |   |  |   |        |   |  |   |      |   |  |   | (1,477 | ) |  | 
|Share issuances for employee benefit plans                    |  |                  |       |             |  |        | 5    |         |  |          |       |        |  |             | (33   | )       |  |       | (104   | ) |  |   |      |   |  |   | 197    |   |  |   |      |   |  |   | 60     |   |  | 
|Purchase of treasury stock                                    |  |                  |       |             |  |        | (22  | )       |  |          |       |        |  |             |       |         |  |       |        |   |  |   |      |   |  |   | (591   | ) |  |   |      |   |  |   | (591   | ) |  | 
|Purchase of stock by grantor trusts                           |  |                  |       |             |  |        |      |         |  |          |       |        |  |             |       |         |  |       | (18    | ) |  |   |      |   |  |   | 18     |   |  |   |      |   |  |   |       |   |  | 
|Stock-based compensation                                      |  |                  |       |             |  |        |      |         |  |          |       |        |  |             | 171   |         |  |       |        |   |  |   |      |   |  |   |        |   |  |   |      |   |  |   | 171    |   |  | 
|Tax benefit related to stock options                          |  |                  |       |             |  |        |      |         |  |          |       |        |  |             | 40    |         |  |       |        |   |  |   |      |   |  |   |        |   |  |   |      |   |  |   | 40     |   |  | 
|ESOP activities and related tax benefit                       |  |                  |       |             |  |        |      |         |  |          |       |        |  |             |       |         |  |       | 2      |   |  |   |      |   |  |   |        |   |  |   | 66   |   |  |   | 68     |   |  | 
|                                                             
|Balance at December 31, 2002                                  |  |                  | 2,020 |             |  |        | (160 | )       |  | $        | 2,020 |        |  | $           | 7,546 |         |  | $     | 14,531 |   |  | $ | (740 | ) |  | $ | (5,372 | ) |  | $ | (79  | ) |  | $ | 17,906 |   |  | 
|                                                             
|Net Income                                                    |  |                  |       |             |  |        |      |         |  |          |       |        |  |             |       |         |  |       | 3,904  |   |  |   |      |   |  |   |        |   |  |   |      |   |  |   | 3,904  |   |  | 
|Other comprehensive income, net of tax                        |  |                  |       |             |  |        |      |         |  |          |       |        |  |             |       |         |  |       |        |   |  |   | 155  |   |  |   |        |   |  |   |      |   |  |   | 155    |   |  | 
|                                                              |  |                  |       |             |  |        |      |         |  |          |       |        |  |             |       |         |  |       |        |   |  |   |      |   |  |   |        |   |  |   |      |   |  |  
|Total comprehensive income                                    |  |                  |       |             |  |        |      |         |  |          |       |        |  |             |       |         |  |       |        |   |  |   |      |   |  |   |        |   |  |   |      |   |  |   | 4,059  |   |  | 
|Dividends declared                                            |  |                  |       |             |  |        |      |         |  |          |       |        |  |             |       |         |  |       | (1,696 | ) |  |   |      |   |  |   |        |   |  |   |      |   |  |   | (1,696 | ) |  | 
|Share issuances for employee benefit plans                    |  |                  |       |             |  |        | 5    |         |  |          |       |        |  |             | (19   | )       |  |       | (89    | ) |  |   |      |   |  |   | 169    |   |  |   |      |   |  |   | 61     |   |  | 
|Purchase of treasury stock                                    |  |                  |       |             |  |        | (35  | )       |  |          |       |        |  |             |       |         |  |       |        |   |  |   |      |   |  |   | (858   | ) |  |   |      |   |  |   | (858   | ) |  | 
|Purchases and sales of treasury stock with
    grantor trusts |  |                  |       |             |  |        |      |         |  |          |       |        |  |             | 43    |         |  |       | (112   | ) |  |   |      |   |  |   | 69     |   |  |   |      |   |  |   |       |   |  | 
|Stock-based compensation                                      |  |                  |       |             |  |        |      |         |  |          |       |        |  |             | 137   |         |  |       |        |   |  |   |      |   |  |   |        |   |  |   |      |   |  |   | 137    |   |  | 
|Tax benefit related to stock options                          |  |                  |       |             |  |        |      |         |  |          |       |        |  |             | 22    |         |  |       |        |   |  |   |      |   |  |   |        |   |  |   |      |   |  |   | 22     |   |  | 
|ESOP activities and related tax benefit                       |  |                  |       |             |  |        |      |         |  |          |       |        |  |             |       |         |  |       | 2      |   |  |   |      |   |  |   |        |   |  |   | 79   |   |  |   | 81     |   |  | 
|                                                             
|Balance at December 31, 2003                                  |  |                  | 2,020 |             |  |        | (190 | )       |  | $        | 2,020 |        |  | $           | 7,729 |         |  | $     | 16,540 |   |  | $ | (585 | ) |  | $ | (5,992 | ) |  | $ |     |   |  |   | 19,712 |   |  | 
|                                                             
|Net Income                                                    |  |                  |       |             |  |        |      |         |  |          |       |        |  |             |       |         |  |       | 4,758  |   |  |   |      |   |  |   |        |   |  |   |      |   |  |   | 4,758  |   |  | 
|Other comprehensive income, net of tax                        |  |                  |       |             |  |        |      |         |  |          |       |        |  |             |       |         |  |       |        |   |  |   | 428  |   |  |   |        |   |  |   |      |   |  |   | 428    |   |  | 
|                                                              |  |                  |       |             |  |        |      |         |  |          |       |        |  |             |       |         |  |       |        |   |  |   |      |   |  |   |        |   |  |   |      |   |  |  
|Total comprehensive income                                    |  |                  |       |             |  |        |      |         |  |          |       |        |  |             |       |         |  |       |        |   |  |   |      |   |  |   |        |   |  |   |      |   |  |   | 5,186  |   |  | 
|Dividends declared                                            |  |                  |       |             |  |        |      |         |  |          |       |        |  |             |       |         |  |       | (1,934 | ) |  |   |      |   |  |   |        |   |  |   |      |   |  |   | (1,934 | ) |  | 
|Share issuances for employee benefit plans                    |  |                  |       |             |  |        | 7    |         |  |          |       |        |  |             | (59   | )       |  |       | (94    | ) |  |   |      |   |  |   | 236    |   |  |   |      |   |  |   | 83     |   |  | 
|Purchase of treasury stock                                    |  |                  |       |             |  |        | (6   | )       |  |          |       |        |  |             |       |         |  |       |        |   |  |   |      |   |  |   | (146   | ) |  |   |      |   |  |   | (146   | ) |  | 
|Purchases and sales of treasury stock with
    grantor trusts |  |                  |       |             |  |        |      |         |  |          |       |        |  |             | 2     |         |  |       |        |   |  |   |      |   |  |   | (2     | ) |  |   |      |   |  |   |       |   |  | 
|Stock-based compensation                                      |  |                  |       |             |  |        |      |         |  |          |       |        |  |             | 121   |         |  |       |        |   |  |   |      |   |  |   |        |   |  |   |      |   |  |   | 121    |   |  | 
|Tax benefit related to stock options                          |  |                  |       |             |  |        |      |         |  |          |       |        |  |             | 39    |         |  |       |        |   |  |   |      |   |  |   |        |   |  |   |      |   |  |   | 39     |   |  | 
|Other                                                         |  |                  |       |             |  |        |      |         |  |          |       |        |  |             | 8     |         |  |       | (3     | ) |  |   |      |   |  |   |        |   |  |   |      |   |  |   | 5      |   |  | 
|                                                             
|Balance at December 31, 2004                                  |  |                  | 2,020 |             |  |        | (189 | )       |  | $        | 2,020 |        |  | $           | 7,840 |         |  | $     | 19,267 |   |  | $ | (157 | ) |  | $ | (5,904 | ) |  | $ |     |   |  | $ | 23,066 |   |  | 
|                                                             



|    |  |                                                                                                                                                                                                                        
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | Trust and treasury shares are not considered
    to be outstanding for financial reporting purposes. As of
    December 31, 2004, there were approximately 26 shares
    held in trust and 163 shares held in treasury.

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



BELLSOUTH
2004      53




---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


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


BELLSOUTH CORPORATION






Note A  Accounting Policies


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

ORGANIZATION

We are a communications company headquartered in
Atlanta, Georgia. For management purposes, our operations are
organized into three reportable segments: Communications Group;
Domestic Wireless; and Advertising & Publishing Group.

BASIS OF PRESENTATION

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

In accordance with Statement of Financial
Accounting Standards (SFAS) No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets (SFAS
No. 144), we have classified the results of our Latin
American segment as discontinued operations. The presentation of
discontinued operations includes revenues and expenses of the
Latin American operations as one line item on the income
statement for all periods presented. All Latin America related
balance sheet items at December 31, 2004 are presented in
the assets and liabilities of Discontinued Operations line
items. In accordance with SFAS No. 144 the
December 31, 2003 balance sheet and related footnotes were
not restated for discontinued operations. Unless explicitly
noted all amounts disclosed and described in these accompanying
notes to the consolidated financial statements exclude our two
remaining Latin investments that were sold in January 2005.
Beginning with the second quarter of 2004, long-lived assets of
the Latin America group ceased to be depreciated (amortized) in
accordance with SFAS No. 144.


USE OF ESTIMATES

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

CASH AND CASH EQUIVALENTS

We consider all highly liquid investments with an
original maturity of three months or less to be cash
equivalents. Investments with an original maturity of over three
months to one year are not considered cash equivalents and are
included as other current assets in the consolidated balance
sheets. Interest income on cash equivalents and temporary cash
investments was $95 for 2002, $76 for 2003, and $60 for 2004.

Included in the December 31, 2004 cash
balance of $696 are cash balances of $148 held by our remaining
discontinued operations in Latin America.


SHORT-TERM INVESTMENTS

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

MATERIAL AND SUPPLIES

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

PROPERTY, PLANT AND EQUIPMENT

The investment in property, plant and equipment
is stated at original cost. For plant dedicated to providing
regulated telecommunications services, depreciation is based on
the group remaining life method of depreciation and
straight-line rates determined on the basis of equal life groups
of certain categories of telephone plant acquired in a given
year. This method requires the periodic revision of depreciation
rates. When depreciable telephone plant is disposed of, the
original cost less any net salvage proceeds is charged to
accumulated depreciation. We perform inventories of the
telephone plant to verify the existence of these assets and
reconcile these inventories to our property records. In
addition, the inventory reconciliation results allow us to
correct our records for investment moved from one location to
another and to



54 BELLSOUTH
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##### Table of Contents







account for delayed retirements. The cost of
other property, plant and equipment is depreciated using either
straight-line or accelerated methods over the estimated useful
lives of the assets. Depreciation of property, plant and
equipment in continuing operations was $3,718 for 2002, $3,257
for 2003, and $3,039 for 2004.

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


VALUATION OF LONG-LIVED ASSETS

Long-lived assets, including property, plant and
equipment and intangible assets with finite lives are reviewed
for impairment whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable. The
communications industry is rapidly evolving and therefore it is
reasonably possible that our long-lived assets could become
impaired as a result of technological or other industry changes.
For assets we intend to hold for use, if the total of the
expected future undiscounted cash flows is less than the
carrying amount of the asset, we recognize a loss for the
difference between the fair value and carrying value of the
asset. For assets we intend to dispose of, we recognize a loss
for the amount that the estimated fair value, less costs to
sell, is less than the carrying value of the assets. We
principally use the discounted cash flow method to estimate the
fair value of long-lived assets.

We account for equity security investments in
which we exercise significant influence under the equity method
of accounting. In accordance with Accounting Principles Board
(APB) Opinion No. 18, The Equity Method of Accounting
for Investments in Common Stock, we periodically review equity
method investments for impairment. These reviews are performed
to determine whether a decline in the fair value of an
investment below its carrying value is deemed to be other than
temporary.


FOREIGN CURRENCY

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

COST METHOD INVESTMENTS

We have investments in marketable securities,
primarily common stocks, which are accounted for under the cost
method. Securities classified as available-for-sale under,
Accounting for Certain Investments in Debt and Equity
Securities, SFAS No. 115 are carried at fair value,
with unrealized gains and losses, net of income taxes, recorded
in accumulated other comprehensive income (loss) in the
statement of changes in shareholders equity and
comprehensive income. The fair values of individual investments
in marketable securities are determined based on market
quotations. Gains or losses are calculated based on the original
cost. We periodically review cost method investments for
impairment. These reviews are performed to determine whether a
decline in the fair value of an investment below its carrying
value is deemed to be other than temporary. Equity securities
that are restricted for more than one year or not publicly
traded are recorded at cost.

DERIVATIVE FINANCIAL INSTRUMENTS

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

REVENUE RECOGNITION

Revenues are recognized when earned. Certain
revenues derived from local telephone services are billed
monthly in advance and are recognized the following month when
services are provided. Revenues derived from other
telecommunications services, principally network access, long
distance and wireless airtime usage, are recognized monthly as
services are provided. Marketing incentives, including cash
coupons, package discounts and free service are recognized as
revenue reductions and are accrued in the period the service is
provided. With respect to coupons, accruals are based on
historical redemption experience. While cash is generally
received at the time of sale, revenues from installation and
activation activities are



BELLSOUTH
2004      55




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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS CONTINUED


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


BELLSOUTH CORPORATION

deferred and recognized over the life of the
customer relationship, which is generally four years. Print
Advertising & Publishing revenues and related directory
costs are recognized ratably over the life of the related
directory, generally 12 months. Allowances for uncollectible
accounts are determined based on analysis of history and future
expectations. The provision for such uncollectible accounts in
continuing operations was $795 for 2002, $523 for 2003, and $384
for 2004.

DEFERRED ACTIVATION AND INSTALLATION
EXPENSES

We defer certain expenses associated with
installation and activation activities. Expense is only deferred
to the extent associated revenues are deferred. Service costs in
excess of revenues are recognized in the period incurred. The
deferred costs are recognized over approximately 4 years.

ADVERTISING

We expense advertising costs as they are
incurred. These expenses include production, media and other
promotional and sponsorship costs. Our total advertising expense
in continuing operations was $258 for 2002, $357 for 2003, and
$382 for 2004.

INCOME TAXES

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

EARNINGS PER SHARE

Basic earnings per share are computed based on
the weighted-average number of common shares outstanding during
each year. Diluted earnings per share are based on the
weighted-average number of common shares outstanding plus net
incremental shares arising out of employee stock options and
benefit plans. The earnings amounts used for per-share
calculations are the same for both the basic and diluted
methods. The following is a reconciliation of the
weighted-average share amounts (in millions) used in calculating
earnings per share:

|                                                            |  |      |       |      |  |      |       |  |  |  |       |  |  | 
|----------------------------------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- |  |  |  | ----- |  |  | 
|                                                            |  | 2002 |       | 2003 |  | 2004 |       | 
|                                                           
|                                                           
|Basic common shares outstanding                             |  |      | 1,870 |      |  |      | 1,848 |  |  |  | 1,832 |  |  | 
|Incremental shares from stock options and benefit
    plans |  |      | 6     |      |  |      | 4     |  |  |  | 4     |  |  | 
|                                                           
|Diluted common shares outstanding                           |  |      | 1,876 |      |  |      | 1,852 |  |  |  | 1,836 |  |  | 
|                                                           
|Stock options excluded from the computation                 |  |      | 77    |      |  |      | 92    |  |  |  | 79    |  |  | 
|                                                           

Options with an exercise price greater than the
average market price of the common stock or that have an
anti-dilutive effect on the computation are excluded from the
calculation of diluted earnings per share.


GOODWILL AND INTANGIBLE ASSETS

Intangible assets consist primarily of
capitalized software, wireless licenses and customer related
intangibles. Goodwill represents the excess of consideration
paid over the fair value of net assets acquired in purchase
business combinations. Beginning January 1, 2002 we ceased
amortization of goodwill and other indefinite-lived intangible
assets in connection with the adoption of SFAS 142,
Goodwill and Other Intangible Assets (SFAS
No. 142). Customer-related intangible assets represent
values placed on customer lists, contracts and non-contractual
relationships of acquired businesses and are amortized over
periods up to eight years using the sum-of-the-years digits
method. Capitalized software costs are being amortized ratably
over periods of three to five years. Amortization of intangibles
in continuing operations was $484 for 2002, $554 for 2003, and
$597 for 2004.

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




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

In December 2004, the FASB issued SFAS
No. 123 (Revised 2004), Share-Based Payment.
This standard amends and clarifies the accounting for stock
compensation plans under SFAS No. 123, Accounting for
Stock-Based Compensation, which we adopted effective
January 1, 2003. We will adopt this revised statement for
our quarter ending September 30, 2005. We do not expect the
adoption of this statement to have a material impact on our
results of operations, financial position or cash flows.



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

ASSET RETIREMENT OBLIGATIONS

Effective January 1, 2003, we adopted SFAS
No. 143, Accounting for Asset Retirement
Obligations (SFAS No. 143). This statement provides
the accounting for the cost of legal obligations associated with
the retirement of



56 BELLSOUTH
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##### Table of Contents







long-lived assets. SFAS No. 143 requires
that companies recognize the fair value of a liability for asset
retirement obligations in the period in which the obligations
are incurred and capitalize that amount as part of the book
value of the long-lived asset. SFAS No. 143 also precludes
companies from accruing removal costs that exceed gross salvage
in their depreciation rates and accumulated depreciation
balances if there is no legal obligation to remove the
long-lived assets. For our outside plant accounts, such as
telephone poles and cable, estimated cost of removal does exceed
gross salvage.

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


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


REVENUE RECOGNITION FOR PUBLISHING
REVENUES

Effective January 1, 2003, we changed our
method for recognizing revenues and expenses related to our
directory publishing business from the publication and delivery
method to the deferral method. Under the publication and
delivery method, we recognized 100% of the revenues and direct
expenses at the time the directories were published and
delivered to end-users. Under the deferral method, revenues and
direct expenses are recognized ratably over the life of the
related directory, generally 12 months. The change in
accounting method is reflected in the 2003 income statement as a
cumulative effect of accounting change adjustment and on the
balance sheet as a decrease to accounts receivable of $845,
increase to other current assets of $166, increase to current
liabilities of $129, and a decrease to deferred income taxes of
$307. The cumulative effect of the change resulted in a decrease
to net income of $501 for 2003. Absent this one-time adjustment,
the change in accounting did not materially affect our annual
results.



BELLSOUTH
2004      57




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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS CONTINUED


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


BELLSOUTH CORPORATION

PRO FORMA IMPACT OF ACCOUNTING
CHANGES

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

|                                                                                                                                                 |                                                                                                                                   |                                 |        |             |        |             |     |             |      |   |    |      |    |   |        |       |        | 
|------------------------------------------------------------------------------------------------------------------------------------------------ | --------------------------------------------------------------------------------------------------------------------------------- | ------------------------------- | ------ | ----------- | ------ | ----------- | --- | ----------- | ---- | - | -- | ---- | -- | - | ------ | ----- | ------ | 
|                                                                                                                                                 |                                                                                                                                   |                                
|                                                                                                                                                 |                                                                                                                                   | For the Year Ended December 31,
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                 |                                                                                                                                   | SFAS No.                        |        | Directory   |        | 2002 Pro   
|                                                                                                                                                 |                                                                                                                                   | 2002                            |        | 143         |        | Publishing  |     | Forma      
|                                                                                                                                                 |                                                                                                                                   | (As reported)                   |        | (Unaudited) |        | (Unaudited) |     | (Unaudited)
|                                                                                                                                                
|                                                                                                                                                
|Total Operating Revenue                                                                                                                          |                                                                                                                                   | $                               | 20,207 |             |        | $           |    |             |      | $ | 49 |      |    | $ | 20,256 |      
|Operating Expenses                                                                                                                               |                                                                                                                                   |                                 |        |             |        |             |     |             |      |   |    |      |    |   |        |      
|                                                                                                                                                 | Cost of services and products                                                                                                     |                                 |        | 6,670       |        |             |     | 32          |      |   |    | 37   |    |   |        | 6,739 |       
|                                                                                                                                                 | Selling, general, and administrative expenses                                                                                     |                                 |        | 3,891       |        |             |     |            |      |   |    | 13   |    |   |        | 3,904 |       
|                                                                                                                                                 | Depreciation and amortization                                                                                                     |                                 |        | 4,202       |        |             |     | (133        | )    |   |    |     |    |   |        | 4,069 |       
|                                                                                                                                                 | Provision for restructuring and asset impairments                                                                                 |                                 |        | 990         |        |             |     |            |      |   |    |     |    |   |        | 990   |       
|                                                                                                                                                
|                                                                                                                                                 |                                                                                                                                   | Total operating expenses        |        |             | 15,753 |             |     |             | (101 | ) |    |      | 50 |   |        |       | 15,702 | 
|Operating income                                                                                                                                 |                                                                                                                                   |                                 | 4,454  |             |        |             | 101 |             |      |   | (1 | )    |    |   | 4,554  |      
|Non-operating income (expense), net                                                                                                              |                                                                                                                                   |                                 | 913    |             |        |             |    |             |      |   |   |      |    |   | 913    |      
|                                                                                                                                                
|Income from continuing operations before income
    taxes, discontinued operations, and cumulative effect of changes
    in accounting principle |                                                                                                                                   |                                 | 5,367  |             |        |             | 101 |             |      |   | (1 | )    |    |   | 5,467  |      
|Provision for income taxes                                                                                                                       |                                                                                                                                   |                                 | 1,892  |             |        |             | 39  |             |      |   |   |      |    |   | 1,931  |      
|                                                                                                                                                
|Income from continuing operations before
    discontinued operations and cumulative effect of changes in
    accounting principle                |                                                                                                                                   |                                 | 3,475  |             |        |             | 62  |             |      |   | (1 | )    |    |   | 3,536  |      
|Income (Loss) from discontinued operations, net
    of tax                                                                                       |                                                                                                                                   |                                 | (867   | )           |        |             |    |             |      |   |   |      |    |   | (867   | )    
|                                                                                                                                                
|Income before cumulative effect of changes in
    accounting principle                                                                           |                                                                                                                                   |                                 | 2,608  |             |        |             | 62  |             |      |   | (1 | )    |    |   | 2,669  |      
|Cumulative effect of changes in accounting
    principle, net of tax                                                                             |                                                                                                                                   |                                 | (1,285 | )           |        |             |    |             |      |   |   |      |    |   | (1,285 | )    
|                                                                                                                                                
|                                                                                                                                                 |                                                                                                                                   | Net Income                      |        | $           | 1,323  |             |     | $           | 62   |   |    | $    | (1 | ) |        | $     | 1,384  | 
|                                                                                                                                                
|Basic earnings per share*:                                                                                                                       |                                                                                                                                   |                                 |        |             |        |             |     |             |      |   |    |      |    |   |        |      
|                                                                                                                                                 | Income from continuing operations before
    discontinued operations and cumulative effect of changes in
    accounting principle |                                 | $      | 1.86        |        |             | $   | 0.03        |      |   | $  | 0.00 |    |   | $      | 1.89  |       
|                                                                                                                                                 | Income before cumulative effect of changes in
    accounting principle                                                            |                                 | $      | 1.39        |        |             | $   | 0.03        |      |   | $  | 0.00 |    |   | $      | 1.43  |       
|                                                                                                                                                 | Net income                                                                                                                        |                                 | $      | 0.71        |        |             | $   | 0.03        |      |   | $  | 0.00 |    |   | $      | 0.74  |       
|Diluted earnings per share*:                                                                                                                     |                                                                                                                                   |                                 |        |             |        |             |     |             |      |   |    |      |    |   |        |      
|                                                                                                                                                 | Income from continuing operations before
    discontinued operations and cumulative effect of changes in
    accounting principle |                                 | $      | 1.85        |        |             | $   | 0.03        |      |   | $  | 0.00 |    |   | $      | 1.88  |       
|                                                                                                                                                 | Income before cumulative effect of changes in
    accounting principle                                                            |                                 | $      | 1.39        |        |             | $   | 0.03        |      |   | $  | 0.00 |    |   | $      | 1.42  |       
|                                                                                                                                                 | Net income                                                                                                                        |                                 | $      | 0.71        |        |             | $   | 0.03        |      |   | $  | 0.00 |    |   | $      | 0.74  |       

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



|         |                        
|-------- | -----------------------
|Note D  | Discontinued Operations

In March 2004, we signed an agreement with
Telefónica Móviles, S.A., the wireless affiliate of
Telefónica, S.A. (Telefónica), to sell all of our
interests in Latin America. Total after-tax proceeds of the sale
to Telefónica of the 10 properties, including shareholder
loans, were $5.1 billion. The net assets sold to
Telefónica included $1.2 billion of cash as part of
the Latin American operations, resulting in a net cash inflow to
BellSouth related to the Latin American divestitures of
approximately $3.9 billion. Based on the net book value of
our investment, we recorded after-tax gains totalling
approximately $1.2 billion.

Under the agreement, Telefónica purchased
all equity interests that we purchased from the minority
shareholders in various Latin American operations. Following the
deal announcement, we purchased debt and equity interests and
other rights of minority partners in our Argentina, Ecuador,
Nicaragua, Uruguay, and Venezuela operations for a combined
total of $757. In addition, we purchased $125 of third party
Argentine debt.


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




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SUMMARY OF SALE TRANSACTIONS

|                                |       |          |   |        |  |  |   |       | 
|------------------------------- | ----- | -------- | - | ------ |  |  | - | ----- | 
|                                |       |          |   | After-
|                                |       | Gross    |   | Tax   
|                                |       | Proceeds |   | Gain  
|                               
|                               
|For the year ended December 31: |       |          |   |        |  |  |   |      
|                                | 2004  |          | $ | 4,037  |  |  | $ | 850   | 
|                                | 2005  |          | $ | 1,079  |  |  | $ | 391   | 
|                               
|                                | Total |          | $ | 5,116  |  |  | $ | 1,241 | 
|                               

The 2004 gain includes the recognition of
cumulative foreign currency translation losses of $421 and the
2005 gain includes the recognition of cumulative foreign
currency translation gains of $77.

SUMMARY FINANCIAL INFORMATION

The assets and liabilities of our remaining Latin
American operations (Argentina and Chile) are aggregated and
presented as current assets and current liabilities in the
consolidated balance sheet at December 31, 2004. Additional
detail related to the assets and liabilities of our discontinued
operations follows:

|                                        |                   |   |     |       | 
|--------------------------------------- | ----------------- | - | --- | ----- | 
|At December 31, 2004:                   |                   |   |     |      
|Current assets (excluding cash of $148) |                   | $ | 403 |      
|Property, plant and equipment, net      |                   |   | 387 |      
|Investments and advances                |                   |   | 4   |      
|Intangible assets, net                  |                   |   | 269 |      
|Other non-current assets                |                   |   | 5   |      
|                                       
|                                        | Total Assets      |   | $   | 1,068 | 
|                                       
|Current liabilities                     |                   | $ | 830 |      
|Long-term debt                          |                   |   |    |      
|Other non-current liabilities           |                   |   |    |      
|                                       
|                                        | Total Liabilities |   | $   | 830   | 
|                                       

Summarized results for the discontinued
operations are as follows:

|                                               |  |                    |       |      |  |      |       |  |  |   |       | 
|---------------------------------------------- |  | ------------------ | ----- | ---- |  | ---- | ----- |  |  | - | ----- | 
|                                               |  |                   
|                                               |  | For the Year Ended
|                                               |  | December 31,      
|                                               |  |                   
|                                               |  |                   
|                                               |  | 2002               |       | 2003 |  | 2004
|                                              
|                                              
|Operating revenue                              |  | $                  | 2,233 |      |  | $    | 2,294 |  |  | $ | 2,429 | 
|Operating income                               |  | $                  | 292   |      |  | $    | 349   |  |  | $ | 647   | 
|Income (loss) before income taxes              |  | $                  | (951  | )    |  | $    | 176   |  |  | $ | 1,525 | 
|Provision (benefit) for income taxes           |  | $                  | (84   | )    |  | $    | 75    |  |  | $ | 161   | 
|Net income (loss) from discontinued operations |  | $                  | (867  | )    |  | $    | 101   |  |  | $ | 1,364 | 
|                                              

TAX OVER BOOK BASIS DIFFERENTIAL

No US tax benefit was previously recognized on
losses generated by the Latin American operations due to the
essentially permanent duration of those investments. During
2004, we recorded a $336 tax benefit in accordance with
SFAS No. 109, Accounting for Income Taxes,
relating to excess tax basis over book basis for our Latin
American operations. In addition, a tax benefit of $189 was
recorded directly to equity related to the cumulative currency
translation balance associated with the discontinued operations.
At December 31, 2004, our tax basis in the remaining Latin
America investments exceeds the book basis by approximately
$520, resulting in a tax benefit of $140 in net deferred tax
liabilities and $42 in equity. These balances reverse in the
first quarter of 2005 with the sale of the final two Latin
American properties (Argentina and Chile).

BUYOUT OF MINORITY PARTNERS

In March and April 2004, we purchased interests
and other rights of minority partners in Argentina, Ecuador and
Colombia. These purchases brought our ownership interests to
100% in Argentina and Ecuador and to 77.6% in Colombia. The
aggregate purchase price for these acquisitions, including
payment of minority shareholder loans, was $177. The assignment
of the purchase price to the estimated fair values of assets
acquired and liabilities assumed resulted in an increase to
intangible assets of $55 and an increase to goodwill of $81. In
connection with the purchase of our minority partner in
Argentina, the consideration paid exceeded the fair value by
approximately $33. Accordingly, this amount was recognized as a
charge to income (loss) from discontinued operations in the
second quarter 2004.

In October 2004, to facilitate the transfer of
ownership to Telefónica, we purchased interests of minority
partners in Nicaragua and Uruguay. These purchases brought our
ownership interests to 100% in Nicaragua and 68% in Uruguay. The
aggregate purchase price for these acquisitions was $37, which
approximated the proceeds received in the sale to
Telefónica.


VENEZUELAN ARBITRATION AND
SETTLEMENT

Prior to the sale of Telcel, our Venezuelan
operation, to Telefónica on October 28, 2004, we owned
a 78.2% interest in Telcel. Telcels other major
shareholder held an indirect 21.8% interest in Telcel. Under a
Stock Purchase Agreement, that shareholder had the right to
initiate a process that could require us to purchase (the puts),
and we had the right to initiate a process that could require
that shareholder to sell (the calls) to us, the
shareholders interest in Telcel.

In 2000, the shareholder initiated a process for
appraising the value of approximately half of its interest in
Telcel, but the process was not completed. The shareholder also
sent a letter purporting to exercise the balance of the puts
under the Stock Purchase Agreement. The matter was taken before
an arbitration panel over alleged breaches by BellSouth and the
shareholder of the Stock Purchase Agreement, including the
timing of the valuation and whether the process was properly
initiated in 2000. The shareholder was seeking damages and
specific performance, and BellSouth was seeking, among other
things, unspecified damages and a ruling that it had not
breached the Stock Purchase Agreement in any respect. The
arbitration also related to an alleged oral agreement to buy out
the shareholders entire interest in Telcel, which




BELLSOUTH
2004      59




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS CONTINUED


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


BELLSOUTH CORPORATION

agreement we argued did not exist. Hearings on
these matters occurred in January and April 2004.

In a 2 to 1 decision issued on October 13,
2004, the arbitration panel ordered BellSouth to purchase an
11.1% interest in Telcel associated with the first put and
directed the parties to negotiate a price for the second put. In
addition, the arbitration panel ordered us to pay this
shareholder approximately $25 to satisfy its claims that we
breached certain investment tax credit contracts. A provision
for this $25 payment had already been provided for in
BellSouths financial statements. The arbitration panel
rejected the shareholders claim that BellSouth breached an
oral agreement to buy out the shareholders entire interest
in Telcel, and denied all other claims raised by the parties.


In response to the arbitration ruling, BellSouth
purchased this shareholders 21.8% interest in Telcel and
settled all outstanding claims for an aggregate payment of $616.
The aggregate payment of $616 included all the amounts that the
arbitration panel ordered BellSouth to pay to this shareholder.
Upon closing, BellSouth sold the interest to Telefónica for
$300. Because the settlement amount allocable to this interest
exceeded the fair value, BellSouth recognized a pre-tax charge
of approximately $293 ($190 after-tax) in income (loss) from
discontinued operations in 2004.


VENEZUELA CURRENCY

Our results from discontinued operations reflect
consolidation of the operations of Telcel in Venezuela in
accordance with SFAS No. 94, Consolidation of
All Majority-Owned Subsidiaries. There are currency
restrictions in place in Venezuela that limit the conversion of
local currency to US Dollars. Due to the currency controls,
there is no free market currency exchange rate. Therefore, in
preparing our consolidated financial statements, we used the
exchange rate established by the Venezuelan government of 1,920
Bolivars to the US Dollar to translate the local currency
financial statements into our reporting currency, the US Dollar.

ARGENTINA CURRENCY

In January 2002, the Argentine government
announced economic reforms, including a devaluation of its
national currency, the Argentine Peso. The Argentine Peso lost
over 71% of its value as compared to the US Dollar in 2002.
Based on the net monetary position of CRM, we recorded foreign
currency transaction losses of $683 during 2002. We are
recording a valuation allowance in 2004 on the net operating
losses, deferring recognition of the tax benefits generated by
these losses due to the potentially limited tax carry forward
period in Argentina. The value of the Argentine Peso as compared
to the US Dollar slightly recovered during 2003 resulting in the
recognition of foreign currency transaction gains of $104 during
2003. The value of the Argentine Peso remained stable in 2004.



|         |                                        
|-------- | ---------------------------------------
|Note E  | Investments in and Advances to Cingular

|           |  |      |       |      |  |   |        |  |  | 
|---------- |  | ---- | ----- | ---- |  | - | ------ |  |  | 
|           |  | 2003 |       | 2004 |  |  
|          
|          
|Investment |  | $    | 3,867 |      |  | $ | 18,311 |  |  | 
|Advances   |  |      | 3,812 |      |  |   | 4,460  |  |  | 
|          
|           |  | $    | 7,679 |      |  | $ | 22,771 |  |  | 
|          

INVESTMENT

We own an approximate 40% economic interest in
Cingular Wireless, and share joint control of the venture with
SBC Communications, Inc. The following table presents 100% of
Cingulars assets, liabilities, and results of operations
as of and for the years ended December 31:

|                           |  |      |        |      |  |   |        |  |  | 
|-------------------------- |  | ---- | ------ | ---- |  | - | ------ |  |  | 
|                           |  | 2003 |        | 2004 |  |  
|                          
|                          
|Balance Sheet Information: |  |      |        |      |  |   |        |  |  | 
|Current assets             |  | $    | 3,300  |      |  | $ | 5,570  |  |  | 
|                          
|Noncurrent assets          |  | $    | 22,230 |      |  | $ | 76,668 |  |  | 
|                          
|Current liabilities        |  | $    | 3,210  |      |  | $ | 7,983  |  |  | 
|                          
|Noncurrent liabilities     |  | $    | 13,328 |      |  | $ | 29,110 |  |  | 
|                          
|Minority Interest          |  | $    | 659    |      |  | $ | 609    |  |  | 
|                          
|Members capital           |  | $    | 8,333  |      |  | $ | 44,536 |  |  | 
|                          

|                                                                      |  |      |        |      |  |      |        |  |  |   |        |  |  | 
|--------------------------------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------ |  |  | 
|                                                                      |  | 2002 |        | 2003 |  | 2004 |        | 
|                                                                     
|                                                                     
|Income Statement Information:                                         |  |      |        |      |  |      |        |  |  |  
|Revenues                                                              |  | $    | 14,903 |      |  | $    | 15,483 |  |  | $ | 19,436 |  |  | 
|                                                                     
|Operating Income                                                      |  | $    | 2,496  |      |  | $    | 2,254  |  |  | $ | 1,528  |  |  | 
|                                                                     
|Income Before Cumulative Effect of Change in
    Accounting Principle |  | $    | 1,205  |      |  | $    | 977    |  |  | $ | 201    |  |  | 
|                                                                     
|Cumulative Effect of Change in Accounting
    Principle               |  | $    | (32    | )    |  |      |       |  |  | $ |       |  |  | 
|                                                                     
|Net Income                                                            |  | $    | 1,173  |      |  | $    | 977    |  |  | $ | 201    |  |  | 
|                                                                     

As of December 31, 2004 and 2003, our book
investment exceeded our proportionate share of the net assets of
Cingular by $497 and $534, respectively. As of December 31,
2004, $1,377 of our consolidated retained earnings represented
undistributed earnings from Cingular.


On October 26, 2004, Cingular completed its
previously announced acquisition of AT&T Wireless, creating
the largest wireless carrier in the United States based on the
number of customers. Cingulars cash purchase price for
AT&T Wireless shares totaled approximately $41 billion.
That amount was funded by equity contributions from
Cingulars two owners in proportion to their equity
ownership of Cingular  60% for SBC and 40% for
BellSouth  with the remainder provided from cash on
hand at AT&T Wireless. BellSouths portion of the
funding, which was reflected as an increase in our investment in
Cingular, was approximately $14.4 billion.




60 BELLSOUTH
2004




---



##### Table of Contents







ADVANCE

We have an advance to Cingular that was $3,792 at
December 31, 2004 and $3,812 at December 31, 2003.
Effective July 1, 2003, BellSouth and SBC agreed to amend
the terms of our notes with Cingular. The amendment included
reducing the fixed interest rate from 7.5% to 6.0% per annum and
extending the maturity date from March 31, 2005 to
June 30, 2008.

REVOLVING LINE OF CREDIT

Effective August 1, 2004, BellSouth and SBC
have agreed to finance their respective pro rata shares of
Cingulars capital and operating cash requirements based
upon Cingulars budget and forecasted cash needs.
Borrowings under this agreement bear interest at 1-Month LIBOR
plus 0.05% payable monthly. Cingular also terminated its bank
credit facilities and ceased issuing commercial paper and
long-term debt. Available cash (as defined) generated by
Cingular is applied on the first day of the succeeding month to
the repayment of the advances from BellSouth and SBC. With
regard to any interim loans Cingular makes to BellSouth from
time to time, BellSouth pays Cingular interest on the excess
cash at 1-Month LIBOR. The balance outstanding under the
revolving credit line, including interest, was $668 at
December 31, 2004.

PROVISION OF SERVICES

We also generate revenues from Cingular in the
ordinary course of business for the provision of local
interconnection services, long distance services, sales agency
fees and customer billing and collection fees.

INTEREST AND REVENUE EARNED FROM
CINGULAR

|                            |  |                     |     |      |  |      |     |  |  |   |     |  |  | 
|--------------------------- |  | ------------------- | --- | ---- |  | ---- | --- |  |  | - | --- |  |  | 
|                            |  |                     |     |     
|                            |  | For the Years Ended |     |     
|                            |  | December 31,        |     |     
|                           
|                           
|                            |  | 2002                |     | 2003 |  | 2004 |     | 
|                           
|                           
|Revenues                    |  | $                   | 386 |      |  | $    | 426 |  |  | $ | 537 |  |  | 
|Interest income on advances |  | $                   | 284 |      |  | $    | 256 |  |  | $ | 230 |  |  | 
|                           

Interest income on advances is offset by a like
amount of interest expense recorded by Cingular and reported in
our financial statements in the caption Net earnings of
equity affiliates.


Receivables and payables incurred in the ordinary
course of business are recorded in our balance sheets as follows:


|                         |  |              |    |      |  |   |    |  |  | 
|------------------------ |  | ------------ | -- | ---- |  | - | -- |  |  | 
|                         |  |              |    |     
|                         |  | As of        |    |     
|                         |  | December 31, |    |     
|                        
|                        
|                         |  | 2003         |    | 2004 |  |  
|                        
|                        
|Receivable from Cingular |  | $            | 57 |      |  | $ | 56 |  |  | 
|Payable to Cingular      |  | $            | 33 |      |  | $ | 44 |  |  | 
|                        

Note F  Other Assets

Other assets at December 31 consist of the
following:

|                                              |  |      |       |      |  |   |       |  |  | 
|--------------------------------------------- |  | ---- | ----- | ---- |  | - | ----- |  |  | 
|                                              |  | 2003 |       | 2004 |  |  
|                                             
|                                             
|Deferred activation and installation expenses |  | $    | 1,614 |      |  | $ | 1,405 |  |  | 
|Prepaid pension and postretirement benefits   |  |      | 3,851 |      |  |   | 4,362 |  |  | 
|Equity method investments other than Cingular |  |      | 370   |      |  |   | 277   |  |  | 
|Cost method investments                       |  |      | 382   |      |  |   | 921   |  |  | 
|Advance to Sonofon                            |  |      | 106   |      |  |   |      |  |  | 
|Investments in debt securities                |  |      | 244   |      |  |   |      |  |  | 
|Other                                         |  |      | 410   |      |  |   | 435   |  |  | 
|                                             
|Other assets                                  |  | $    | 6,977 |      |  | $ | 7,400 |  |  | 
|                                             

DEFERRED ACTIVATION AND INSTALLATION
EXPENSES

|                                                                    |  |   |       |   |  | 
|------------------------------------------------------------------- |  | - | ----- | - |  | 
|                                                                    |  |   |       |  
|                                                                   
|                                                                   
|Deferred activation and installation expenses
    December 31, 2002 |  | $ | 1,800 |   |  | 
|Amortization of previous deferrals                                  |  |   | (864  | ) |  | 
|Current period deferrals                                            |  |   | 678   |   |  | 
|                                                                   
|Deferred activation and installation expenses
    December 31, 2003 |  |   | 1,614 |   |  | 
|Amortization of previous deferrals                                  |  |   | (811  | ) |  | 
|Current period deferrals                                            |  |   | 602   |   |  | 
|                                                                   
|Deferred activation and installation expenses
    December 21, 2004 |  | $ | 1,405 |   |  | 
|                                                                   

EQUITY METHOD INVESTMENTS OTHER THAN
CINGULAR

Ownership in equity investments other than
Cingular at December 31 is as follows:

|                       |  |            |       |            |  |            |     |            |  |  |       |  |  |   |     | 
|---------------------- |  | ---------- | ----- | ---------- |  | ---------- | --- | ---------- |  |  | ----- |  |  | - | --- | 
|                       |  |            |       |           
|                       |  | 2003       |       | 2004      
|                      
|                      
|                       |  | Ownership  |       | Investment |  | Ownership  |     | Investment
|                       |  | Percentage |       | Balance    |  | Percentage |     | Balance   
|                      
|                      
|Abiatar (Uruguay)      |  |            | 46.0% |            |  | $          | 26  |            |  |  |      |  |  | $ |    | 
|BellSouth Guatemala(1) |  |            | 60.0% |            |  |            | 7   |            |  |  |      |  |  |   |    | 
|BellSouth Panama       |  |            | 43.7% |            |  |            | 86  |            |  |  |      |  |  |   |    | 
|Cellcom (Israel)       |  |            | 34.8% |            |  |            | 191 |            |  |  | 34.8% |  |  |   | 242 | 
|Sonofon (Denmark)      |  |            | 46.5% |            |  |            | 57  |            |  |  |      |  |  |   |    | 
|Internet Yellow Pages  |  |            |      |            |  |            |    |            |  |  | 34.0% |  |  |   | 33  | 
|Other                  |  |            |      |            |  |            | 3   |            |  |  |      |  |  |   | 2   | 
|                      
|                       |  |            |       |            |  | $          | 370 |            |  |  |       |  |  | $ | 277 | 
|                      



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

COST METHOD INVESTMENTS

We have investments in marketable securities,
primarily common stocks, which are accounted for under the cost
method. These investments are held in grantor trusts and our
captive insurance subsidiary. In 2003 and 2004, the trusts



BELLSOUTH
2004      61




---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS CONTINUED


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


BELLSOUTH CORPORATION

diversified their portfolio through the sale of
BellSouth stock using the proceeds to reinvest in other equity
securities.

ADVANCE TO SONOFON

On February 12, 2004, we closed on a
previously announced agreement to sell our interest in Danish
wireless provider, Sonofon, for 3.68 billion Danish Kroner
to Telenor ASA. We received 3.05 billion Danish Kroner, or
$525, for our 46.5% equity stake and 630 million Danish
Kroner, or $109, for our shareholder loan and accrued interest,
reduced by a settlement of $17 associated with foreign currency
swap contracts. As a result of these transactions, we recorded a
gain of $462, or $295 net of tax, which included the recognition
of cumulative foreign currency translation gains of $13.

INVESTMENT IN DEBT SECURITIES

Investments in debt securities represented our
loan participation agreements related to our Colombian
operations. These securities were sold in conjunction with the
sale of our Colombian operations.

Note G  Intangible Assets

Intangible assets are summarized as follows:

|                                               |  |                   |       |                   |  |          |       |              |  |   |       |  |  |   |       |  |  | 
|---------------------------------------------- |  | ----------------- | ----- | ----------------- |  | -------- | ----- | ------------ |  | - | ----- |  |  | - | ----- |  |  | 
|                                              
|                                              
|                                               |  |                   |       |                   |  |         
|                                               |  | December 31, 2003 |       | December 31, 2004 |  |         
|                                               |  | Carrying          |       | Accumulated       |  | Carrying |       | Accumulated  |  |  
|                                               |  | Amount            |       | Amortization      |  | Amount   |       | Amortization |  |  
|                                              
|                                              
|Intangible assets subject to amortization:     |  |                   |       |                   |  |          |       |              |  |   |       |  |  |   |       |  |  | 
|Capitalized Software                           |  | $                 | 2,893 |                   |  | $        | 1,303 |              |  | $ | 2,930 |  |  | $ | 1,388 |  |  | 
|Wireless Licenses                              |  |                   | 764   |                   |  |          | 294   |              |  |   |      |  |  |   |      |  |  | 
|Customer related intangible assets             |  |                   | 330   |                   |  |          | 288   |              |  |   |      |  |  |   |      |  |  | 
|Other                                          |  |                   | 38    |                   |  |          | 15    |              |  |   | 37    |  |  |   | 12    |  |  | 
|                                              
|Total                                          |  | $                 | 4,025 |                   |  | $        | 1,900 |              |  | $ | 2,967 |  |  | $ | 1,400 |  |  | 
|                                              
|Intangible assets not subject to amortization: |  |                   |       |                   |  |          |       |              |  |   |       |  |  |   |       |  |  | 
|Wireless Licenses                              |  | $                 | 164   |                   |  | $        | 12    |              |  |   |      |  |  |   |      |  |  | 
|MMDS Licenses                                  |  |                   | 20    |                   |  |          |      |              |  |   | 20    |  |  |   |      |  |  | 
|                                              
|Total                                          |  | $                 | 184   |                   |  | $        | 12    |              |  | $ | 20    |  |  |   |      |  |  | 
|                                              
|Total Intangible Assets                        |  | $                 | 4,209 |                   |  | $        | 1,912 |              |  | $ | 2,987 |  |  | $ | 1,400 |  |  | 
|                                              

The following table presents current and expected
amortization expense of the existing intangible assets as of
December 31, 2004 for each of the following periods:

Aggregate amortization expense:


For the year ended December 31,
2004                 $597


Expected amortization expense:

|                    |  |   |     | 
|------------------- |  | - | --- | 
|For the years ended |  |  
|December 31,        |  |  
|2005                |  | $ | 567 | 
|2006                |  |   | 421 | 
|2007                |  |   | 294 | 
|2008                |  |   | 175 | 
|2009                |  |   | 70  | 

INTANGIBLE ASSET IMPAIRMENTS

We adopted SFAS No. 142 and recorded a
cumulative effect of change in accounting principle on
January 1, 2002.

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


During 2002, we completed the transitional
impairment test required under SFAS No. 142. In accordance
with SFAS No. 142, goodwill was tested for impairment by
comparing the fair value of our reporting units to their
carrying values. Fair values were determined by the assessment
of future discounted cash flows. The fair values of our Latin
America reporting units were less than the carrying value of
these units. The allocation of fair values to identifiable
tangible and intangible assets resulted in an implied valuation
of the goodwill associated with these reporting units of $118.
As a result, we recorded an impairment loss of $1,277, with no
income tax benefit. Additionally, our equity investee, Cingular
Wireless, completed its transitional impairment test in 2002
resulting in an impairment loss to BellSouth of $8 after tax.
These impairment losses are recorded as a cumulative effect of
change in accounting principle in the statements of income as of
January 1, 2002.


The changes in the carrying amount of goodwill
for 2003 and 2004 are as follows:


|                                                |  |   |     |   |  | 
|----------------------------------------------- |  | - | --- | - |  | 
|                                               
|Balance at December 31, 2002                    |  | $ | 98  |   |  | 
|Other changes                                   |  |   | (5  | ) |  | 
|                                               
|Balance at December 31, 2003                    |  | $ | 93  |   |  | 
|                                               
|Transfer of goodwill to discontinued operations |  |   | (93 | ) |  | 
|                                               
|Balance at December 31, 2004                    |  | $ | 0   |   |  | 
|                                               

During 2004 we reclassified goodwill balances
associated with our Cingular investment to the Cingular
investment line item in the consolidated balance sheet. We
reclassified $249 in the December 31, 2003 balance sheet to
conform to the current period presentation. The table above
reflects this reclassification in all periods presented.



62 BELLSOUTH
2004




---



##### Table of Contents







OTHER IMPAIRMENTS OF INTANGIBLE
ASSETS

In September 2003, a decision was reached to
abandon a software project related to a network operations
system. The project was terminated due to changes in the
business since the initiation of the project and an assessment
of the remaining costs to complete the project. As a result, we
recorded an asset impairment charge of $52 to write-off
capitalized software associated with the project.



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

PROPERTY, PLANT AND EQUIPMENT

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

|                                   |                   |             |       |           |  |      |      |      |  |   |        |        |  |   |        |        |  |  | 
|---------------------------------- | ----------------- | ----------- | ----- | --------- |  | ---- | ---- | ---- |  | - | ------ | ------ |  | - | ------ | ------ |  |  | 
|                                   |                   | Estimated   |       |           |  |      |      |      |  |  
|                                   |                   | Depreciable |       | Average   |  |      |      |      |  |  
|                                   |                   | Lives       |       | Remaining |  |      |      |      |  |  
|                                   |                   | (In Years)  |       | Life      |  | 2003 |      | 2004 |  |  
|                                  
|                                  
|Central office equipment           |                   |             | 811  |           |  |      | 4.7  |      |  | $ | 26,066 |        |  | $ | 26,539 |        |  | 
|Outside plant:                     |                   |             |       |           |  |      |      |      |  |   |        |        |  |   |        |        |  | 
|                                   | Copper cable      |             |       | 1516     |  |      |      | 6.8  |  |   |        | 19,975 |  |   |        | 20,440 |  |  | 
|                                   | Fiber cable       |             |       | 20        |  |      |      | 10.9 |  |   |        | 3,094  |  |   |        | 3,270  |  |  | 
|                                   | Poles and conduit |             |       | 3655     |  |      |      | 28.0 |  |   |        | 3,567  |  |   |        | 3,620  |  |  | 
|Operating and
    other equipment  |                   |             | 515  |           |  |      | 3.3  |      |  |   | 4,419  |        |  |   | 1,691  |        |  | 
|Building and building improvements |                   |             | 2545 |           |  |      | 28.0 |      |  |   | 4,780  |        |  |   | 4,597  |        |  | 
|Furniture and fixtures             |                   |             | 1015 |           |  |      | 8.4  |      |  |   | 2,478  |        |  |   | 2,429  |        |  | 
|Station equipment                  |                   |             | 6     |           |  |      | 3.0  |      |  |   | 763    |        |  |   | 542    |        |  | 
|Land                               |                   |             |      |           |  |      |     |      |  |   | 293    |        |  |   | 267    |        |  | 
|Plant under construction           |                   |             |      |           |  |      |     |      |  |   | 280    |        |  |   | 206    |        |  | 
|                                  
|                                   |                   |             |       |           |  |      |      |      |  |   | 65,715 |        |  |   | 63,601 |        |  | 
|Less: accumulated depreciation     |                   |             |       |           |  |      |      |      |  |   | 41,908 |        |  |   | 41,562 |        |  | 
|                                  
|Property, plant and equipment, net |                   |             |       |           |  |      |      |      |  | $ | 23,807 |        |  | $ | 22,039 |        |  | 
|                                  

OTHER CURRENT LIABILITIES

Other current liabilities are summarized as
follows at December 31:

|                                       |  |      |       |      |  |   |       |  |  | 
|-------------------------------------- |  | ---- | ----- | ---- |  | - | ----- |  |  | 
|                                       |  | 2003 |       | 2004 |  |  
|                                      
|                                      
|Advanced billing and customer deposits |  | $    | 863   |      |  | $ | 832   |  |  | 
|Interest and rents accrued             |  |      | 470   |      |  |   | 382   |  |  | 
|Taxes payable                          |  |      | 632   |      |  |   | 222   |  |  | 
|Dividends payable                      |  |      | 461   |      |  |   | 493   |  |  | 
|Salaries and wages payable             |  |      | 359   |      |  |   | 403   |  |  | 
|Accrued compensated absences           |  |      | 224   |      |  |   | 229   |  |  | 
|Restructuring and severance accrual    |  |      | 72    |      |  |   | 26    |  |  | 
|Other                                  |  |      | 547   |      |  |   | 332   |  |  | 
|                                      
|Other current liabilities              |  | $    | 3,628 |      |  | $ | 2,919 |  |  | 
|                                      

OTHER NONCURRENT LIABILITIES

Other noncurrent liabilities are summarized as
follows at December 31:

|                                                |  |      |       |      |  |   |       |  |  | 
|----------------------------------------------- |  | ---- | ----- | ---- |  | - | ----- |  |  | 
|                                                |  | 2003 |       | 2004 |  |  
|                                               
|                                               
|Deferred installation and activation revenues   |  | $    | 1,614 |      |  | $ | 1,405 |  |  | 
|Accrued pension and postretirement benefits     |  |      | 983   |      |  |   | 1,207 |  |  | 
|Deferred credits                                |  |      | 724   |      |  |   | 652   |  |  | 
|Compensation related accruals                   |  |      | 747   |      |  |   | 879   |  |  | 
|Minority interests in consolidated subsidiaries |  |      | 209   |      |  |   |      |  |  | 
|Postemployment benefits                         |  |      | 237   |      |  |   | 254   |  |  | 
|Derivatives liability                           |  |      | 80    |      |  |   | 32    |  |  | 
|Other                                           |  |      | 100   |      |  |   | 31    |  |  | 
|                                               
|Other noncurrent liabilities                    |  | $    | 4,694 |      |  | $ | 4,460 |  |  | 
|                                               

SUPPLEMENTAL CASH FLOW FROM CONTINUING
OPERATIONS INFORMATION

|               |  |      |     |      |  |      |     |  |  |   |       |  |  | 
|-------------- |  | ---- | --- | ---- |  | ---- | --- |  |  | - | ----- |  |  | 
|               |  | 2002 |     | 2003 |  | 2004 |     | 
|              
|              
|Cash paid for: |  |      |     |      |  |      |     |  |  |   |       |  |  | 
|Income taxes   |  | $    | 864 |      |  | $    | 678 |  |  | $ | 1,279 |  |  | 
|              
|Interest       |  | $    | 993 |      |  | $    | 845 |  |  | $ | 863   |  |  | 
|              

Note I  Debt

DEBT MATURING WITHIN ONE YEAR

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

|                          |                                      |                               |   |       |       |  |   |       |       | 
|------------------------- | ------------------------------------ | ----------------------------- | - | ----- | ----- |  | - | ----- | ----- | 
|                          |                                      | 2003                          |   | 2004 
|                         
|                         
|Short-term notes payable: |                                      |                               |   |       |       |  |   |      
|                          | Bank loans                           |                               | $ | 167   |       |  | $ |      |      
|                          | Commercial paper                     |                               |   | 1,470 |       |  |   | 3,248 |      
|                          | Current maturities of long-term debt |                               |   | 1,854 |       |  |   | 2,227 |      
|                         
|                          |                                      | Debt maturing within one year |   | $     | 3,491 |  |   | $     | 5,475 | 
|                         

Weighted-average interest rate at end of period:


|                 |  |      |       |      |  |  |       |  |  | 
|---------------- |  | ---- | ----- | ---- |  |  | ----- |  |  | 
|                 |  | 2003 |       | 2004 |  | 
|                
|                
|Bank loans       |  |      | 5.25% |      |  |  | %    |  |  | 
|Commercial paper |  |      | 1.04% |      |  |  | 2.26% |  |  | 
|                

|                                                 |  |      |       |      |  |   |       |  |  | 
|------------------------------------------------ |  | ---- | ----- | ---- |  | - | ----- |  |  | 
|                                                
|                                                
|Credit lines at end of period:                   |  | 2003 |       | 2004 |  |  
|                                                
|                                                
|Available domestic committed credit lines        |  | $    | 1,500 |      |  | $ | 3,523 |  |  | 
|Borrowings under domestic credit lines           |  | $    |      |      |  | $ |      |  |  | 
|Available international uncommitted credit lines |  | $    | 118   |      |  | $ |      |  |  | 
|Borrowings under international credit lines      |  | $    | 12    |      |  | $ |      |  |  | 

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



BELLSOUTH
2004      63




---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS CONTINUED


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


BELLSOUTH CORPORATION

LONG-TERM DEBT

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

|                                             |  |                                          |        |      |        |      |         |   |        |  |  | 
|-------------------------------------------- |  | ---------------------------------------- | ------ | ---- | ------ | ---- | ------- | - | ------ |  |  | 
|                                             |  |                                          |        | 2003 |        | 2004 |         |  
|                                            
|                                            
|Issued by BellSouth Telecommunications, Inc. |  |                                          |        |      |        |     
|5.85%5.88%                                  |  | 20092045                                |        | $    | 437    |      |         | $ | 437    |  |  | 
|6.13%7%                                     |  | 20042033(1)                             |        |      | 2,151  |      |         |   | 1,949  |  |  | 
|7.5%7.63%                                   |  | 20332035                                |        |      | 300    |      |         |   | 300    |  |  | 
|7%                                           |  | 2095                                     |        |      | 500    |      |         |   | 500    |  |  | 
|2.42%2.47%                                  |  | Extendible Liquidity Securities due 2006 |        |      | 745    |      |         |   | 745    |  |  | 
|6.65%                                        |  | Zero-to-Full Debentures due 2095         |        |      | 217    |      |         |   | 232    |  |  | 
|6.3%                                         |  | Amortizing Debentures due 2015           |        |      | 277    |      |         |   | 261    |  |  | 
|Issued by BellSouth Corporation              |  |                                          |        |      |        |     
|2.42%                                        |  | 2007                                     |        |      |       |      |         |   | 500    |  |  | 
|4.2%4.75%                                   |  | 20092012(1)                             |        |      |       |      |         |   | 2,299  |  |  | 
|5%7.38%                                     |  | 20062039(1)                             |        |      | 3,852  |      |         |   | 6,631  |  |  | 
|7.75%7.88%                                  |  | 20102030                                |        |      | 2,000  |      |         |   | 2,000  |  |  | 
|7.12%                                        |  | 2097                                     |        |      | 500    |      |         |   | 500    |  |  | 
|4.11%4.12%                                  |  | 20-put-1 Securities due 2021             |        |      | 1,000  |      |         |   | 1,000  |  |  | 
|Issued by Foreign Operations                 |  |                                          |        |      |        |     
|3.30%9.25%                                  |  | Argentina due 2003-2008(2)               |        |      | 350    |      |         |   |       |  |  | 
|1.72%                                        |  | Chile due 2004                           |        |      | 180    |      |         |   |       |  |  | 
|2.95%14.18%                                 |  | Colombia due 20052006                   |        |      | 641    |      |         |   |       |  |  | 
|4.19%4.59%                                  |  | Venezuela due 2004                       |        |      | 23     |      |         |   |       |  |  | 
|1.79%2.06%                                  |  | Peru due 2005                            |        |      | 200    |      |         |   |       |  |  | 
|Capital leases and other                     |  |                                          | 86     |      |        |      | 58      |   |        | 
|Unamortized discount, net of premium         |  |                                          | (116   | )    |        |      | (77     | ) |        | 
|                                            
|                                             |  |                                          |        |      | 13,343 |      |         |   | 17,335 |  |  | 
|Current maturities                           |  |                                          | (1,854 | )    |        |      | (2,227  | ) |        | 
|Long-term debt                               |  | $                                        | 11,489 |      |        |      | $15,108 |   |        | 
|                                            



|    |  |                                                                                                                                                                                                                              
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) |  | These debt maturities are affected by FAS 133
    accounting requirements to mark hedged debt to fair
    value.                                                                                                             
|   
|(2) |  | CRM, our subsidiary in Argentina, was in
    default on $490 of its US Dollar-denominated debt. The debt is
    classified as liabilities of discontinued operations in our
    consolidated December 31, 2004 balance sheet.

Several issues of long-term debt contain embedded
options, which may require us to repurchase the debt or will
alter the interest rate associated with that debt. Those issues,
and their related options, are as follows:

|                             |  |                   
|---------------------------- |  | ------------------
|Issue                        |  | Date of Put Option
|                            
|                            
|20-put-1 Securities due 2021 |  | Annually in April 
|Putable debentures           |  | November 2006     

If the holders of the put options on the 20-put-1
Securities do not require us to repurchase the securities, the
interest rates for these securities will be reset based on
current market conditions. Since the 20-put-1 Securities can be
put to us annually, the balance is included in current
maturities of long-term debt in our balance sheet. Holders of
our 6.04% bond maturing November 15, 2026, have a one-time
ability to put the bond back to us on November 15, 2006.

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


Maturities of long-term debt outstanding, in
principal amounts, at December 31, 2004 are summarized
below. Maturities after the year 2009 include the final
principal amount of $500 for the Zero-to-Full Debentures due in
2095.


|           |  |   |        |  |  | 
|---------- |  | - | ------ |  |  | 
|Maturities |  |   |        |  |  | 
|2005       |  | $ | 2,227  |  |  | 
|2006       |  |   | 1,722  |  |  | 
|2007       |  |   | 525    |  |  | 
|2008       |  |   | 625    |  |  | 
|2009       |  |   | 1,877  |  |  | 
|Thereafter |  |   | 10,704 |  |  | 
|          
|Total      |  | $ | 17,680 |  |  | 
|          

At December 31, 2004, we had a shelf
registration statement on file with the Securities and Exchange
Commission under which $3,100 of debt securities could be
publicly offered.

During 2004, we issued $6,100 of debt and paid
$200 in maturing debt.


In addition, on August 1, 2004, we redeemed
$517 of 40-year, 7.375% quarterly interest bonds, due
August 1, 2039. The redemption price was 100% of the
principal amount, and resulted in recognition of a loss in Other
income (expense) of $14, or $9 net of tax, associated with fully
expensing remaining discount and deferred debt issuance costs.


Subsequent Event

In December 2004, we called $400 of 40-year,
6.75% semi-annual interest bonds, due October 15, 2033,
which we redeemed on January 18, 2005. The redemption price
was 103.33% of the principal amount, and resulted in recognition
of a loss of $22, or $14 net of tax, which includes $9
associated with fully expensing remaining discount and deferred
debt issuance costs.

Note J  Income Taxes

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



64 BELLSOUTH
2004




---



##### Table of Contents







The provision for income taxes is summarized as
follows:

|                                 |         |      |       |       |   |      |       |       |   |   |       |       |  |  | 
|-------------------------------- | ------- | ---- | ----- | ----- | - | ---- | ----- | ----- | - | - | ----- | ----- |  |  | 
|                                 |         | 2002 |       | 2003  |   | 2004 |       |      
|                                
|                                
|Current                          |         |      |       |       |   |      |       |       |   |   |       |       |  | 
|                                 | Federal |      | $     | 525   |   |      | $     | 1,020 |   |   | $     | 645   |  |  | 
|                                 | State   |      |       | 36    |   |      |       | 128   |   |   |       | 66    |  |  | 
|                                
|                                 |         |      | 561   |       |   |      | 1,148 |       |   |   | 711   |       |  | 
|                                
|Deferred, net                    |         |      |       |       |   |      |       |       |   |   |       |       |  | 
|                                 | Federal |      |       | 1,245 |   |      |       | 730   |   |   |       | 1,010 |  |  | 
|                                 | State   |      |       | 113   |   |      |       | 85    |   |   |       | 71    |  |  | 
|                                
|                                 |         |      | 1,358 |       |   |      | 815   |       |   |   | 1,081 |       |  | 
|                                
|Investment tax credits, net      |         |      |       |       |   |      |       |       |   |   |       |       |  | 
|                                 | Federal |      |       | (27   | ) |      |       | (27   | ) |   |       |      |  |  | 
|                                
|Total provision for income taxes |         | $    | 1,892 |       |   | $    | 1,936 |       |   | $ | 1,792 |       |  | 
|                                

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

|                                            |  |      |        |      |  |   |        |   |  | 
|------------------------------------------- |  | ---- | ------ | ---- |  | - | ------ | - |  | 
|                                            |  | 2003 |        | 2004 |  |  
|                                           
|                                           
|Operating loss and tax credit carryforwards |  | $    | 718    |      |  | $ | 363    |   |  | 
|Capital loss carryforwards                  |  |      | 781    |      |  |   | 658    |   |  | 
|Allowance for uncollectibles                |  |      | 183    |      |  |   | 125    |   |  | 
|Other                                       |  |      | 399    |      |  |   | 164    |   |  | 
|                                           
|                                            |  |      | 2,081  |      |  |   | 1,310  |   |  | 
|                                           
|Valuation Allowance                         |  |      | (1,135 | )    |  |   | (873   | ) |  | 
|                                           
|Deferred tax assets                         |  | $    | 946    |      |  | $ | 437    |   |  | 
|                                           
|Tangible and intangible property            |  | $    | (4,009 | )    |  | $ | (4,667 | ) |  | 
|Equity investments                          |  |      | (1,647 | )    |  |   | (1,640 | ) |  | 
|Compensation related                        |  |      | (169   | )    |  |   | (131   | ) |  | 
|Other                                       |  |      | (165   | )    |  |   | (147   | ) |  | 
|                                           
|Deferred tax liabilities                    |  |      | (5,990 | )    |  |   | (6,585 | ) |  | 
|                                           
|Net deferred tax liability                  |  | $    | (5,044 | )    |  | $ | (6,148 | ) |  | 
|                                           

The decrease in valuation allowance on deferred
tax assets during 2004 relates primarily to operating loss
carryforwards associated with sold Latin American operations.
The remaining valuation allowance relates to excess US capital
losses, state operating losses, and state credits that may not
be utilized during the carryforward period. The carryforward
periods for the excess capital losses expire in 2007 and 2008.
The operating losses relate to state losses and credit
carryforwards expiring in various years beginning in 2005.

At December 31, 2004, net deferred tax
liabilities include a deferred tax asset of $320 relating to
compensation expense recognized under SFAS No. 123. Full
realization of the deferred asset requires stock options to be
exercised at a price equal to the sum of the exercise price plus
the fair value at the grant date; any tax benefit realized in
excess of the deferred asset is recorded as an increase to
equity. A significant number of the options for which a deferred
tax asset has been recognized have a combined exercise price and
fair value at grant date in excess of $45.00 per share.
Accordingly, there is no assurance that the stock price of
BellSouth will rise to levels sufficient to realize the entire
tax benefit currently reflected in our balance sheet. The
provisions of SFAS No. 123 prohibit us from recording a
valuation allowance on the deferred tax asset related to these
options. If the full value of the deferred tax asset is not
realized either at the exercise or expiration of the options,
the deferred asset will reverse against equity to the extent of
previously recognized excess tax benefits, otherwise against
income tax expense. At December 31, 2004, accumulated
excess tax benefits of $72 have been recorded in equity.


The net deferred tax liability at
December 31, 2004 included a current asset balance of $344
and a noncurrent liability balance of $6,492. The net deferred
tax liability at December 31, 2003 included a current asset
balance of $305 and a noncurrent liability balance of $5,349.


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


|                                                          |  |      |      |      |  |      |      |   |  |  |      |   |  | 
|--------------------------------------------------------- |  | ---- | ---- | ---- |  | ---- | ---- | - |  |  | ---- | - |  | 
|                                                          |  | 2002 |      | 2003 |  | 2004 |      |  
|                                                         
|                                                         
|Federal statutory tax rate                                |  |      | 35.0 | %    |  |      | 35.0 | % |  |  | 35.0 | % |  | 
|State income taxes, net of federal income tax
    benefit |  |      | 1.9  |      |  |      | 2.6  |   |  |  | 1.7  |   |  | 
|Net earnings (losses) of equity affiliates                |  |      | (0.3 | )    |  |      | (0.3 | ) |  |  | (0.3 | ) |  | 
|Investment tax credits                                    |  |      | (0.3 | )    |  |      | (0.3 | ) |  |  |     |   |  | 
|Medicare drug subsidy                                     |  |      |     |      |  |      |     |   |  |  | (0.6 | ) |  | 
|Other                                                     |  |      | (1.0 | )    |  |      | (1.3 | ) |  |  | (1.2 | ) |  | 
|                                                         
|Effective tax rate                                        |  |      | 35.3 | %    |  |      | 35.7 | % |  |  | 34.6 | % |  | 
|                                                         

At December 31, 2004, we had approximately
$242 of cumulative unrepatriated earnings from an equity
investment in an unconsolidated business. The deferred tax
liability related to these unrepatriated earnings was excluded
under SFAS No. 109 because such earnings are intended to be
reinvested indefinitely. The potential income tax liability on
these unrepatriated earnings is between $85 and $140.



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

WORKFORCE REDUCTION CHARGES

Based on ongoing challenges in the telecom
industry, continued economic pressures, the uncertainty
resulting from regulatory rulings and productivity improvements,
we have initiated workforce reductions and recorded charges
related to approximately 8,700 employees in the last three
years. These downsizings were implemented on a voluntary and
non-voluntary basis. The positions were both management and
non-management, primarily in network operations where the volume
of work has substantially decreased. Charges to earnings have
been recognized in accordance with provisions of SFAS
No. 112, Employers Accounting for
Postemployment Benefits (SFAS No. 112), and consisted
primarily of cash severance, outplacement



BELLSOUTH
2004      65




---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS CONTINUED


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


BELLSOUTH CORPORATION

and payroll taxes under pre-existing separation
pay plans. The following table summarizes the charges by year:

|     |  |             |  |         |  | 
|---- |  | ----------- |  | ------- |  | 
|     |  | Employee    |  | Related |  | 
|     |  | separations |  | charge  |  | 
|    
|    
|2002 |  | 3,800       |  | $430    |  | 
|2003 |  | 3,500       |  | $132    |  | 
|2004 |  | 1,400       |  | $51     |  | 

ASSET IMPAIRMENTS

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

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


RESTRUCTURING LIABILITY

As of December 31, 2004, the aggregate
liability related to the charges described above, excluding
postretirement and pension impacts, was $26. As of
December 31, 2004 announced workforce reductions are
expected to be substantially complete by the end of the first
quarter 2005.

|                             |  |              |      |            |  |       |     |   |  |   |      |   |  | 
|---------------------------- |  | ------------ | ---- | ---------- |  | ----- | --- | - |  | - | ---- | - |  | 
|                             |  |              |      |           
|                             |  | Type of Cost |      |           
|                            
|                            
|                             |  | Employee     |      | Other Exit |  |      
|                             |  | Separations  |      | Costs      |  | Total |     |  
|                            
|                            
|Balance at December 31, 2002 |  | $            | 84   |            |  | $     | 31  |   |  | $ | 115  |   |  | 
|                            
|Accruals                     |  |              | 132  |            |  |       | 1   |   |  |   | 133  |   |  | 
|Cash payments                |  |              | (125 | )          |  |       | (18 | ) |  |   | (143 | ) |  | 
|Adjustments                  |  |              | (25  | )          |  |       | (8  | ) |  |   | (33  | ) |  | 
|                            
|Balance at December 31, 2003 |  | $            | 66   |            |  | $     | 6   |   |  | $ | 72   |   |  | 
|                            
|Accruals                     |  |              | 51   |            |  |       |    |   |  |   | 51   |   |  | 
|Cash payments                |  |              | (80  | )          |  |       | (1  | ) |  |   | (81  | ) |  | 
|Adjustments                  |  |              | (12  | )          |  |       | (4  | ) |  |   | (16  | ) |  | 
|                            
|Balance at December 31, 2004 |  | $            | 25   |            |  | $     | 1   |   |  | $ | 26   |   |  | 
|                            

Adjustments to the employee separations accrual
are due to estimated demographics being different than actual
demographics of employees that separated from the company.
Deductions from the accrual for other exit costs consist
primarily of changes to prior estimates.

Note L  Employee Benefit Plans

PENSION AND OTHER POSTRETIREMENT BENEFIT
PLANS

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

Pension Plans

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

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


Other Benefits

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

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


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




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medical trend inflation above the caps is
considered in the valuation.

Our non-management labor contract with the CWA
contains contractual limits on the company-funded portion of
retiree medical costs (also referred to as caps). We
have waived the premiums in excess of the caps during the
current and past contract periods and therefore have not
collected contributions from those non-management retirees. We
previously calculated the obligation for non-management retiree
medical costs based on the terms of the written agreement with
the CWA.


The 2004 agreement with the CWA includes an
increase in the amount of the caps. We have determined that this
increase in the caps combined with BellSouths history of
increasing the caps in prior agreements creates a substantive
plan that is an uncapped plan, which differs from the written
plan. Accordingly, we began calculating the obligation for
non-management retiree medical costs as if there were no caps,
effective with the ratification of the contract in the fourth
quarter.


The change in the calculation resulted in an
increase to the retiree medical accumulated postretirement
benefit obligation of approximately $3.5 billion, which
will be recognized over the remaining years of future service to
full eligibility of the active plan participants. As a result of
this change, we remeasured the retiree medical obligation as of
September 30, 2004. Net periodic benefit cost increased
$117 during the fourth quarter of 2004, or $60 net of tax. The
annual impact on net periodic benefit cost due to the
remeasurement is approximately $460, which will be partially
offset by reductions in other retirement benefits.


Other benefit plan changes that resulted from the
labor contract were not considered significant enough to perform
an interim remeasurement but have been included in our annual
valuation of the plans as of December 31, 2004.


Medicare Prescription Drug, Improvement and
Modernization Act of 2003

In December 2003, the Medicare Prescription Drug
Act was signed into law. The Act allows companies that provide
certain prescription drug benefits for retirees to receive a
federal subsidy beginning in 2006. We accounted for the
government subsidy provided for in the Medicare Act as a plan
amendment in the calculation of our 2003 retiree medical
obligation, resulting in a reduction to the liability of $575 as
of December 31, 2003. Effective January 1, 2004 in
accordance with final FASB guidance, we changed the method to
treat the subsidy as an actuarial gain. The cumulative effect of
the change in method was not material and did not affect the
retiree medical obligation. Due to the change in the calculation
of the obligation for non-management retiree medical costs as if
there were no caps. The subsidy increased to approximately
$1.1 billion as of December 31, 2004. The total impact
of the subsidy on net periodic benefit cost for 2004 was $89.

A plan sponsors eligibility for the federal
subsidy depends on whether the plans prescription drug
benefit is at least actuarially equivalent to the Medicare Part
D benefit. Actuarial equivalence was based on comparing the
Medicare Part D standard drug coverage and premiums to
BellSouths retiree prescription drug coverage and
premiums. We calculated the actuarial values based on our
specific experience combined with nationwide statistics
published in a standardized rating manual adjusted for
historical utilization by our retirees. Our plans are projected
to satisfy actuarial equivalence for substantially all
participants in future years. Detailed regulations regarding the
calculation of actuarial equivalence were issued on
January 21, 2005. We do not expect our obligation or our
assessment of actuarial equivalence to be materially affected by
the regulations. We continue to study the regulations to
determine whether any change to our analysis will be required
for future valuations.




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2004      67




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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS CONTINUED


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


BELLSOUTH CORPORATION

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

|                                                                                       |  |                  |        |                |  |      |        |      |  |   |        |   |  |   |        |   |  |  
|-------------------------------------------------------------------------------------- |  | ---------------- | ------ | -------------- |  | ---- | ------ | ---- |  | - | ------ | - |  | - | ------ | - |  | -
|                                                                                       |  |                  |        |                |  |     
|                                                                                       |  | Pension Benefits |        | Other Benefits |  |     
|                                                                                      
|                                                                                      
|                                                                                       |  | 2003             |        | 2004           |  | 2003 |        | 2004 |  |  
|                                                                                       |  |                  |        |                |  |      |        |      |  |  
|                                                                                      
|                                                                                      
|Change in benefit obligation:                                                          |  |                  |        |                |  |      |        |      |  |   |        |   |  |   |        |   |  |  
|Benefit obligation at the beginning of the year                                        |  | $                | 11,386 |                |  | $    | 11,620 |      |  | $ | 7,387  |   |  | $ | 7,156  |   |  |  
|Service cost                                                                           |  |                  | 181    |                |  |      | 177    |      |  |   | 50     |   |  |   | 66     |   |  |  
|Interest cost                                                                          |  |                  | 742    |                |  |      | 696    |      |  |   | 478    |   |  |   | 472    |   |  |  
|Amendments                                                                             |  |                  |       |                |  |      | 27     |      |  |   | (572   | ) |  |   | 3,315  |   |  |  
|Actuarial (gain) loss                                                                  |  |                  | 803    |                |  |      | 288    |      |  |   | 293    |   |  |   | 386    |   |  |  
|Gross benefits and lump sums paid                                                      |  |                  | (1,492 | )              |  |      | (1,083 | )    |  |   | (480   | ) |  |   | (512   | ) |  |  
|                                                                                      
|Benefit obligation at the end of the year                                              |  | $                | 11,620 |                |  | $    | 11,725 |      |  | $ | 7,156  |   |  | $ | 10,883 |   |  |  
|                                                                                      
|                                                                                      
|Change in plan assets:                                                                 |  |                  |        |                |  |      |        |      |  |   |        |   |  |   |        |   |  |  
|Fair value of plan assets at the beginning of the
    year                             |  | $                | 13,338 |                |  | $    | 14,605 |      |  | $ | 2,820  |   |  | $ | 3,693  |   |  |  
|Actual return (loss) on plan assets                                                    |  |                  | 2,759  |                |  |      | 2,090  |      |  |   | 761    |   |  |   | 556    |   |  |  
|Employer contribution                                                                  |  |                  |       |                |  |      |       |      |  |   | 563    |   |  |   | 422    |   |  |  
|Plan participants contributions                                                        |  |                  |       |                |  |      |       |      |  |   | 29     |   |  |   | 39     |   |  |  
|Benefits and lump sums paid                                                            |  |                  | (1,492 | )              |  |      | (1,083 | )    |  |   | (480   | ) |  |   | (512   | ) |  |  
|                                                                                      
|Fair value of plan assets at the end of year                                           |  | $                | 14,605 |                |  | $    | 15,612 |      |  | $ | 3,693  |   |  | $ | 4,198  |   |  |  
|                                                                                      
|                                                                                      
|Funded status:                                                                         |  |                  |        |                |  |      |        |      |  |   |        |   |  |   |        |   |  |  
|As of the end of the year                                                              |  | $                | 2,985  |                |  | $    | 3,887  |      |  | $ | (3,463 | ) |  | $ | (6,685 | ) |  |  
|Unrecognized prior service cost                                                        |  |                  | (432   | )              |  |      | (362   | )    |  |   | (49    | ) |  |   | 3,266  |   |  |  
|Unrecognized net (gain) loss                                                           |  |                  | 942    |                |  |      | 454    |      |  |   | 2,923  |   |  |   | 2,376  |   |  |  
|Unrecognized net (asset) obligation                                                    |  |                  |       |                |  |      |       |      |  |   | (38    | ) |  |   | 219    |   |  |  
|                                                                                      
|Prepaid (accrued) benefit cost                                                         |  | $                | 3,495  |                |  | $    | 3,979  |      |  | $ | (627   | ) |  | $ | (824   | ) |  |  
|                                                                                      
|                                                                                      
|Amounts recognized in the consolidated balance
    sheets at December 31:              |  |                  |        |                |  |      |        |      |  |   |        |   |  |   |        |   |  |  
|Prepaid benefit cost                                                                   |  | $                | 3,572  |                |  | $    | 4,055  |      |  | $ | 279    |   |  | $ | 307    |   |  |  
|Accrued benefit cost                                                                   |  |                  | (77    | )              |  |      | (76    | )    |  |   | (906   | ) |  |   | (1,131 |   |  | )
|                                                                                      
|Net amount recognized                                                                  |  | $                | 3,495  |                |  | $    | 3,979  |      |  | $ | (627   | ) |  | $ | (824   |   |  | )
|                                                                                      
|                                                                                      
|Weighted-average assumptions used to determine
    benefit obligations at December 31: |  |                  |        |                |  |      |        |      |  |   |        |   |  |   |        |   |  |  
|Discount rate                                                                          |  |                  | 6.25%  |                |  |      | 5.25%  |      |  |   | 6.25%  |   |  |   | 5.50%  |   |  |  
|Rate of compensation increase                                                          |  |                  | 5.10%  |                |  |      | 4.50%  |      |  |   | 4.80%  |   |  |   | 4.50%  |   |  |  
|Health care cost trend rate assumed for the
    following year (Pre-age 65)            |  |                  |       |                |  |      |       |      |  |   | 9.00%  |   |  |   | 8.33%  |   |  |  
|Health care cost trend rate assumed for the
    following year (Post-age 65)           |  |                  |       |                |  |      |       |      |  |   | 13.00% |   |  |   | 11.67% |   |  |  
|Rate to which the cost trend rate is assumed to
    decline (the ultimate trend rate)  |  |                  |       |                |  |      |       |      |  |   | 5.00%  |   |  |   | 5.00%  |   |  |  
|Year that the rate reaches the ultimate trend rate                                     |  |                  |       |                |  |      |       |      |  |   | 2010   |   |  |   | 2010   |   |  |  
|                                                                                      

Discount rates are selected considering yields
available on high-quality debt instruments at the measurement
date. At December 31, 2004, in addition to reviewing
standard bond market indices, we specifically considered the
timing and amounts of expected future benefit payments and
compared that with a yield curve developed to reflect yields
available on high-quality bonds. The discount rates selected as
of December 31, 2004, 5.25% for pension and 5.50% for other
benefits, reflect the results of this yield curve analysis. The
rates are lower than many published indices of long-maturity
corporate bond rates. This difference is a reflection of the
plans demographics and benefit design, and the shape of
the yield curve.


Assumed health care cost trend rates have a
significant effect on the amounts reported for the health care
plan. A one-percentage point change in assumed health care cost
trend rates would have the following effects as of
December 31, 2004:


|                                                         |  |                |       |                |  |   |        |  
|-------------------------------------------------------- |  | -------------- | ----- | -------------- |  | - | ------ | -
|                                                         |  | 1-Percentage   |       | 1-Percentage  
|                                                         |  | Point Increase |       | Point Decrease
|                                                        
|                                                        
|Effect on total service and interest cost
    components |  | $              | 53    |                |  | $ | (42    | )
|Effect on other postretirement benefit obligation        |  | $              | 1,251 |                |  | $ | (1,030 | )

In contrast to the projected benefit obligation,
the accumulated benefit obligation represents the actuarial
present value of benefits based on employee service and
compensation as of a certain date and does not include an
assumption about future compensation levels. The accumulated
benefit obligation for the qualified defined benefit pension
plans was $11,164 and $11,486 at December 31, 2003 and
2004, respectively.



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The other benefits funded status above of
$(3,463) and $(6,685) for the years ended December 31, 2003
and 2004, respectively, includes a plan with a positive funded
status. For the remaining plans, the unfunded status was
$(3,754) and $(7,146) for the years ended December 31, 2003
and 2004, respectively, which was comprised of a benefit
obligation of $6,709 and $10,492 for the years ended
December 31, 2003 and 2004, respectively, and a fair value
of plan assets of $2,955 and $3,346 at December 31, 2003
and 2004, respectively.

|                                                                                                                  |                              |                  |        |                |   |      |        |      |  |      |        |      |  |   |        |    |  |   |        |   |  |   |        |   |  |   | 
|----------------------------------------------------------------------------------------------------------------- | ---------------------------- | ---------------- | ------ | -------------- | - | ---- | ------ | ---- |  | ---- | ------ | ---- |  | - | ------ | -- |  | - | ------ | - |  | - | ------ | - |  | - | 
|                                                                                                                  |                              |                  |        |                |   |     
|                                                                                                                  |                              | Pension Benefits |        | Other Benefits |   |     
|                                                                                                                 
|                                                                                                                 
|                                                                                                                  |                              | 2002             |        | 2003           |   | 2004 |        | 2002 |  | 2003 |        | 2004 |  |  
|                                                                                                                 
|                                                                                                                 
|Components of net periodic benefit
    cost:                                                                      |                              |                  |        |                |   |      |        |      |  |      |        |      |  |   |        |    |  |   |        |   |  |   |        |   |  |  
|Service cost                                                                                                      |                              | $                | 177    |                |   | $    | 181    |      |  | $    | 177    |      |  | $ | 51     |    |  | $ | 50     |   |  | $ | 66     |   |  |  
|Interest cost                                                                                                     |                              |                  | 809    |                |   |      | 742    |      |  |      | 696    |      |  |   | 453    |    |  |   | 478    |   |  |   | 472    |   |  |  
|Expected return on plan assets                                                                                    |                              |                  | (1,598 | )              |   |      | (1,386 | )    |  |      | (1,319 | )    |  |   | (323   | )  |  |   | (315   | ) |  |   | (321   |   |  | )
|Amortization of prior service cost                                                                                |                              |                  | (50    | )              |   |      | (39    | )    |  |      | (43    | )    |  |   | 164    |    |  |   | 149    |   |  |   | 235    |   |  |  
|Amortization of actuarial (gain) loss                                                                             |                              |                  | (145   | )              |   |      | (28    | )    |  |      | 5      |      |  |   | 34     |    |  |   | 108    |   |  |   | 88     |   |  |  
|Amortization of transition (asset) obligation                                                                     |                              |                  | (19    | )              |   |      | (5     | )    |  |      |       |      |  |   | 75     |    |  |   | 66     |   |  |   | 80     |   |  |  
|                                                                                                                 
|                                                                                                                 
|Net periodic benefit cost                                                                                         |                              | $                | (826   | )              |   | $    | (535   | )    |  | $    | (484   | )    |  | $ | 454    |    |  | $ | 536    |   |  | $ | 620    |   |  |  
|                                                                                                                  | Curtailment (gain) loss      |                  |        | (21            | ) |      |        |     |  |      |        |     |  |   |        | 66 |  |   |        |  |  |   |        |  |  |   | 
|                                                                                                                  | Settlement (gain) loss       |                  |        | 181            |   |      |        | 49   |  |      |        |     |  |   |        |   |  |   |        |  |  |   |        |  |  |   | 
|                                                                                                                  | Special termination benefits |                  |        |               |   |      |        |     |  |      |        |     |  |   |        | 13 |  |   |        |  |  |   |        |  |  |   | 
|                                                                                                                 
|Net periodic benefit cost with adjustments                                                                        |                              | $                | (666   | )              |   | $    | (486   | )    |  | $    | (484   | )    |  | $ | 533    |    |  | $ | 536    |   |  | $ | 620    |   |  |  
|                                                                                                                 
|                                                                                                                 
|Weighted-average assumptions used to determine
    net
    periodic benefit cost for years ended
    December 31: |                              |                  |        |                |   |      |        |      |  |      |        |      |  |   |        |    |  |   |        |   |  |   |        |   |  |  
|Discount rate                                                                                                     |                              |                  | 7.25%  |                |   |      | 6.75%  |      |  |      | 6.25%  |      |  |   | 7.25%  |    |  |   | 6.75%  |   |  |   | 6.00%  |   |  |  
|Expected return on plan assets                                                                                    |                              |                  | 9.00%  |                |   |      | 8.50%  |      |  |      | 8.50%  |      |  |   | 8.25%  |    |  |   | 8.00%  |   |  |   | 8.00%  |   |  |  
|Rate of compensation increase                                                                                     |                              |                  | 5.10%  |                |   |      | 5.10%  |      |  |      | 5.10%  |      |  |   | 4.80%  |    |  |   | 4.80%  |   |  |   | 4.80%  |   |  |  
|Health care cost trend rate pre-age 65                                                                            |                              |                  |        |                |   |      |        |      |  |      |        |      |  |   | 8.00%  |    |  |   | 10.00% |   |  |   | 9.00%  |   |  |  
|Health care cost trend rate post-age 65                                                                           |                              |                  |        |                |   |      |        |      |  |      |        |      |  |   | 10.50% |    |  |   | 12.00% |   |  |   | 13.00% |   |  |  

Curtailments and Settlements

Work force reduction activity in 2002 resulted in
a curtailment gain for pensions and curtailment and special
termination benefits charges for other postretirement benefits.

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


Expected Return on Assets
Assumption

Our expected return on plan assets at
December 31, 2004 of 8.5% reflects our long-term
expectation of earnings on assets held in trusts. The expected
return on plan assets reflects asset allocations, investments
strategy and the views of investment managers and other large
pension plan sponsors as well as historical returns. Our asset
returns were approximately 22% in 2003 and 15% in 2004. As of
December 2004, the 5-year average return on our pension assets
was 4.7%, the 10-year average return was 10.8%, and the average
return since inception was 10.9%. The postretirement benefits
rate is slightly lower than the pension rate due to the use of a
taxable postretirement benefits trust.

Plan Assets

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

|                  |       |             |       |         |  |             |    |          |   |      |    |      |   |  |       |   |  |  |    |     |   |  |    |     |   |  | 
|----------------- | ----- | ----------- | ----- | ------- |  | ----------- | -- | -------- | - | ---- | -- | ---- | - |  | ----- | - |  |  | -- | --- | - |  | -- | --- | - |  | 
|                  |       |             |       |         |  |             |    |          |   |      |    |     
|                  |       |             |       |         |  |             |    | Other    |   |     
|                  |       |             |       | Pension |  |             |    | Benefits |   |     
|                 
|                 
|                  |       |             |       |         |  |             |    |         
|                  |       | At          |       |         |  | At          |    |         
|                  |       | December 31 |       |         |  | December 31 |    |         
|                  |       |            
|                  |       |            
|Asset Category    |       | Target      |       | 2003    |  | 2004        |    | Target   |   | 2003 |    | 2004 |   | 
|                 
|                 
|Equity securities |       |             | 55-65 | %       |  |             | 57 | %        |   |      | 58 | %    |   |  | 60-80 | % |  |  | 78 | %   |   |  | 81 | %   |   | 
|Debt securities   |       |             | 15-25 |         |  |             | 19 |          |   |      | 20 |      |   |  | 0-5   |   |  |  | 5  |     |   |  | 3  |     |   | 
|Real estate       |       |             | 10-15 |         |  |             | 10 |          |   |      | 10 |      |   |  | 5-15  |   |  |  | 4  |     |   |  | 4  |     |   | 
|Other             |       |             | 10-15 |         |  |             | 14 |          |   |      | 12 |      |   |  | 15-25 |   |  |  | 13 |     |   |  | 12 |     |   | 
|                 
|                  | Total |             |       |         |  |             |    | 100      | % |      |    | 100  | % |  |       |   |  |  |    | 100 | % |  |    | 100 | % |  | 
|                 

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



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

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



BELLSOUTH
2004      69




---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS CONTINUED


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


BELLSOUTH CORPORATION

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

Cash Flows

CONTRIBUTIONS

Due to the funded status of our pension plans, we
do not expect to make contributions to these plans in 2005.
Consistent with prior years, we expect to contribute cash to the
VEBA trusts to fund other benefit payments. Contributions for
2005 are estimated to be in the range of $450 to $500.

ESTIMATED FUTURE BENEFIT PAYMENTS

The following benefit payments, which reflect
expected future service, as appropriate, are expected to be paid
over the next ten years:

|                |  |          |       |          |  |          |       |  |  |   |      |  
|--------------- |  | -------- | ----- | -------- |  | -------- | ----- |  |  | - | ---- | -
|               
|               
|                |  | Other    |       | Medicare
|                |  | Pension  |       | Benefits |  | Subsidy 
|                |  | Benefits |       | Gross    |  | Receipts
|               
|               
|2005            |  | $        | 998   |          |  | $        | 557   |  |  | $ |     |  
|2006            |  |          | 1,007 |          |  |          | 598   |  |  |   | (32  | )
|2007            |  |          | 1,019 |          |  |          | 640   |  |  |   | (35  | )
|2008            |  |          | 1,043 |          |  |          | 679   |  |  |   | (39  | )
|2009            |  |          | 1,068 |          |  |          | 715   |  |  |   | (43  | )
|Years 2010-2014 |  |          | 5,059 |          |  |          | 3,887 |  |  |   | (284 | )

Cash-Balance Pension Plan

In July 2003, a Federal district court in
Illinois ruled that the benefit formula used in International
Business Machines Corporations (IBM) cash balance pension
plan violated the age discrimination provisions of ERISA. The
IBM decision conflicts with decisions of at least two other
district courts, including most recently a June 2004 decision of
the federal district court in Maryland in a case involving
ARINC, Inc. Proposed regulations validating the cash balance
design have been withdrawn by the Treasury Department while
Congress considers legislative action to clarify the legal
status of cash balance plans under age discrimination rules. At
this time, it is unclear what effect, if any, these court
decisions or Congressional action may have on our tax-qualified
cash balance pension plans or our financial condition.

Supplemental Executive Retirement
Plan

The pension amounts reported above do not include
the supplemental executive retirement plan (SERP), which is an
unfunded nonqualified plan. The net periodic benefit cost
associated with this plan was $58 in 2002, $53 in 2003 and $53
in 2004. Additional information for the plan, which has an
accumulated benefit obligation in excess of plan assets, is:

|                                                                                    |  |             |      |      |  |   |      |   |  | 
|----------------------------------------------------------------------------------- |  | ----------- | ---- | ---- |  | - | ---- | - |  | 
|                                                                                    |  |             |      |     
|                                                                                    |  | December 31 |      |     
|                                                                                    |  |            
|                                                                                    |  |            
|                                                                                    |  | 2003        |      | 2004 |  |  
|                                                                                   
|                                                                                   
|Project benefit obligation                                                          |  | $           | 473  |      |  | $ | 584  |   |  | 
|Accumulated benefit obligation (net amount
    recognized pre-tax)                  |  |             | 429  |      |  |   | 515  |   |  | 
|Fair value of plan assets                                                           |  |             | 0    |      |  |   | 0    |   |  | 
|                                                                                   
|Amounts recognized in the consolidated balance
    sheet at December 31:            |  |             |      |      |  |   |      |   |  | 
|Amount recognized as accrued benefit cost                                           |  |             | (293 | )    |  |   | (320 | ) |  | 
|Additional minimum liability recognized in other
    comprehensive income (pre-tax) |  |             | (136 | )    |  |   | (195 | ) |  | 
|                                                                                   

DEFINED CONTRIBUTION PLANS

We maintain several contributory savings plans
that cover substantially all employees. The BellSouth Retirement
Savings Plan and the Bellsouth Savings and Security Plan
(collectively, the Savings Plans) are tax-qualified defined
contribution plans. Assets of the plans are held by two trusts
(the Trusts) which, in turn, are part of the BellSouth Master
Savings Trust. We match a portion of employees eligible
contributions to the Savings Plans at rates determined annually
by the Board of Directors. During 2004, our matching obligation
was fulfilled with cash contributions to the Savings Plans,
which were recorded as expenses of $94.

The prior periods presented, 2002 and 2003, were
the final two years of our leveraged Employee Stock Ownership
Plan (ESOP) arrangement, which had been incorporated into the
Savings Plans. In that arrangement, the Trusts used loan
proceeds to purchase shares of BellSouth common stock, which
were then held in suspense accounts in the Trusts. Our matching
obligation was fulfilled with shares released from the suspense
accounts semiannually for allocation to participants. During the
term of the leveraged ESOP arrangement, we recognized expense
using the shares allocated accounting method, which combined the
cost of the shares allocated for the period plus interest




70 BELLSOUTH
2004




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##### Table of Contents







incurred, reduced by the dividends used to
service the ESOP debt.

|                                                               |  |                     |      |      |  |      |      |  |  |  |    |   |  | 
|-------------------------------------------------------------- |  | ------------------- | ---- | ---- |  | ---- | ---- |  |  |  | -- | - |  | 
|                                                               |  |                     |      |     
|                                                               |  | For the years Ended |      |     
|                                                               |  | December 31,        |      |     
|                                                               |  |                     |      |     
|                                                               |  |                     |      |     
|                                                               |  | 2002                |      | 2003 |  | 2004 |      | 
|                                                              
|                                                              
|Compensation cost                                              |  | $                   | 38   |      |  | $    | 55   |  |  |  | (a | ) |  | 
|Interest expense                                               |  | $                   | 9    |      |  | $    | 2    |  |  |  |    |   |  | 
|Actual interest on ESOP Notes                                  |  | $                   | 12   |      |  | $    | 2    |  |  |  |    |   |  | 
|Cash contributions, excluding dividends paid to
    the trusts |  | $                   | 84   |      |  | $    | 86   |  |  |  |    |   |  | 
|Dividends paid to the trusts, used for debt
    service        |  | $                   | 34   |      |  | $    | 14   |  |  |  |    |   |  | 
|Shares allocated to participants (millions)                    |  |                     | 58.6 |      |  |      | 63.5 |  |  |  |    |   |  | 
|Shares unallocated (millions)                                  |  |                     | 4.9  |      |  |      |     |  |  |  |    |   |  | 



|    |  |                                                                                                       
|--- |  | ------------------------------------------------------------------------------------------------------
|(a) |  | This table relates only to the leveraged ESOP
    arrangement which was terminated at the end of 2003.

Note M  Financial Instruments

The recorded amounts of cash and cash
equivalents, temporary cash investments, bank loans and
commercial paper approximate fair value due to the short-term
nature of these instruments. The fair value for BSTs
long-term debt is estimated based on the closing market prices
for each issue at December 31, 2003 and 2004. Fair value
estimates for the BellSouth Corporation long-term debt and
interest rate swaps are based on quotes from dealers. Since
judgment is required to develop the estimates, the estimated
amounts presented herein may not be indicative of the amounts
that we could realize in a current market exchange.

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


|                                   |                                  |          |        |            |   |   |        |       |  
|---------------------------------- | -------------------------------- | -------- | ------ | ---------- | - | - | ------ | ----- | -
|                                   |                                  |         
|                                   |                                  | 2003    
|                                  
|                                  
|                                   |                                  | Recorded |        | Estimated 
|                                   |                                  | Amount   |        | Fair Value
|                                  
|                                  
|Assets:                            |                                  |          |        |            |   |   |        |      
|Advance to Cingular                |                                  | $        | 3,812  |            |   | $ | 3,812  |      
|Cost-method investments            |                                  | $        | 382    |            |   | $ | 382    |      
|Debt:                              |                                  |          |        |            |   |   |        |      
|                                   | Issued by BST                    |          | $      | 4,713      |   |   | $      | 4,950 |  
|                                   | Issued by BellSouth Corporation  |          |        | 8,822      |   |   |        | 9,528 |  
|                                   | Issue by Discontinued Operations |          |        | 1,556      |   |   |        | 1,458 |  
|                                   | Other debt and discounts         |          |        | (111       | ) |   |        | (111  | )
|                                   |                                  |         
|                                   |                                  | $        | 14,980 |            |   | $ | 15,825 |      
|Interest rate swaps, net liability |                                  | $        | 75     |            |   | $ | 75     |      

|                                   |                                 |          |        |            |   |   |        |        |  
|---------------------------------- | ------------------------------- | -------- | ------ | ---------- | - | - | ------ | ------ | -
|                                   |                                 |         
|                                   |                                 | 2004    
|                                  
|                                  
|                                   |                                 | Recorded |        | Estimated 
|                                   |                                 | Amount   |        | Fair Value
|                                  
|                                  
|Assets:                            |                                 |          |        |            |   |   |        |       
|Advances to Cingular               |                                 | $        | 4,460  |            |   | $ | 4,460  |       
|Cost-method investments            |                                 | $        | 921    |            |   | $ | 921    |       
|Debt:                              |                                 |          |        |            |   |   |        |       
|                                   | Issued by BST                   |          | $      | 4,482      |   |   | $      | 4,699  |  
|                                   | Issued by BellSouth Corporation |          |        | 16,178     |   |   |        | 16,999 |  
|                                   | Other debt and discounts        |          |        | (77        | ) |   |        | (76    | )
|                                   |                                 |         
|                                   |                                 | $        | 20,583 |            |   | $ | 21,622 |       
|Interest rate swaps, net liability |                                 | $        | 29     |            |   | $ | 29     |       

DERIVATIVE FINANCIAL INSTRUMENTS

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

INTEREST RATE SWAPS

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

|                                               |                                  |                     |   |       |  |  |   |       |  |  | 
|---------------------------------------------- | -------------------------------- | ------------------- | - | ----- |  |  | - | ----- |  |  | 
|                                               |                                  |                    
|                                               |                                  | For the Years Ended
|                                               |                                  | December 31,       
|                                               |                                  |                    
|                                               |                                  | 2003                |   | 2004  |  | 
|                                              
|                                              
|                                              
|Pay fixed/receive variable (cash flow hedge):  |                                  |                     |   |       |  | 
|                                               | Weighted average notional amount |                     | $ | 1,120 |  |  | $ | 1,000 |  |  | 
|                                               | Rate paid                        |                     |   | 5.75% |  |  |   | 5.90% |  |  | 
|                                               | Rate received                    |                     |   | 1.22% |  |  |   | 1.36% |  |  | 
|Pay variable/receive fixed (fair value hedge): |                                  |                     |   |       |  | 
|                                               | Weighted average notional amount |                     | $ | 125   |  |  | $ | 955   |  |  | 
|                                               | Rate paid                        |                     |   | 1.09% |  |  |   | 3.25% |  |  | 
|                                               | Rate received                    |                     |   | 2.22% |  |  |   | 5.53% |  |  | 

|                                               |                 |              |   |       |  |  |   |       |  |  | 
|---------------------------------------------- | --------------- | ------------ | - | ----- |  |  | - | ----- |  |  | 
|                                               |                 |             
|                                               |                 | As of       
|                                               |                 | December 31,
|                                               |                 |             
|                                               |                 | 2003         |   | 2004  |  | 
|                                              
|                                              
|                                              
|Pay fixed/receive variable (cash flow hedge):  |                 |              |   |       |  | 
|                                               | Notional amount |              | $ | 1,120 |  |  | $ | 1,000 |  |  | 
|Pay variable/receive fixed (fair value hedge): |                 |              |   |       |  | 
|                                               | Notional amount |              | $ | 500   |  |  | $ | 1,400 |  |  | 



BELLSOUTH
2004      71




---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS CONTINUED


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


BELLSOUTH CORPORATION

The change in fair market value for derivatives
designated as hedging the exposure to variable cash flows of a
forecasted transaction is recognized as a component of other
comprehensive income, net of tax impacts. The change in fair
market value for derivatives designated as hedging the exposure
to changes in the fair value of a recognized asset or liability,
is recognized in earnings in the period of change together with
the offsetting loss or gain on the hedged item attributable to
the risk being hedged. During 2004, the change in value of our
fair value hedges was completely offset by the change in the
fair value of the hedged items, resulting in no impact to net
income. The cash flow swaps mature in 2005 and the fair value
swaps mature in 2008-2009.

CONCENTRATIONS OF CREDIT RISK

Financial instruments that potentially subject us
to credit risk consist principally of trade accounts receivable.
Concentrations of credit risk with respect to these receivables,
other than those from long distance carriers, are limited due to
the composition of the customer base, which includes a large
number of individuals and businesses. Accounts receivable from
long distance carriers totaled $246 at December 31, 2003
and $296 at December 31, 2004.

Note N  Shareholders Equity

COMMON STOCK AUTHORIZED

Our articles of incorporation authorize the
issuance of 8,650,000,000 shares of common stock, par value $1
per share. Our Board of Directors is authorized to create from
the unissued common stock one or more series, and, prior to the
issuance of any shares in any particular series, to fix the
voting powers, preferences, designations, rights,
qualifications, limitations or restrictions of such series. The
Board has not created any series of common stock.

PREFERRED STOCK AUTHORIZED

Our articles of incorporation authorize
100 million shares of cumulative first preferred stock
having a par value of $1 per share, of which 30 million
shares have been reserved and designated series B for
possible issuance under a shareholder rights plan. As of
December 31, 2004, no preferred shares had been issued. The
series A first preferred stock was created for a previous
shareholder rights plan which has expired.

SHAREHOLDER RIGHTS PLAN

In 1999, we adopted a shareholder rights plan by
declaring a dividend of one right for each share of common stock
then outstanding and to be issued thereafter. This plan was
amended in 2005. Each right entitles shareholders to buy one
one-thousandth of a share of series B first preferred stock
for $200.00 per share. The rights may be exercised only if a
person or group acquires 15% of the common stock of BellSouth
without the prior approval of the Board of Directors or
announces a tender or exchange offer that would result in
ownership of 15% or more of the common stock. If a person or
group acquires 15% of BellSouths stock without prior Board
approval, other shareholders are then allowed to purchase
BellSouth common stock, or units of preferred stock with the
same voting and economic characteristics, at half price. The
rights currently trade with BellSouth common stock and may be
redeemed by the Board of Directors for one cent per right until
they become exercisable, and thereafter under certain
circumstances. The rights expire in December 2009.

SHARES HELD IN TRUST AND TREASURY

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

|                                  |  |               |     |        |  |               |       |        |  |  |     |  |  |   |       | 
|--------------------------------- |  | ------------- | --- | ------ |  | ------------- | ----- | ------ |  |  | --- |  |  | - | ----- | 
|                                  |  |               |     |       
|                                  |  | 2003          |     | 2004  
|                                 
|                                 
|                                  |  | Shares        |     |        |  | Shares        |       |       
|                                  |  | (in millions) |     | Amount |  | (in millions) |       | Amount
|                                 
|                                 
|Shares held in treasury           |  |               | 153 |        |  | $             | 5,333 |        |  |  | 163 |  |  | $ | 5,524 | 
|Shares held by grantor trusts     |  |               | 37  |        |  |               | 659   |        |  |  | 26  |  |  |   | 380   | 
|                                 
|Shares held in trust and treasury |  |               | 190 |        |  | $             | 5,992 |        |  |  | 189 |  |  | $ | 5,904 | 
|                                 

Treasury Shares

Shares held in trust and treasury include
treasury share purchases made by the company primarily in open
market transactions under repurchase plans and to satisfy shares
issued in connection with employee and director share plans. The
following table summarizes activity with respect to share
repurchases for the periods presented:

|      |  |               |      |           |  |           |       |  |  |   |       | 
|----- |  | ------------- | ---- | --------- |  | --------- | ----- |  |  | - | ----- | 
|     
|     
|      |  | Number of     |      |          
|      |  | shares        |      | Aggregate |  | Average  
|      |  | purchased (in |      | purchase  |  | price per
|      |  | millions)     |      | price     |  | share    
|      |  |               |      |           |  |          
|     
|     
|2002  |  |               | 22.3 |           |  | $         | 591   |  |  | $ | 26.47 | 
|2003  |  |               | 35.0 |           |  | $         | 858   |  |  | $ | 24.50 | 
|2004  |  |               | 5.6  |           |  | $         | 146   |  |  | $ | 26.13 | 
|     
|Total |  |               | 55.4 |           |  | $         | 1,360 |  |  | $ | 24.55 | 
|     

We reissued 4.9 million shares in 2002,
4.5 million shares in 2003 and 6.8 million shares in
2004 in connection with various employee and director benefit
plans.


Grantor Trusts

We have grantor trusts that are designed to
provide funding for the benefits payable under certain
nonqualified benefit plans. The trusts are funded with shares of
BellSouth stock and marketable securities. The trusts are
irrevocable,



72 BELLSOUTH
2004




---



##### Table of Contents







and assets contributed to the trusts can only be
used to pay such benefits with certain exceptions. These trusts
are wholly owned by BellSouth and its subsidiaries and are
consolidated in our financial statements. Accordingly, the
shares of BellSouth stock held by the trusts have been
classified as a reduction to shareholders equity in the
consolidated balance sheets and are not considered in the
computation of shares outstanding for financial reporting
purposes.

OTHER COMPREHENSIVE INCOME

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

|                                                   |  |      |      |      |  |   |      |   |  | 
|-------------------------------------------------- |  | ---- | ---- | ---- |  | - | ---- | - |  | 
|                                                   |  | 2003 |      | 2004 |  |  
|                                                  
|                                                  
|Cumulative foreign currency translation adjustment |  | $    | (444 | )    |  | $ | (79  | ) |  | 
|Minimum pension liability adjustment               |  |      | (89  | )    |  |   | (129 | ) |  | 
|Net unrealized losses on derivatives               |  |      | (56  | )    |  |   | (12  | ) |  | 
|Net unrealized gains (losses) on securities        |  |      | 4    |      |  |   | 63   |   |  | 
|                                                  
|                                                   |  | $    | (585 | )    |  | $ | (157 | ) |  | 
|                                                  

Accumulated other comprehensive income (loss) for
our discontinued operations included in the amounts above was
$(458) as of December 31, 2003 and $(77) as of
December 31, 2004. Total comprehensive income details are
presented in the table below.


|                                                                             |                                                                                                              |                     |       |      |   |      |       |      |   |   |       |     |   |  | 
|---------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------ | ------------------- | ----- | ---- | - | ---- | ----- | ---- | - | - | ----- | --- | - |  | 
|                                                                             |                                                                                                              |                     |       |     
|                                                                             |                                                                                                              | For the Years Ended |       |     
|                                                                             |                                                                                                              | December 31,        |       |     
|                                                                             |                                                                                                              |                    
|                                                                             |                                                                                                              |                    
|Total Comprehensive Income                                                   |                                                                                                              | 2002                |       | 2003 |   | 2004 |       |     
|                                                                            
|                                                                            
|Net Income                                                                   |                                                                                                              | $                   | 1,323 |      |   | $    | 3,904 |      |   | $ | 4,758 |     |   | 
|Foreign currency translation(1):                                             |                                                                                                              |                     |       |      |   |      |       |      |   |   |       |     |   | 
|                                                                             | Adjustments                                                                                                  |                     |       | (333 | ) |      |       | (103 | ) |   |       | (43 | ) |  | 
|                                                                             | Sale of foreign entities                                                                                     |                     |       | (97  | ) |      |       | 268  |   |   |       | 408 |   |  | 
|                                                                             |                                                                                                              |                    
|                                                                             |                                                                                                              |                     | (430  | )    |   |      | 165   |      |   |   | 365   |     |   | 
|                                                                             |                                                                                                              |                    
|Minimum pension liability adjustment, net of tax
    of $5, $(10), and $(20) |                                                                                                              |                     | 9     |      |   |      | (18   | )    |   |   | (40   | )   |   | 
|Deferred gains (losses) on derivatives:                                      |                                                                                                              |                     |       |      |   |      |       |      |   |   |       |     |   | 
|                                                                             | Deferred gains (losses), net of tax of $21, $8,
    and $20                                                  |                     |       | 33   |   |      |       | 14   |   |   |       | 36  |   |  | 
|                                                                             | Reclassification adjustment for (gains) losses
    included in net income, net of tax of $(11), $(7), and $0 |                     |       | (20  | ) |      |       | (13  | ) |   |       | 8   |   |  | 
|                                                                             |                                                                                                              |                    
|                                                                             |                                                                                                              |                     | 13    |      |   |      | 1     |      |   |   | 44    |     |   | 
|                                                                             |                                                                                                              |                    
|Unrealized gains (losses) on securities:                                     |                                                                                                              |                     |       |      |   |      |       |      |   |   |       |     |   | 
|                                                                             | Unrealized holdings gains (losses), net of tax of
    $(14), $21, and $33                                    |                     |       | (27  | ) |      |       | 39   |   |   |       | 57  |   |  | 
|                                                                             | Reclassification adjustment for (gains) losses
    included in net income, net of tax of $(6), $(17), and $1 |                     |       | (11  | ) |      |       | (32  | ) |   |       | 2   |   |  | 
|                                                                             |                                                                                                              |                    
|                                                                             |                                                                                                              |                     | (38   | )    |   |      | 7     |      |   |   | 59    |     |   | 
|                                                                             |                                                                                                              |                    
|Total comprehensive income                                                   |                                                                                                              | $                   | 877   |      |   | $    | 4,059 |      |   | $ | 5,186 |     |   | 
|                                                                            



|    |                                                                                                                                                                                                      
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Foreign currency translation amounts had no
    tax impacts in 2002 and 2003. In 2004, the Adjustments are net
    of tax of $42. There were no tax impacts on the 2004 sale of
    foreign entities.

Note O  Stock Compensation Plans

We grant stock-based compensation awards to key
employees under several plans. In April 2004, BellSouth
shareholders approved the adoption of The BellSouth Corporation
Stock and Incentive Compensation Plan (the Stock Plan), which
provides for various types of grants, including stock options,
restricted stock, and performance-based awards. One share of
BellSouth common stock is the underlying security for any award.
The number of shares available for future grants under the Stock
Plan shall not exceed 80 million and shall be reduced by
awards granted and increased by shares tendered in option
exercises. Prior to adoption of the Stock Plan, stock options
and other stock-based awards were granted under the BellSouth
Corporation Stock Plan and the BellSouth Corporation Stock
Option Plan. We adopted the fair value recognition provisions of
SFAS No. 123, Accounting for Stock-Based
Compensation, effective January 1, 2003 using the
retroactive restatement method.

Given trends in long-term compensation awards and
market conditions, over the last few years we have moved toward
granting a mix of restricted stock and performance share units
in lieu of stock options. The table below summarizes the types
and numbers of awards granted and total compensation cost for
each type of award included in our results of operations:


|                        |  |                |            |                   |  |      |            |      |  |      |           |      |  |   |     |  |  |   |     |  |  |   |     |  |  | 
|----------------------- |  | -------------- | ---------- | ----------------- |  | ---- | ---------- | ---- |  | ---- | --------- | ---- |  | - | --- |  |  | - | --- |  |  | - | --- |  |  | 
|                        |  |                |            |                   |  |     
|                        |  | Awards Granted |            | Compensation Cost |  |     
|                        |  |                |            |                  
|                        |  |                |            |                  
|                        |  | 2002           |            | 2003              |  | 2004 |            | 2002 |  | 2003 |           | 2004 |  |  
|                        |  |               
|                        |  |               
|Stock options           |  |                | 19,376,330 |                   |  |      | 14,374,127 |      |  |      | 369,076   |      |  | $ | 159 |  |  | $ | 114 |  |  | $ | 78  |  |  | 
|Restricted stock        |  |                | 1,182,000  |                   |  |      | 772,250    |      |  |      | 2,264,300 |      |  |   | 12  |  |  |   | 23  |  |  |   | 43  |  |  | 
|Performance share units |  |                | 545,050    |                   |  |      | 1,244,700  |      |  |      | 2,699,400 |      |  |   | 5   |  |  |   | 15  |  |  |   | 40  |  |  | 
|                       
|Totals                  |  |                | 21,103,380 |                   |  |      | 16,391,077 |      |  |      | 5,332,776 |      |  | $ | 176 |  |  | $ | 152 |  |  | $ | 161 |  |  | 
|                       

Stock-based compensation cost related to stock
options for our discontinued operations included in the amounts
above was $14 in 2002, $11 in 2003, and $8 in 2004. As of
December 31, 2004, there was $160 of total unrecognized
compensation cost related to nonvested awards, which will




BELLSOUTH
2004      73




---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS CONTINUED


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


BELLSOUTH CORPORATION

be amortized over the remaining applicable
vesting period of each award.

STOCK OPTION AWARDS

Stock options granted under the plans entitle
recipients 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 generally
become exercisable at the end of three to five years, have a
term of ten years, and provide for accelerated vesting if there
is a change in control (as defined in the plans). A summary of
option activity under the plans is presented below:

|                                                                                        |  |      |             |      |  |      |             |   |  |  |             |  
|--------------------------------------------------------------------------------------- |  | ---- | ----------- | ---- |  | ---- | ----------- | - |  |  | ----------- | -
|                                                                                        |  | 2002 |             | 2003 |  | 2004
|                                                                                       
|                                                                                       
|Options outstanding at January 1                                                        |  |      | 93,467,300  |      |  |      | 106,328,465 |   |  |  | 112,840,873 |  
|Options granted                                                                         |  |      | 19,376,330  |      |  |      | 14,374,127  |   |  |  | 369,076     |  
|Options exercised                                                                       |  |      | (3,757,663  | )    |  |      | (4,495,974  | ) |  |  | (4,832,564  | )
|Options forfeited                                                                       |  |      | (2,757,502  | )    |  |      | (3,365,745  | ) |  |  | (2,613,812  | )
|Options outstanding at December 31                                                      |  |      | 106,328,465 |      |  |      | 112,840,873 |   |  |  | 105,763,573 |  
|                                                                                       
|Weighted-average option prices per common share:                                        |  |      |             |      |  |      |             |   |  |  |             |  
|Outstanding at January 1                                                                |  |      | $35.10      |      |  |      | $35.68      |   |  |  | $34.52      |  
|Granted at fair market value                                                            |  |      | $35.98      |      |  |      | $21.96      |   |  |  | $27.25      |  
|Exercised                                                                               |  |      | $17.55      |      |  |      | $17.94      |   |  |  | $18.54      |  
|Forfeited                                                                               |  |      | $42.44      |      |  |      | $38.85      |   |  |  | $36.37      |  
|Outstanding at December 31                                                              |  |      | $35.68      |      |  |      | $34.52      |   |  |  | $35.19      |  
|Weighted-average fair value of options granted at
    fair market value during the year |  |      | $ 9.39      |      |  |      | $ 4.20      |   |  |  | $ 5.66      |  
|Options exercisable at December 31                                                      |  |      | 64,431,978  |      |  |      | 70,615,852  |   |  |  | 75,627,927  |  
|Shares available for grant at December 31                                               |  |      | 48,345,455  |      |  |      | 54,881,922  |   |  |  | 79,886,521  |  

The total intrinsic value of
options exercised during the years ended December 31, 2002,
2003, and 2004 was $59, $40, and $48, respectively.

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:


|                        |  |      |       |      |  |      |       |  |  |  |       | 
|----------------------- |  | ---- | ----- | ---- |  | ---- | ----- |  |  |  | ----- | 
|                        |  | 2002 |       | 2003 |  | 2004
|                       
|                       
|Expected life (years)   |  |      | 5     |      |  |      | 5     |  |  |  | 5     | 
|Dividend yield          |  |      | 2.19% |      |  |      | 3.87% |  |  |  | 3.67% | 
|Expected volatility     |  |      | 29.0% |      |  |      | 29.0% |  |  |  | 29.0% | 
|Risk-free interest rate |  |      | 4.03% |      |  |      | 2.65% |  |  |  | 3.46% | 

The following table summarizes
information about stock options outstanding at December 31,
2004:

|            |                 |             |  |             |             |          |  |          |      |          |  |   |       |  |  |  |            |  |  |   |       | 
|----------- | --------------- | ----------- |  | ----------- | ----------- | -------- |  | -------- | ---- | -------- |  | - | ----- |  |  |  | ---------- |  |  | - | ----- | 
|            |                 |             |  |            
|            |                 | Outstanding |  | Exercisable
|            |                 |             |  |            
|            |                 |             |  | Weighted    |             |          |  | Weighted
|            |                 |             |  | Weighted    |             | Average  |  |          |      | Average 
|Exercise    |                 |             |  | Average     |             | Exercise |  |          |      | Exercise
|Price Range |                 | Options     |  | Life(a)     |             | Price    |  | Options  |      | Price   
|           
|           
|            | $14.77 - $21.28 |             |  |             | 6,525,924   |          |  |          | 0.93 |          |  | $ | 20.34 |  |  |  | 6,519,624  |  |  | $ | 20.34 | 
|            | $21.38 - $22.19 |             |  |             | 20,723,475  |          |  |          | 5.91 |          |  | $ | 21.88 |  |  |  | 7,834,775  |  |  | $ | 22.11 | 
|            | $22.20 - $30.91 |             |  |             | 17,886,842  |          |  |          | 4.61 |          |  | $ | 29.86 |  |  |  | 12,801,233 |  |  | $ | 30.63 | 
|            | $31.03 - $41.00 |             |  |             | 16,367,327  |          |  |          | 6.76 |          |  | $ | 38.96 |  |  |  | 5,097,089  |  |  | $ | 38.72 | 
|            | $41.26 - $51.78 |             |  |             | 44,260,005  |          |  |          | 5.21 |          |  | $ | 44.38 |  |  |  | 43,375,206 |  |  | $ | 44.39 | 
|            |                 |             |  |             |             |          |  |          |      |          |  |   |       |  |  |  |            |  |  |   |       | 
|            | $14.77 - $51.78 |             |  |             | 105,763,573 |          |  |          | 5.22 |          |  | $ | 35.19 |  |  |  | 75,627,927 |  |  | $ | 37.30 | 



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

RESTRICTED STOCK AWARDS

Restricted stock awards granted to key employees
under the plans are settled by issuing shares of common stock at
the vesting date. Generally, the restrictions lapse in full on
the third anniversary of the grant date, or on a pro rata basis
on each of the first three anniversaries of the grant date. The
vesting of restricted stock accelerates if there is a change in
control (as defined in the plans). The grant date fair value of
the restricted stock is expensed over the period during which
the restrictions lapse. The shares represented by restricted
stock awards are considered outstanding at the grant date, as
the recipients are entitled to dividends and voting rights. The
total fair value of restricted stock vested during the years
ended December 31, 2002, 2003, and 2004, was $2, $13, and
$11, respectively. A summary of restricted stock activity under
the plans is presented below:

|                                                                  |  |      |           |      |  |      |           |   |  |  |           |  
|----------------------------------------------------------------- |  | ---- | --------- | ---- |  | ---- | --------- | - |  |  | --------- | -
|                                                                  |  | 2002 |           | 2003 |  | 2004
|                                                                 
|                                                                 
|Restricted shares outstanding at January 1                        |  |      | 1,058,568 |      |  |      | 2,163,250 |   |  |  | 2,267,667 |  
|Restricted shares granted                                         |  |      | 1,182,000 |      |  |      | 772,250   |   |  |  | 2,264,300 |  
|Restricted shares vested                                          |  |      | (65,814   | )    |  |      | (489,691  | ) |  |  | (407,286  | )
|Restricted shares forfeited                                       |  |      | (11,504   | )    |  |      | (178,142  | ) |  |  | (149,830  | )
|Restricted shares outstanding at December 31                      |  |      | 2,163,250 |      |  |      | 2,267,667 |   |  |  | 3,974,851 |  
|                                                                 
|Weighted-average grant date stock price per
    restricted share: |  |      |           |      |  |      |           |   |  |  |           |  
|Outstanding at January 1                                          |  |      | $41.82    |      |  |      | $34.69    |   |  |  | $29.91    |  
|Granted                                                           |  |      | $28.78    |      |  |      | $22.11    |   |  |  | $27.60    |  
|Vested                                                            |  |      | $41.58    |      |  |      | $36.45    |   |  |  | $34.28    |  
|Forfeited                                                         |  |      | $43.08    |      |  |      | $36.20    |   |  |  | $27.31    |  
|Outstanding at December 31                                        |  |      | $34.69    |      |  |      | $29.91    |   |  |  | $28.24    |  
|                                                                 



74 BELLSOUTH
2004




---



##### Table of Contents







PERFORMANCE SHARE UNIT AWARDS

Performance share units granted to key employees
are settled in cash based on an average stock price at the end
of the three-year performance period multiplied by the number of
units earned. The number of performance share units actually
earned by recipients is based on the achievement of certain
performance goals as defined by the terms of the awards, and can
range from 0% to 150% of the number of units granted. At the end
of the performance period, recipients also receive a cash
payment equal to the dividends paid on a share of BellSouth
stock during the performance period for each performance share
unit earned. Vesting accelerates and the performance period is
modified if there is a change in control (as defined in the
plans). Performance share unit expense is recognized over the
performance period based on the stock price at each reporting
date and the expected outcome of the performance condition;
expense is also recognized for dividends accrued during the
performance period. The total cash payments for units vested in
2003 and 2004 were $0 and $12, respectively. A summary of
performance share unit activity under the plans is presented
below:

|                                                                        |  |      |           |      |  |      |           |   |  |  |           |  
|----------------------------------------------------------------------- |  | ---- | --------- | ---- |  | ---- | --------- | - |  |  | --------- | -
|                                                                        |  | 2002 |           | 2003 |  | 2004
|                                                                       
|                                                                       
|Performance share units:                                                |  |      |           |      |  |      |           |   |  |  |           |  
|Outstanding at January 1                                                |  |      | 482,450   |      |  |      | 1,017,050 |   |  |  | 1,718,400 |  
|Units granted                                                           |  |      | 545,050   |      |  |      | 1,244,700 |   |  |  | 2,699,400 |  
|Units vested                                                            |  |      |          |      |  |      | (448,200  | ) |  |  | (504,815  | )
|Units forfeited                                                         |  |      | (10,450   | )    |  |      | (95,150   | ) |  |  | (124,203  | )
|Outstanding at December 31                                              |  |      | 1,017,050 |      |  |      | 1,718,400 |   |  |  | 3,788,782 |  
|                                                                       
|Weighted-average grant date stock price per
    performance share unit: |  |      | $38.68    |      |  |      | $26.71    |   |  |  | $28.22    |  
|                                                                       

Note P  Segment Information

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

We own an approximate 40% economic interest in
Cingular Wireless, and share joint control of the venture with
SBC. We account for the investment under the equity method. For
management purposes we evaluate our domestic wireless segment
based on our proportionate share of Cingulars results.
Accordingly, results for our domestic wireless segment reflect
the proportional consolidation of 40% of Cingulars results.


The following table provides information for each
operating segment:


|                                                  |                        |      |        |        |  |      |        |        |  |   |        |        |  |  | 
|------------------------------------------------- | ---------------------- | ---- | ------ | ------ |  | ---- | ------ | ------ |  | - | ------ | ------ |  |  | 
|                                                  |                        | 2002 |        | 2003   |  | 2004 |        |       
|                                                 
|                                                 
|                                                 
|Communications Group                              |                        |      |        |        |  |      |        |        |  |   |        |        |  | 
|External revenues                                 |                        | $    | 18,334 |        |  | $    | 18,255 |        |  | $ | 18,289 |        |  | 
|Intersegment revenues                             |                        |      | 155    |        |  |      | 193    |        |  |   | 163    |        |  | 
|                                                  | Total segment revenues |      |        | 18,489 |  |      |        | 18,448 |  |   |        | 18,452 |  |  | 
|Depreciation and amortization                     |                        |      | 4,161  |        |  |      | 3,771  |        |  |   | 3,593  |        |  | 
|Segment operating income                          |                        |      | 4,916  |        |  |      | 4,843  |        |  |   | 4,628  |        |  | 
|Interest expense                                  |                        |      | 498    |        |  |      | 407    |        |  |   | 367    |        |  | 
|Income taxes                                      |                        |      | 1,671  |        |  |      | 1,645  |        |  |   | 1,563  |        |  | 
|Segment net income                                |                        | $    | 2,751  |        |  | $    | 2,829  |        |  | $ | 2,727  |        |  | 
|Segment assets                                    |                        | $    | 31,925 |        |  | $    | 32,354 |        |  | $ | 32,303 |        |  | 
|Capital expenditures                              |                        | $    | 3,337  |        |  | $    | 2,824  |        |  | $ | 3,018  |        |  | 
|                                                 
|Domestic Wireless (40% proportional
    interest) |                        |      |        |        |  |      |        |        |  |   |        |        |  | 
|External revenues                                 |                        | $    | 5,961  |        |  | $    | 6,193  |        |  | $ | 7,774  |        |  | 
|Intersegment revenues                             |                        |      |       |        |  |      |       |        |  |   |       |        |  | 
|                                                  | Total segment revenues |      |        | 5,961  |  |      |        | 6,193  |  |   |        | 7,774  |  |  | 
|Depreciation and amortization                     |                        |      | 740    |        |  |      | 835    |        |  |   | 1,232  |        |  | 
|Segment operating income                          |                        |      | 1,086  |        |  |      | 915    |        |  |   | 736    |        |  | 
|Interest expense                                  |                        |      | 364    |        |  |      | 343    |        |  |   | 360    |        |  | 
|Net earnings (losses) of equity affiliates        |                        |      | (106   | )      |  |      | (129   | )      |  |   | (156   | )      |  | 
|Income taxes                                      |                        |      | 224    |        |  |      | 159    |        |  |   | 67     |        |  | 
|Segment net income                                |                        | $    | 357    |        |  | $    | 261    |        |  | $ | 129    |        |  | 
|Segment assets                                    |                        | $    | 9,654  |        |  | $    | 10,212 |        |  | $ | 32,895 |        |  | 
|Capital expenditures                              |                        | $    | 1,234  |        |  | $    | 1,094  |        |  | $ | 1,380  |        |  | 
|Advertising & Publishing Group                    |                        |      |        |        |  |      |        |        |  |  
|External revenues                                 |                        | $    | 2,134  |        |  | $    | 2,033  |        |  | $ | 2,005  |        |  | 
|Intersegment revenues                             |                        |      | 23     |        |  |      | 17     |        |  |   | 14     |        |  | 
|                                                  | Total segment revenues |      |        | 2,157  |  |      |        | 2,050  |  |   |        | 2,019  |  |  | 
|Depreciation and amortization                     |                        |      | 29     |        |  |      | 26     |        |  |   | 28     |        |  | 
|Segment operating income                          |                        |      | 898    |        |  |      | 973    |        |  |   | 954    |        |  | 
|Interest expense                                  |                        |      | 12     |        |  |      | 7      |        |  |   | 8      |        |  | 
|Income taxes                                      |                        |      | 340    |        |  |      | 368    |        |  |   | 363    |        |  | 
|Segment net income                                |                        | $    | 545    |        |  | $    | 600    |        |  | $ | 583    |        |  | 
|Segment assets                                    |                        | $    | 1,703  |        |  | $    | 1,002  |        |  | $ | 1,057  |        |  | 
|Capital expenditures                              |                        | $    | 29     |        |  | $    | 28     |        |  | $ | 29     |        |  | 

RECONCILIATION TO

CONSOLIDATED FINANCIAL INFORMATION


|                                           |  |      |        |      |  |      |        |   |  |   |        |   |  | 
|------------------------------------------ |  | ---- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | - |  | 
|                                           |  | 2002 |        | 2003 |  | 2004 |        |  
|                                          
|                                          
|                                          
|Operating revenues                         |  |      |        |      |  |      |        |   |  |   |        |   |  | 
|Total reportable segments                  |  | $    | 26,607 |      |  | $    | 26,691 |   |  | $ | 28,245 |   |  | 
|Cingular proportional consolidation        |  |      | (5,961 | )    |  |      | (6,193 | ) |  |   | (7,774 | ) |  | 
|Advertising & Publishing accounting change |  |      | (49    | )    |  |      |       |   |  |   |       |   |  | 
|Unbilled receivable adjustment             |  |      | (163   | )    |  |      |       |   |  |   |       |   |  | 
|Refund of customer late fees in Florida    |  |      | (108   | )    |  |      |       |   |  |   |       |   |  | 
|South Carolina regulatory settlement       |  |      |       |      |  |      |       |   |  |   | (50    | ) |  | 
|Corporate, eliminations and other          |  |      | (119   | )    |  |      | (157   | ) |  |   | (121   | ) |  | 
|                                          
|Total consolidated                         |  | $    | 20,207 |      |  | $    | 20,341 |   |  | $ | 20,300 |   |  | 
|                                          



BELLSOUTH
2004      75




---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS CONTINUED


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


BELLSOUTH CORPORATION

|                                                                |  |      |        |      |  |      |       |   |  |   |       |   |  | 
|--------------------------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ----- | - |  | - | ----- | - |  | 
|                                                                |  | 2002 |        | 2003 |  | 2004 |       |  
|                                                               
|                                                               
|                                                               
|Operating income                                                |  |      |        |      |  |      |       |   |  |   |       |   |  | 
|Total reportable segments                                       |  | $    | 6,900  |      |  | $    | 6,731 |   |  | $ | 6,318 |   |  | 
|Cingular proportional consolidation                             |  |      | (1,086 | )    |  |      | (915  | ) |  |   | (736  | ) |  | 
|Unbilled receivable adjustment                                  |  |      | (163   | )    |  |      |      |   |  |   |      |   |  | 
|Restructuring charge and asset impairment                       |  |      | (907   | )    |  |      | (158  | ) |  |   | (29   | ) |  | 
|Pension settlement loss                                         |  |      | (167   | )    |  |      | (47   | ) |  |   |      |   |  | 
|Refund of customer late fees in Florida                         |  |      | (108   | )    |  |      |      |   |  |   |      |   |  | 
|South Carolina regulatory settlement                            |  |      |       |      |  |      |      |   |  |   | (53   | ) |  | 
|Hurricane-related expenses                                      |  |      |       |      |  |      |      |   |  |   | (164  | ) |  | 
|Corporate, eliminations and other                               |  |      | (15    | )    |  |      | (54   | ) |  |   | (47   | ) |  | 
|                                                               
|Total consolidated                                              |  | $    | 4,454  |      |  | $    | 5,557 |   |  | $ | 5,289 |   |  | 
|                                                               
|                                                               
|Net income                                                      |  |      |        |      |  |      |       |   |  |   |       |   |  | 
|Total reportable segments                                       |  | $    | 3,653  |      |  | $    | 3,690 |   |  | $ | 3,439 |   |  | 
|Unbilled receivable adjustment                                  |  |      | (101   | )    |  |      |      |   |  |   |      |   |  | 
|Restructuring charge and asset impairment                       |  |      | (584   | )    |  |      | (97   | ) |  |   | (18   | ) |  | 
|Pension settlement loss                                         |  |      | (100   | )    |  |      | (29   | ) |  |   |       |   |  | 
|Refund of customer late fees in Florida                         |  |      | (70    | )    |  |      |      |   |  |   |      |   |  | 
|Net gain (loss) on ownership transactions                       |  |      | 857    |      |  |      |      |   |  |   | 295   |   |  | 
|Net gains (losses) on sale or impairment of
    securities      |  |      | (212   | )    |  |      | (5    | ) |  |   |      |   |  | 
|Early extinguishment of debt                                    |  |      | (22    | )    |  |      | (11   | ) |  |   |      |   |  | 
|South Carolina regulatory settlement                            |  |      |       |      |  |      |      |   |  |   | (33   | ) |  | 
|Hurricane-related expenses                                      |  |      |       |      |  |      |      |   |  |   | (100  | ) |  | 
|Wireless merger integration costs and fair value
    adjustment |  |      |       |      |  |      |      |   |  |   | (66   | ) |  | 
|Cingular lease accounting adjustments                           |  |      |       |      |  |      |      |   |  |   | (43   | ) |  | 
|Income (loss) from discontinued operations                      |  |      | (867   | )    |  |      | 101   |   |  |   | 1,364 |   |  | 
|Cumulative effect of changes in accounting
    principle        |  |      | (1,285 | )    |  |      | 315   |   |  |   |      |   |  | 
|Corporate, eliminations and other                               |  |      | 54     |      |  |      | (60   | ) |  |   | (80   | ) |  | 
|                                                               
|Total consolidated                                              |  | $    | 1,323  |      |  | $    | 3,904 |   |  | $ | 4,758 |   |  | 
|                                                               

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


Reconciling items are transactions or events that
are included in reported consolidated results but are excluded
from segment results due to their nonrecurring or nonoperational
nature. Net gain (loss) on ownership transactions include: in
2002, a gain from the conversion of our ownership interest in
E-Plus; in 2004, a gain on the sale of our operations in Denmark.


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


|      |                   |        |   |               |  |       |   |       |  |  |   |        |  |  | 
|----- | ----------------- | ------ | - | ------------- |  | ----- | - | ----- |  |  | - | ------ |  |  | 
|      |                   | United |   | (1)           |  |       |   |      
|      |                   | States |   | International |  | Total |   |      
|     
|     
|     
|2002: |                   |        |   |               |  |       |   |       |  |  |   |        |  | 
|      | Revenues          |        | $ | 20,207        |  |       | $ | 2,233 |  |  | $ | 20,207 |  |  | 
|      | Long-lived assets |        |   | 39,106        |  |       |   | 2,511 |  |  |   | 41,617 |  |  | 
|     
|2003: |                   |        |   |               |  |       |   |       |  |  |   |        |  | 
|      | Revenues          |        | $ | 20,341        |  |       | $ | 2,294 |  |  | $ | 20,341 |  |  | 
|      | Long-lived assets |        |   | 38,537        |  |       |   | 2,316 |  |  |   | 40,853 |  |  | 
|     
|2004: |                   |        |   |               |  |       |   |       |  |  |   |        |  | 
|      | Revenues          |        | $ | 20,300        |  |       |   |      |  |  | $ | 20,300 |  |  | 
|      | Long-lived assets |        |   | 53,797        |  |       |   |      |  |  |   | 53,797 |  |  | 



|    |                                                                                                                                                                                                                                                                                                                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Revenues from our Latin America consolidated
    entities are not included in the revenue line item in the
    consolidated statements of income due to the discontinued
    operations presentation. Long-lived assets from our Latin
    America entities are not included in the long-lived asset line
    item in the consolidated balance sheets due to the discontinued
    operations presentation.



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

LEASES

We have entered into operating leases for
facilities and equipment used in operations. Rental expense
under operating leases was $300 for 2002, $309 for 2003 and $232
for 2004. 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, 2004:

| |            |         |  |   |     | 
| | ---------- | ------- |  | - | --- | 
| |            | Minimum
| |            | Rentals
|
|
|
| | 2005       |         |  | $ | 136 | 
| | 2006       |         |  |   | 106 | 
| | 2007       |         |  |   | 85  | 
| | 2008       |         |  |   | 65  | 
| | 2009       |         |  |   | 47  | 
| | Thereafter |         |  |   | 252 | 
|
| | Total      |         |  | $ | 691 | 
|

OUTSIDE PLANT

We currently self-insure all of our outside plant
against casualty losses. Such outside plant, located in the nine
southeastern states served by BST, is susceptible to damage from
severe weather conditions and other perils. The net book value
of outside plant was $8,527 at December 31, 2003 and $8,530
at December 31, 2004.

GUARANTEES

In most of our sale and divestiture transactions,
we indemnify the purchaser for various items including labor and
general litigation as well as certain tax matters.



76 BELLSOUTH
2004




---



##### Table of Contents







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

PURCHASE OBLIGATIONS

As of December 31, 2004, we have contracts
in place to outsource certain services, principally information
technology. We also have various commitments with vendors to
purchase telecommunications equipment, software and services.

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


|                                      |  |                        |       |        |  |           |     |           |  |            |       |  |  |   |     |  |  |  |   |  |  | 
|------------------------------------- |  | ---------------------- | ----- | ------ |  | --------- | --- | --------- |  | ---------- | ----- |  |  | - | --- |  |  |  | - |  |  | 
|                                      |  |                        |       |       
|                                      |  | Payments Due by Period |       |       
|                                     
|                                     
|                                     
|                                      |  | Less than              |       |       
|                                      |  | Total                  |       | 1 year |  | 2006-2008 |     | 2009-2011 |  | After 2011 |       | 
|                                     
|                                     
|                                     
|Unconditional purchase obligations(1) |  | $                      | 3,102 |        |  | $         | 723 |           |  | $          | 1,599 |  |  | $ | 780 |  |  |  |  |  |  | 
|                                     



|    |  |                                                                                                                                                                                                                                                                                                                                                                              
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) |  | The total unconditional purchase obligation
    includes $472 related to agreements with Qwest and Accenture
    that do not stipulate annual minimum purchases. The agreement
    with Qwest expires in 2010 and the Accenture agreement expires
    in 2007. Of this amount, $6 is included in the 2006-2008 column
    and $466 is included in the 2009-2011 column above.

REGULATORY MATTERS

AT&T Prepaid Card

In February 2005, the FCC released an order
finding that certain prepaid card services of AT&T were
telecommunications services. The FCC held that revenue of the
services would accordingly be subject to the same universal
service fund and switched access charges as were all other
similarly situated telecommunications services. AT&T has
estimated in a securities filing that it had saved
approximately $160 in universal service fund contributions and
$340 in access charges through use of the prepaid card services
that were the subject of the FCC decision. We believe that some
of the improperly avoided access charges should have been paid
to us for the use of our network. While AT&T has not
provided information sufficient for us to reasonably estimate
access charge payments we may be owed, we believe the charges
could result in additional revenue that is material to our
results of operations.

South Carolina Price
Regulation

Beginning in 1996, we operated under a price
regulation plan approved by the South Carolina Public Service
Commission (PSC) under existing state laws. In April 1999,
however, the South Carolina Supreme Court invalidated this price
regulation plan. In July 1999, we elected to be regulated under
a new state statute, adopted subsequent to the PSCs
approval of the earlier plan. The new statute allows telephone
companies in South Carolina to operate under a price regulation
without obtaining approval from the PSC. The election became
effective during August 1999. The South Carolina Consumer
Advocate petitioned the PSC seeking review of the level of our
earnings during the 1996-1998 period when we operated under the
subsequently invalidated price regulation plan. The PSC
dismissed the petition in November 1999 and issued orders
confirming the vote in February and June of 2000. In July 2000,
the Consumer Advocate appealed the PSCs dismissal of the
petition. In January 2004, the court hearing the appeal affirmed
the PSCs decision. An appeal of this decision to the South
Carolina Supreme Court was filed in March 2004. In April 2004,
BellSouth entered into agreements that would completely
terminate the litigation. Under the terms of the settlement,
BellSouth agreed to, among other things, refund $50 to its South
Carolina end user customers. The refund was recorded in the
first quarter 2004 as a reduction to revenue. Refunds were
implemented following court approval of the agreements.
BellSouth agreed to settle the case to avoid further expensive
litigation and uncertainty relating to the outcome of the
litigation. The settlement is not an admission of liability.

Section 272 Claim

In December 2004, the FCC partially granted and
otherwise dismissed July 2004 claims of AT&T that two
optional discount special access tariffs violated various
provisions of the Communications Act. The FCC held that one of
the tariffs, the Transport Savings Plan, was unlawful under
Section 272 of the Act, which governs dealings between BST
and our long distance affiliate. That tariff, originally filed
in 1999, provided an overlay discount for carriers that accepted
its terms, which included a five year commitment, a commitment
for a defined amount of spending on special access, and
shortfall charges if commitments were not met. The FCC held that
the discount structure in the tariff was insufficiently related
to cost, and unduly favored a class of carriers (including our
long distance affiliate) with relatively lower volume special
access spending, and discriminated against carriers with
relatively higher volumes. The FCC dismissed the other claims
associated with the Transport Savings Plan, and dismissed all
claims associated with the second tariff. We do not agree with
the FCCs finding, and appealed its decision to the
D.C. Circuit Court of Appeals. We do not believe that
AT&T has suffered any damages, and we believe that any such
claims would be barred in whole or in part by various provisions
of law. At this time, however,



BELLSOUTH
2004      77




---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS CONTINUED


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


BELLSOUTH CORPORATION

neither the likely outcome of the appeal nor
AT&Ts potential damages claim can be predicted, and
therefore no reasonable estimate of loss, if any, can be made.

LEGAL PROCEEDINGS

Employment Claim

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

Securities and ERISA Claims

From August through October 2002, several
individual shareholders filed substantially identical class
action lawsuits against BellSouth and three of its senior
officers alleging violations of the federal securities laws. The
cases have been consolidated in the United States District Court
for the Northern District of Georgia and are captioned In re
BellSouth Securities Litigation. Pursuant to the provisions
of the Private Securities Litigation Reform Act of 1995, the
court has appointed a Lead Plaintiff. The Lead Plaintiff filed a
Consolidated and Amended Class Action Complaint in July 2003 on
behalf of two putative classes: (1) purchasers of BellSouth
stock during the period November 7, 2000 through
February 19, 2003 (the class period) for alleged violations
of Sections 10(b) and 20 of the Securities Exchange Act of
1934 and (2) participants in BellSouths Direct
Investment Plan during the class period for alleged violations
of Sections 11, 12 and 15 of the Securities Act of 1933.
Four outside directors were named as additional defendants. The
Consolidated and Amended Class Action Complaint alleged that
during the class period the Company (1) overstated the
unbilled receivables balance of its Advertising & Publishing
subsidiary; (2) failed to properly implement SAB 101 with
regard to its recognition of Advertising & Publishing
revenues; (3) improperly billed competitive local exchange
carriers (CLEC) to inflate revenues; (4) failed to take a
reserve for refunds that ultimately came due following
litigation over late payment charges; and (5) failed to
properly write down goodwill of its Latin American operations.
On February 8, 2005, the district court dismissed the
Exchange Act claims, except for those relating to the writedown
of Latin American goodwill. On that date, the district court
also dismissed the Securities Act claims, except for those
relating to the writedown of Latin American goodwill, the
allegations relating to unbilled receivables of the
Companys Advertising & Publishing subsidiary, the
implementation of SAB 101 regarding recognition of
Advertising & Publishing revenues and alleged improper
billing of CLECs. The plaintiffs are seeking an unspecified
amount of damages, as well as attorneys fees and costs. At
this time, the likely outcome of the case cannot be predicted,
nor can a reasonable estimate of loss, if any, be made.

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


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




78 BELLSOUTH
2004




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##### Table of Contents







Antitrust Claims

In October 2002, a number of antitrust class
action lawsuits were filed against BellSouth in federal district
courts in Atlanta, Georgia and Ft. Lauderdale, Florida.
Pursuant to the plaintiffs motion for voluntary dismissal,
the court dismissed the cases on March 9, 2004.

In December 2002, a consumer class action
alleging antitrust violations of Section 1 of the Sherman
Antitrust Act was filed against BellSouth, Verizon, SBC and
Qwest, captioned William Twombley, et al v. Bell Atlantic
Corp., et al, in Federal Court in the Southern District of
New York. The complaint alleged that defendants conspired to
restrain competition by agreeing not to compete with one
another and otherwise allocating customers and markets to one
another. The plaintiffs are seeking an unspecified amount
of treble damages and injunctive relief, as well as
attorneys fees and expenses. In October 2003, the district
court dismissed the complaint for failure to state a claim and
the case is now on appeal.


In June 2004, the U.S. Court of Appeals for the
11th Circuit affirmed the District Courts
dismissal of most of the antitrust and state law claims brought
by a plaintiff CLEC in a case captioned Covad Communications
Company, et al v. BellSouth Corporation, et al. The
appellate court, however, permitted a price squeeze claim and
certain state tort claims to proceed. At this time, the likely
outcome of the case cannot be predicted, nor can a reasonable
estimate of loss, if any, be made.


OTHER CLAIMS

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



|         |                                 
|-------- | --------------------------------
|Note R  | Subsidiary Financial Information

We have fully and unconditionally guaranteed all
of the outstanding debt securities of BellSouth
Telecommunications, Inc. (BST), which is a 100% owned subsidiary
of BellSouth. In accordance with SEC rules, we are providing the
following condensed consolidating financial information. BST is
listed separately because it has debt securities, registered
with the SEC, that we have guaranteed. The Other column
represents all other wholly owned subsidiaries excluding BST and
BST subsidiaries. The Adjustments column includes the necessary
amounts to eliminate the intercompany balances and transactions
between BST, Other and Parent and to consolidate wholly owned
subsidiaries to reconcile to our consolidated financial
information.

CONDENSED CONSOLIDATING STATEMENTS OF
INCOME

|                                                                                                                                                 |  |                                      |        |         |  |        |        |       |  |       |        |   |  |   |        |   |  |   |        |   |  | 
|------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------------------------ | ------ | ------- |  | ------ | ------ | ----- |  | ----- | ------ | - |  | - | ------ | - |  | - | ------ | - |  | 
|                                                                                                                                                 |  |                                     
|                                                                                                                                                 |  | For the Year Ended December 31, 2002
|                                                                                                                                                 |  |                                     
|                                                                                                                                                 |  |                                     
|                                                                                                                                                 |  |                                      |        | Adjust- |  |       
|                                                                                                                                                 |  | BST                                  |        | Other   |  | Parent |        | ments |  | Total |        |  
|                                                                                                                                                
|                                                                                                                                                
|Total operating revenues                                                                                                                         |  | $                                    | 17,515 |         |  | $      | 5,190  |       |  | $     |       |   |  | $ | (2,498 | ) |  | $ | 20,207 |   |  | 
|Total operating expenses                                                                                                                         |  |                                      | 15,292 |         |  |        | 4,322  |       |  |       | 114    |   |  |   | (3,975 | ) |  |   | 15,753 |   |  | 
|                                                                                                                                                
|Operating income                                                                                                                                 |  |                                      | 2,223  |         |  |        | 868    |       |  |       | (114   | ) |  |   | 1,477  |   |  |   | 4,454  |   |  | 
|Interest expense                                                                                                                                 |  |                                      | 617    |         |  |        | 221    |       |  |       | 610    |   |  |   | (382   | ) |  |   | 1,066  |   |  | 
|Net earnings (losses) of equity affiliates                                                                                                       |  |                                      | 1,015  |         |  |        | 548    |       |  |       | 3,766  |   |  |   | (4,787 | ) |  |   | 542    |   |  | 
|Other income (expense), net                                                                                                                      |  |                                      | (46    | )       |  |        | 1,540  |       |  |       | 184    |   |  |   | (241   | ) |  |   | 1,437  |   |  | 
|                                                                                                                                                
|Income from continuing operations before income
    taxes, discontinued operations, and cumulative effect of changes
    in accounting principle |  |                                      | 2,575  |         |  |        | 2,735  |       |  |       | 3,226  |   |  |   | (3,169 | ) |  |   | 5,367  |   |  | 
|Provision (benefit) for income taxes                                                                                                             |  |                                      | 582    |         |  |        | 966    |       |  |       | (249   | ) |  |   | 593    |   |  |   | 1,892  |   |  | 
|                                                                                                                                                
|Income from continuing operations before
    discontinued operations and cumulative effect of changes in
    accounting principle                |  |                                      | 1,993  |         |  |        | 1,769  |       |  |       | 3,475  |   |  |   | (3,762 | ) |  |   | 3,475  |   |  | 
|Income (loss) from discontinued operations, net
    of tax                                                                                       |  |                                      |       |         |  |        | (867   | )     |  |       | (867   | ) |  |   | 867    |   |  |   | (867   | ) |  | 
|Cumulative effect of changes in accounting
    principle                                                                                         |  |                                      |       |         |  |        | (1,285 | )     |  |       | (1,285 | ) |  |   | 1,285  |   |  |   | (1,285 | ) |  | 
|                                                                                                                                                
|Net income (losses)                                                                                                                              |  | $                                    | 1,993  |         |  | $      | (383   | )     |  | $     | 1,323  |   |  | $ | (1,610 | ) |  | $ | 1,323  |   |  | 
|                                                                                                                                                



BELLSOUTH
2004      79




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS CONTINUED


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


BELLSOUTH CORPORATION

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

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



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##### Table of Contents







CONDENSED CONSOLIDATING BALANCE
SHEETS

|                                           |  |                   |        |                   |  |        |        |       |  |         |        |     |  |       |         |        |  |       |        |       |  |   |        |  |  |   |        |  |  |   |        |   |  |   |         |   |  |   |        |  |  | 
|------------------------------------------ |  | ----------------- | ------ | ----------------- |  | ------ | ------ | ----- |  | ------- | ------ | --- |  | ----- | ------- | ------ |  | ----- | ------ | ----- |  | - | ------ |  |  | - | ------ |  |  | - | ------ | - |  | - | ------- | - |  | - | ------ |  |  | 
|                                           |  |                   |        |                  
|                                           |  | December 31, 2003 |        | December 31, 2004
|                                           |  |                   |        |                  
|                                           |  |                   |        |                  
|                                           |  |                   |        | Adjust-           |  |        |        |       |  | Adjust- |        |    
|                                           |  | BST               |        | Other             |  | Parent |        | ments |  | Total   |        | BST |  | Other |         | Parent |  | ments |        | Total |  |  
|                                          
|                                          
|ASSETS                                     |  |                   |        |                   |  |        |        |       |  |         |        |     |  |       |         |        |  |       |        |       |  |   |        |  |  |   |        |  |  |   |        |   |  |   |         |   |  |   |        |  |  | 
|Current assets:                            |  |                   |        |                   |  |        |        |       |  |         |        |     |  |       |         |        |  |       |        |       |  |   |        |  |  |   |        |  |  |   |        |   |  |   |         |   |  |   |        |  |  | 
|Cash and cash equivalents                  |  | $                 | 5      |                   |  | $      | 1,190  |       |  | $       | 1,618  |     |  | $     | 134     |        |  | $     | 2,947  |       |  | $ | 7      |  |  | $ | 405    |  |  | $ | 265    |   |  | $ | 3       |   |  | $ | 680    |  |  | 
|Short-term investments                     |  |                   |       |                   |  |        |       |       |  |         | 1,609  |     |  |       |        |        |  |       | 1,609  |       |  |   |       |  |  |   |       |  |  |   | 16     |   |  |   |        |   |  |   | 16     |  |  | 
|Accounts receivable, net                   |  |                   | 68     |                   |  |        | 1,201  |       |  |         | 3,146  |     |  |       | (1,545  | )      |  |       | 2,870  |       |  |   | 75     |  |  |   | 1,005  |  |  |   | 2,918  |   |  |   | (1,439  | ) |  |   | 2,559  |  |  | 
|Other current assets                       |  |                   | 393    |                   |  |        | 773    |       |  |         | 139    |     |  |       | 118     |        |  |       | 1,423  |       |  |   | 528    |  |  |   | 4,418  |  |  |   | 144    |   |  |   | (3,714  | ) |  |   | 1,376  |  |  | 
|Assets of discontinued operations          |  |                   |       |                   |  |        |       |       |  |         |       |     |  |       |        |        |  |       |       |       |  |   |       |  |  |   | 1,068  |  |  |   |       |   |  |   |        |   |  |   | 1,068  |  |  | 
|                                           |  |                  
|Total current assets                       |  |                   | 466    |                   |  |        | 3,164  |       |  |         | 6,512  |     |  |       | (1,293  | )      |  |       | 8,849  |       |  |   | 610    |  |  |   | 6,896  |  |  |   | 3,343  |   |  |   | (5,150  | ) |  |   | 5,699  |  |  | 
|                                           |  |                  
|Investments and advances to Cingular       |  |                   | 3,464  |                   |  |        | 8,162  |       |  |         | 891    |     |  |       | (4,838  | )      |  |       | 7,679  |       |  |   | 3,515  |  |  |   | 21,686 |  |  |   | 1,539  |   |  |   | (3,969  | ) |  |   | 22,771 |  |  | 
|Property, plant and equipment, net         |  |                   | 21,818 |                   |  |        | 1,947  |       |  |         | 4      |     |  |       | 38      |        |  |       | 23,807 |       |  |   | 21,339 |  |  |   | 665    |  |  |   | 3      |   |  |   | 32      |   |  |   | 22,039 |  |  | 
|Deferred charges and other assets          |  |                   | 5,029  |                   |  |        | 287    |       |  |         | 21,790 |     |  |       | (20,129 | )      |  |       | 6,977  |       |  |   | 5,267  |  |  |   | 293    |  |  |   | 39,305 |   |  |   | (37,465 | ) |  |   | 7,400  |  |  | 
|Intangible assets, net                     |  |                   | 1,036  |                   |  |        | 1,211  |       |  |         | 5      |     |  |       | 138     |        |  |       | 2,390  |       |  |   | 1,072  |  |  |   | 391    |  |  |   | 9      |   |  |   | 115     |   |  |   | 1,587  |  |  | 
|                                           |  |                  
|Total assets                               |  | $                 | 31,813 |                   |  | $      | 14,771 |       |  | $       | 29,202 |     |  | $     | (26,084 | )      |  | $     | 49,702 |       |  | $ | 31,803 |  |  | $ | 29,931 |  |  | $ | 44,199 |   |  | $ | (46,437 | ) |  | $ | 59,496 |  |  | 
|                                           |  |                  
|LIABILITIES AND SHAREHOLDERS
    EQUITY   |  |                   |        |                   |  |        |        |       |  |         |        |     |  |       |         |        |  |       |        |       |  |   |        |  |  |   |        |  |  |   |        |   |  |   |         |   |  |   |        |  |  | 
|Current liabilities:                       |  |                   |        |                   |  |        |        |       |  |         |        |     |  |       |         |        |  |       |        |       |  |   |        |  |  |   |        |  |  |   |        |   |  |   |         |   |  |   |        |  |  | 
|Debt maturing within one year              |  | $                 | 2,454  |                   |  | $      | 920    |       |  | $       | 2,470  |     |  | $     | (2,353  | )      |  | $     | 3,491  |       |  | $ | 3,016  |  |  | $ | 15     |  |  | $ | 4,248  |   |  | $ | (1,804  | ) |  | $ | 5,475  |  |  | 
|Other current liabilities                  |  |                   | 3,942  |                   |  |        | 1,724  |       |  |         | 916    |     |  |       | (1,615  | )      |  |       | 4,967  |       |  |   | 3,941  |  |  |   | 1,165  |  |  |   | 4,905  |   |  |   | (5,946  | ) |  |   | 4,065  |  |  | 
|Liabilities of discontinued operations     |  |                   |       |                   |  |        |       |       |  |         |       |     |  |       |        |        |  |       |       |       |  |   |       |  |  |   | 830    |  |  |   |       |   |  |   |        |   |  |   | 830    |  |  | 
|                                           |  |                  
|Total current liabilities                  |  |                   | 6,396  |                   |  |        | 2,644  |       |  |         | 3,386  |     |  |       | (3,968  | )      |  |       | 8,458  |       |  |   | 6,957  |  |  |   | 2,010  |  |  |   | 9,153  |   |  |   | (7,750  | ) |  |   | 10,370 |  |  | 
|                                           |  |                  
|Long-term debt                             |  |                   | 4,970  |                   |  |        | 845    |       |  |         | 6,301  |     |  |       | (627    | )      |  |       | 11,489 |       |  |   | 3,704  |  |  |   | 107    |  |  |   | 11,874 |   |  |   | (577    | ) |  |   | 15,108 |  |  | 
|                                           |  |                  
|Noncurrent liabilities:                    |  |                   |        |                   |  |        |        |       |  |         |        |     |  |       |         |        |  |       |        |       |  |   |        |  |  |   |        |  |  |   |        |   |  |   |         |   |  |   |        |  |  | 
|Deferred income taxes                      |  |                   | 4,408  |                   |  |        | 1,519  |       |  |         | (751   | )   |  |       | 173     |        |  |       | 5,349  |       |  |   | 5,063  |  |  |   | 1,735  |  |  |   | (490   | ) |  |   | 184     |   |  |   | 6,492  |  |  | 
|Other noncurrent liabilities               |  |                   | 2,991  |                   |  |        | 1,074  |       |  |         | 554    |     |  |       | 75      |        |  |       | 4,694  |       |  |   | 2,974  |  |  |   | 791    |  |  |   | 596    |   |  |   | 99      |   |  |   | 4,460  |  |  | 
|                                           |  |                  
|Total noncurrent liabilities               |  |                   | 7,399  |                   |  |        | 2,593  |       |  |         | (197   | )   |  |       | 248     |        |  |       | 10,043 |       |  |   | 8,037  |  |  |   | 2,526  |  |  |   | 106    |   |  |   | 283     |   |  |   | 10,952 |  |  | 
|                                           |  |                  
|Shareholders equity                       |  |                   | 13,048 |                   |  |        | 8,689  |       |  |         | 19,712 |     |  |       | (21,737 | )      |  |       | 19,712 |       |  |   | 13,105 |  |  |   | 25,288 |  |  |   | 23,066 |   |  |   | (38,393 | ) |  |   | 23,066 |  |  | 
|                                           |  |                  
|Total liabilities and shareholders equity |  | $                 | 31,813 |                   |  | $      | 14,771 |       |  | $       | 29,202 |     |  | $     | (26,084 | )      |  | $     | 49,702 |       |  | $ | 31,803 |  |  | $ | 29,931 |  |  | $ | 44,199 |   |  | $ | (46,437 | ) |  | $ | 59,496 |  |  | 
|                                           |  |                  

CONDENSED CONSOLIDATING CASH FLOW
STATEMENTS

|                                        |                                      |                                      |   |        |   |        |     |             |   |       |       |        |   |   |    |        |   |   |       |        |  
|--------------------------------------- | ------------------------------------ | ------------------------------------ | - | ------ | - | ------ | --- | ----------- | - | ----- | ----- | ------ | - | - | -- | ------ | - | - | ----- | ------ | -
|                                        |                                      |                                     
|                                        |                                      | For the Year Ended December 31, 2002
|                                        |                                      |                                     
|                                        |                                      |                                     
|                                        |                                      | BST                                  |   | Other  |   | Parent |     | Adjustments |   | Total
|                                       
|                                       
|Cash flows from continuing operations:  |                                      |                                      |   |        |   |        |     |             |   |       |       |        |   |   |    |        |   |   |       |       
|                                        | Cash flows from operating activities |                                      | $ | 6,174  |   |        | $   | 828         |   |       | $     | 3,434  |   |   | $  | (2,724 | ) |   | $     | 7,712  |  
|                                        | Cash flows from investing activities |                                      |   | (3,166 | ) |        |     | (223        | ) |       |       | 1,019  |   |   |    | 458    |   |   |       | (1,912 | )
|                                        | Cash flows from financing activities |                                      |   | (3,008 | ) |        |     | (525        | ) |       |       | (3,271 | ) |   |    | 2,361  |   |   |       | (4,443 | )
|Cash flows from discontinued operations |                                      |                                      |  |        |   |        | 72  |             |   |       |      |        |   |   |   |        |   |   | 72    |       
|                                       
|Net increase (decrease) in cash         |                                      | $                                    |  |        |   | $      | 152 |             |   | $     | 1,182 |        |   | $ | 95 |        |   | $ | 1,429 |       
|                                       

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

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



BELLSOUTH
2004      81




---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS CONTINUED


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


BELLSOUTH CORPORATION



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

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

|                                                                                                   |  |         |       |         |  |         |       |         |  |       |       |  |  |   |       |  |  |   |        |  |  | 
|-------------------------------------------------------------------------------------------------- |  | ------- | ----- | ------- |  | ------- | ----- | ------- |  | ----- | ----- |  |  | - | ----- |  |  | - | ------ |  |  | 
|                                                                                                   |  | First   |       | Second  |  | Third   |       | Fourth  |  |       |       | 
|                                                                                                   |  | Quarter |       | Quarter |  | Quarter |       | Quarter |  | Total |       | 
|                                                                                                  
|                                                                                                  
|2003                                                                                               |  |         |       |         |  |         |       |         |  |       |       |  |  |   |       |  |  |   |        |  |  | 
|Operating Revenues                                                                                 |  | $       | 5,014 |         |  | $       | 5,079 |         |  | $     | 5,141 |  |  | $ | 5,107 |  |  | $ | 20,341 |  |  | 
|Operating Income                                                                                   |  |         | 1,351 |         |  |         | 1,354 |         |  |       | 1,453 |  |  |   | 1,399 |  |  |   | 5,557  |  |  | 
|Provision for Income Taxes                                                                         |  |         | 490   |         |  |         | 511   |         |  |       | 486   |  |  |   | 449   |  |  |   | 1,936  |  |  | 
|Income Before Discontinued Operations and
    Cumulative Effect of Changes in Accounting Principle |  |         | 850   |         |  |         | 908   |         |  |       | 894   |  |  |   | 836   |  |  |   | 3,488  |  |  | 
|Income Before Cumulative Effect of Changes in
    Accounting Principle                             |  |         | 915   |         |  |         | 951   |         |  |       | 936   |  |  |   | 787   |  |  |   | 3,589  |  |  | 
|Net Income (Loss)                                                                                  |  |         | 1,230 |         |  |         | 951   |         |  |       | 936   |  |  |   | 787   |  |  |   | 3,904  |  |  | 
|Basic Earnings Per Share(a):                                                                       |  |         |       |         |  |         |       |         |  |       |       |  |  |   |       |  |  |   |        |  |  | 
|Income Before Discontinued Operations and
    Cumulative Effect of Changes in Accounting Principle |  | $       | 0.46  |         |  | $       | 0.49  |         |  | $     | 0.48  |  |  | $ | 0.46  |  |  | $ | 1.89   |  |  | 
|Income Before Cumulative Effect of Changes in
    Accounting Principle                             |  | $       | 0.49  |         |  | $       | 0.51  |         |  | $     | 0.51  |  |  | $ | 0.43  |  |  | $ | 1.94   |  |  | 
|Net Income (Loss)                                                                                  |  | $       | 0.66  |         |  | $       | 0.51  |         |  | $     | 0.51  |  |  | $ | 0.43  |  |  | $ | 2.11   |  |  | 
|Diluted Earnings Per Share(a):                                                                     |  |         |       |         |  |         |       |         |  |       |       |  |  |   |       |  |  |   |        |  |  | 
|Income Before Discontinued Operations and
    Cumulative Effect of Changes in Accounting Principle |  | $       | 0.46  |         |  | $       | 0.49  |         |  | $     | 0.48  |  |  | $ | 0.45  |  |  | $ | 1.88   |  |  | 
|Income Before Cumulative Effect of Changes in
    Accounting Principle                             |  | $       | 0.49  |         |  | $       | 0.51  |         |  | $     | 0.51  |  |  | $ | 0.43  |  |  | $ | 1.94   |  |  | 
|Net Income (Loss)                                                                                  |  | $       | 0.66  |         |  | $       | 0.51  |         |  | $     | 0.51  |  |  | $ | 0.43  |  |  | $ | 2.11   |  |  | 
|                                                                                                  
|Total comprehensive income                                                                         |  | $       | 1,111 |         |  | $       | 1,031 |         |  | $     | 944   |  |  | $ | 973   |  |  | $ | 4,059  |  |  | 
|2004                                                                                               |  |         |       |         |  |         |       |         |  |       |       |  |  |   |       |  |  |   |        |  |  | 
|Operating Revenues                                                                                 |  | $       | 4,976 |         |  | $       | 5,083 |         |  | $     | 5,095 |  |  | $ | 5,146 |  |  | $ | 20,300 |  |  | 
|Operating Income                                                                                   |  |         | 1,358 |         |  |         | 1,442 |         |  |       | 1,401 |  |  |   | 1,088 |  |  |   | 5,289  |  |  | 
|Provision for Income Taxes                                                                         |  |         | 623   |         |  |         | 516   |         |  |       | 465   |  |  |   | 188   |  |  |   | 1,792  |  |  | 
|Income Before Discontinued Operations and
    Cumulative Effect of Change in Accounting Principle  |  |         | 1,150 |         |  |         | 939   |         |  |       | 852   |  |  |   | 453   |  |  |   | 3,394  |  |  | 
|Income Before Cumulative Effect of Change in
    Accounting Principle                              |  |         | 1,599 |         |  |         | 996   |         |  |       | 799   |  |  |   | 1,364 |  |  |   | 4,758  |  |  | 
|Net Income (Loss)                                                                                  |  |         | 1,599 |         |  |         | 996   |         |  |       | 799   |  |  |   | 1,364 |  |  |   | 4,758  |  |  | 
|Basic Earnings Per Share(a):                                                                       |  |         |       |         |  |         |       |         |  |       |       |  |  |   |       |  |  |   |        |  |  | 
|Income Before Discontinued Operations and
    Cumulative Effect of Change in Accounting Principle  |  | $       | 0.63  |         |  | $       | 0.51  |         |  | $     | 0.47  |  |  | $ | 0.25  |  |  | $ | 1.85   |  |  | 
|Income Before Cumulative Effect of Change in
    Accounting Principle                              |  | $       | 0.87  |         |  | $       | 0.54  |         |  | $     | 0.44  |  |  | $ | 0.74  |  |  | $ | 2.60   |  |  | 
|Net Income (Loss)                                                                                  |  | $       | 0.87  |         |  | $       | 0.54  |         |  | $     | 0.44  |  |  | $ | 0.74  |  |  | $ | 2.60   |  |  | 
|Diluted Earnings Per Share(a):                                                                     |  |         |       |         |  |         |       |         |  |       |       |  |  |   |       |  |  |   |        |  |  | 
|Income Before Discontinued Operations and
    Cumulative Effect of Change in Accounting Principle  |  | $       | 0.63  |         |  | $       | 0.51  |         |  | $     | 0.46  |  |  | $ | 0.25  |  |  | $ | 1.85   |  |  | 
|Income Before Cumulative Effect of Change in
    Accounting Principle                              |  | $       | 0.87  |         |  | $       | 0.54  |         |  | $     | 0.44  |  |  | $ | 0.74  |  |  | $ | 2.59   |  |  | 
|Net Income (Loss)                                                                                  |  | $       | 0.87  |         |  | $       | 0.54  |         |  | $     | 0.44  |  |  | $ | 0.74  |  |  | $ | 2.59   |  |  | 
|Total comprehensive income                                                                         |  | $       | 1,713 |         |  | $       | 1,007 |         |  | $     | 789   |  |  | $ | 1,677 |  |  | $ | 5,186  |  |  | 



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

The quarters shown were affected by the items
listed below. These items are specific to net income.

2003



| |   |                                                                                                                                                                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We recorded losses related to our workforce
    reduction of approximately 3,400 positions, which reduced net
    income by $74, or $0.04 per share, in the first quarter; by $12,
    or $0.01 per share, in the second quarter; and by $10, or $0.01
    per share in the fourth quarter.                                       
| |  | Third quarter includes a charge for an asset
    impairment, which reduced net income by $32, or $0.02 per share.                                                                                                                                                                                                                 
| |  | We recorded income (losses) related to our
    Discontinued Operations which impacted net income by $65, or
    $0.03 per share, in the first quarter; by $43, or $0.02 per
    share, in the second quarter; by $42, or $0.02 per share, in the
    third quarter; and by $(49), or $(0.03) per share, in the fourth
    quarter.

2004



| |   |                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | First quarter includes a gain related to the sale
    of our operations in Denmark, which increased net income by
    $295, or $0.16 per share.               
| |  | First quarter also includes a charge for a
    settlement with the South Carolina Consumer Advocate, which
    decreased net income by $33, or 0.02 per share.
| |  | We recorded losses related to service repairs in
    the wireline business due to Hurricanes Charley, Frances,                                                



82 BELLSOUTH
2004




---



##### Table of Contents









| |   |                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | Ivan and Jeanne, which reduced net income by $23,
    or $0.01 per share in the third quarter and by $77, or
    $0.04 per share, in the fourth quarter.                                                                                                                                                                                                                                            
| |  | Our equity in earnings from Cingular included
    losses related to wireless merger integration costs for the
    Cingular/AT&T Wireless merger, a fair value adjustment for
    the sale of Cingular Interactive, and lease accounting
    adjustments, which reduced our net income by $17, or
    $0.01 per share, in the third quarter and by $92, or
    $0.05 per share in the fourth quarter.
| |  | Fourth quarter also includes charges related to
    severance and lease termination payments, which reduced net
    income by $18, or $0.01 per share.                                                                                                                                                                                                                                              
| |  | We recorded income (losses) related to our
    Discontinued Operations which impacted net income by $449, or
    $0.24 per share, in the first quarter; by $57, or $0.03 per
    share, in the second quarter; by $(53), or $(0.03) per share, in
    the third quarter; and by $911, or $0.50 per share, in the
    fourth quarter.                                                                



BELLSOUTH
2004      83




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM


BELLSOUTH CORPORATION






To the Shareholders BellSouth Corporation:


We have completed an integrated audit of
BellSouth Corporations 2004 consolidated financial
statements and of its internal control over financial reporting
as of December 31, 2004 and audits of its 2003 and 2002
consolidated financial statements in accordance with the
standards of the Public Company Accounting Oversight Board
(United States). Our opinions, based on our audits and the
report of other auditors, are presented below.

Consolidated financial statements

In our opinion, based on our audits and the
report of other auditors, the accompanying consolidated balance
sheets and the related consolidated statements of income, cash
flows and shareholders equity and comprehensive income
present fairly, in all material respects, the financial position
of BellSouth Corporation and its subsidiaries
(BellSouth) at December 31, 2004 and 2003, and
the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2004 in
conformity with accounting principles generally accepted in the
United States of America. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the financial
statements of Cingular Wireless, LLC (Cingular), an
equity method investee. BellSouths consolidated financial
statements include an investment of $18,311 million and
$3,867 million as of December 31, 2004 and 2003,
respectively and equity method income of $24 million,
$408 million and $497 million, respectively, for each
of the three years in the period ended December 31, 2004.
Those statements were audited by other auditors whose report
thereon has been furnished to us, and our opinion expressed
herein, insofar as it relates to the amounts included for
Cingular, is based solely on the report of the other auditors.
We conducted our audits of these statements in accordance with
the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit of financial statements includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits and the report of other auditors provide a reasonable
basis for our opinion.

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


Internal control over financial
reporting

Also, in our opinion, managements
assessment, included in the accompanying Report of Management
on Internal Control Over Financial Reporting, that the
Company maintained effective internal control over financial
reporting as of December 31, 2004 based on criteria
established inInternal Control  Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), is fairly
stated, in all material respects, based on those criteria.
Furthermore, in our opinion, the Company maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 2004, based on criteria
established in Internal Control  Integrated
Framework issued by the COSO. The Companys management
is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness
of internal control over financial reporting. Our responsibility
is to express opinions on managements assessment and on
the effectiveness of the Companys internal control over
financial reporting based on our audit. We conducted our audit
of internal control over financial reporting in accordance with
the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was
maintained in all material respects. An audit of internal
control over financial reporting includes obtaining an
understanding of internal control over financial reporting,
evaluating managements assessment, testing and evaluating
the design and operating effectiveness of internal control, and
performing such other procedures as we consider necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinions.

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


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


-s- PricewaterhouseCoopers

Atlanta, Georgia


March 4, 2005






84 BELLSOUTH
2004




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM


BELLSOUTH CORPORATION

Board of Directors and Shareowners

Cingular Wireless Corporation, Manager of


Cingular Wireless LLC


We have audited the consolidated balance sheets
of Cingular Wireless LLC as of December 31, 2003 and 2004,
and the related consolidated statements of income, changes in
members capital, comprehensive income and cash flows for
each of the three years in the period ended December 31,
2004 (not presented separately herein). These financial
statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements based on our audits. The financial
statements of Omnipoint Facilities Network II, LLC (Omnipoint),
a wholly owned subsidiary of GSM Facilities, LLC (an equity
investee in which the Company has an approximate 60% interest at
December 31, 2004), have been audited by other auditors
whose report has been furnished to us; insofar as our opinion on
the consolidated financial statements relates to the 2003 and
2004 amounts included for Omnipoint, it is based solely on their
report. In the consolidated financial statements, the
Companys indirect investment in Omnipoint is stated at
$770 million and $880 million, respectively, at
December 31, 2003 and 2004, and the Companys equity
in net losses of Omnipoint is stated at $100 million and
$135 million, for the years then ended.

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


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


As described in Note 5 to the consolidated
financial statements, in 2002 the Company adopted Statement of
Financial Accounting Standards No. 142, Goodwill and
Other Intangible Assets.


As described in Note 2 to the consolidated
financial statements, the consolidated balance sheet as of
December 31, 2003 and the related consolidated statements
of income, changes in members capital, comprehensive
income and cash flows for each of the years ended
December 31, 2002 and 2003 have been restated.


-s- Ernst & Young

Atlanta, Georgia


March 4, 2005


REPORT OF MANAGEMENT ON INTERNAL
CONTROL

OVER FINANCIAL REPORTING


BELLSOUTH CORPORATION

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

BellSouths management assessed the
effectiveness of the Companys internal control over
financial reporting as of December 31, 2004. In making this
assessment, BellSouths management used the criteria set
forth in Internal Control  Integrated Frameworkissued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Based on its assessment, management
concluded that BellSouth maintained effective internal control
over financial reporting as of December 31, 2004.


PricewaterhouseCoopers LLP, BellSouths
independent registered public accounting firm, has audited our
managements assessment of the effectiveness of the
companys internal control over financial reporting as of
December 31, 2004, as stated in their report which appears
on page 84.


March 4, 2005



BELLSOUTH
2004      85




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##### Table of Contents



EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES


BELLSOUTH CORPORATION



|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|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.

Item 9A.     Controls and
Procedures

We maintain disclosure controls and procedures
that are designed to ensure that information required to be
disclosed in our Exchange Act reports is recorded, processed,
summarized and reported within the time periods specified in the
SECs rules and forms, and that such information is
accumulated and communicated to the management, including the
Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required
disclosure. Management necessarily applied its judgment in
assessing the costs and benefits of such controls and
procedures, which, by their nature, can provide only reasonable
assurance regarding managements control objectives. We
also have investments in certain unconsolidated entities. As we
do not control or manage these entities, our disclosure controls
and procedures with respect to such entities are necessarily
more limited than those we maintain with respect to our
consolidated subsidiaries.

The Companys management, including the
Chief Executive Officer and Chief Financial Officer, does not
expect that our disclosure controls can prevent all errors and
all fraud. A control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met. There are
inherent limitations in all control systems, including the
realities that judgments in decision-making can be faulty, and
that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual
acts of one or more persons. The design of any system of
controls also is based in part upon certain assumptions about
the likelihood of future events, and, while our disclosure
controls and procedures are designed to be effective under
circumstances where they should reasonably be expected to
operate effectively, there can be no assurance that any design
will succeed in achieving its stated goals under all potential
future conditions. Because of the inherent limitations in any
control system, misstatements due to error or fraud may occur
and not be detected.


As of the end of the period covered by this
report, we carried out an evaluation, under the supervision and
with the participation of management, including the Chief
Executive Officer along with the Chief Financial Officer, of the
effectiveness, of the design and operation of our disclosure
controls and procedures pursuant to Exchange Act
Rules 13a-15(b) and 15d-15(b). Based upon the foregoing,
the Chief Executive Officer along with the Chief Financial
Officer concluded that our disclosure controls and procedures
are effective at providing reasonable assurance that all
material information relating to BellSouth (including
consolidated subsidiaries) required to be included in our
Exchange Act reports is reported in a timely manner. In
addition, based on such evaluation we have identified no change
in our internal control over financial reporting that occurred
during the fourth quarter of 2004 that has materially affected
or is reasonably likely to materially affect, our internal
control over financial reporting.


Item 9B.     Other
Information



There is no information that was required to be
disclosed in a report on Form 8-K during the fourth quarter
of 2004 but was not reported.

PART III



|         |                                                   
|-------- | --------------------------------------------------
|Item 10. | Directors and Executive Officers of the Registrant



The following sections of the Companys
definitive proxy statement dated March 11, 2005 are
incorporated herein by reference:

| |   |                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------
| |  | The second and third paragraph under the heading
    Structure and Practices of the Board of
    Directors  Corporate Governance Philosophy
| |  | The information under the heading Structure
    and Practices of the Board of Directors  Independence
    of Committee Members             
| |  | The information under the heading Structure
    and Practices of the Board of Directors  Audit
    Committee Financial Experts             
| |  | The information under the heading Matters
    to Be Voted On  Directors Proposal 1:
    Election of Directors                             
| |  | The information under the heading General
    Information  Section 16(a) Beneficial Ownership
    Reporting Compliance                     

Information regarding executive officers required
by Item 401 of Regulation S-K is furnished in a
separate disclosure on page 16 in Part I of this
report since the registrant did not furnish such information in
its definitive proxy statement prepared in accordance with
Schedule 14A. Information regarding our Code of Ethics is
included under the caption Website Access on
page 16 of this Form 10-K.




|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

The information under the headings
Executive Compensation and Structure and
Practices of the Board



86 BELLSOUTH
2004




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##### Table of Contents







of Directors  Director
Compensation and  Compensation Committee
Interlocks and Insider Participation contained in the
Companys definitive proxy statement dated March 11,
2005 are incorporated herein by reference.



|         |                                                                                                   
|-------- | --------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial Owners and
    Management and Related Shareholder Matters

The information under the headings
Beneficial Ownership of Common Stock contained in
the Companys definitive proxy statement dated
March 11, 2005 are incorporated herein by reference.

SECURITIES AUTHORIZED FOR ISSUANCE UNDER
EQUITY COMPENSATION PLANS

Equity compensation plan
information

The following table provides information about
shares of BellSouth common stock that may be issued under our
equity compensation plans as of December 31, 2004.

|                                                           |  |               |             |             |  |                 |       |     |  |  |            |    
|---------------------------------------------------------- |  | ------------- | ----------- | ----------- |  | --------------- | ----- | --- |  |  | ---------- | ---
|                                                           |  |               |             |             |  | (C)            
|                                                           |  |               |             |             |  | Number of      
|                                                           |  |               |             |             |  | securities     
|                                                           |  | (A)           |             |             |  | remaining      
|                                                           |  | Number of     |             | (B)         |  | available for  
|                                                           |  | securities to |             | Weighted-   |  | future issuance
|                                                           |  | be issued     |             | average     |  | under equity   
|                                                           |  | upon          |             | exercise    |  | compensation   
|                                                           |  | exercise of   |             | price of    |  | plans          
|                                                           |  | outstanding   |             | outstanding |  | (excluding     
|                                                           |  | options,      |             | options,    |  | securities     
|                                                           |  | warrants      |             | warrants    |  | reflected in   
|                                                           |  | and rights    |             | and rights  |  | column (A))    
|                                                          
|                                                          
|Equity compensation plans approved by shareholders         |  |               | 104,414,655 | (1)         |  | $               | 35.12 |     |  |  | 79,886,521 | (2)
|                                                          
|Equity compensation plans not approved by
    shareholders |  |               | 1,572,645   |             |  | $               | 41.00 | (3) |  |  |           |    
|                                                          
|Totals                                                     |  |               | 105,987,300 |             |  | $               | 35.19 | (3) |  |  | 79,886,521 |    
|                                                          

|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) |  | Consists of shares to be issued upon exercise
    of outstanding options granted under the BellSouth Corporation
    Stock and Incentive Compensation Plan, the BellSouth Corporation
    Stock Plan, the BellSouth Corporation Stock Option Plan, the
    BellSouth Corporation Non-Employee Director Stock Plan, and the
    BellSouth Corporation Non-Employee Director Stock Option Plan.
    Of these plans, the only plan under which options may be granted
    in the future is the BellSouth Corporation Stock and Incentive
    Compensation Plan.
|(2) |  | The number of shares available for future
    grant under the BellSouth Corporation Stock and Incentive
    Compensation Plan (as approved by shareholders in April 2004) is
    equal to eighty million (80,000,000) shares authorized for
    issuance under the plan, less the cumulative number of awards
    granted under the plan that will be settled by issuing
    shares.                                                                                                                                                                        
|(3) |  | The weighted average exercise prices in the
    table above exclude 223,727 shares payable under the Incentive
    Award Deferral Plan at December 31, 2004.                                                                                                                                                                                                                                                                                                                                                                                                

Equity compensation plans not approved by
security holders

The BellSouth Corporation Executive Incentive
Award Deferral Plan (the IADP) is a nonqualified
deferred compensation plan that was terminated effective
September 1996. Prior to termination of the IADP, eligible plan
participants could elect to defer receipt of some or all of the
shares of BellSouth Common Stock awarded to them under the
BellSouth Corporation Executive Long-Term Incentive Plan
(terminated effective February 1996). During the deferral
period, dividend equivalents increase the number of shares
payable to participants at the same rate as the dividend rate
received by all shareholders. Shares are issued to plan
participants in accordance with individual payment schedules
that were established when each respective deferral agreement
was executed. Plan participants are not required to pay an
exercise price to receive these shares. Shareholder approval of
this plan was not required under applicable provisions of law or
the rules of the New York Stock Exchange.

Upon Mr. Ackermans election to the
positions of Chairman of the Board, President and Chief
Executive Officer, we entered into a retirement agreement with
him that became effective November 23, 1998. The agreement
was designed to incent Mr. Ackerman to remain with BellSouth
beyond the age of sixty and to link compensation under the
agreement to BellSouths performance. Pursuant to this
agreement, Mr. Ackerman received an award of 1,348,918
nonqualified stock options with an exercise price of $41.00 per
share. If he remains employed by BellSouth, these options vest
20% each year, beginning with Mr. Ackermans 60th birthday,
which occurred in 2002. Shareholder approval of this plan was
not required under applicable provisions of law or the rules of
the New York Stock Exchange.




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

The information under the heading Structure
and Practices of the Board of Directors  Related
Party Transactions contained in the Companys
definitive proxy statement dated March 11, 2005 are
incorporated herein by reference.



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

The information under the headings Audit
Committee Report  Fees Paid to the Independent
Registered Public Accounting Firm and
 Pre-Approval of Services by the Independent
Registered Public Accounting Firm contained in the
Companys definitive proxy statement dated March 11,
2005 are incorporated herein by reference.



BELLSOUTH
2004      87




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##### Table of Contents



EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES


BELLSOUTH CORPORATION






PART IV




|         |                                           
|-------- | ------------------------------------------
|Item 15. | Exhibits and Financial Statement Schedules

|                              |  |                                                                                                                                                                                                                                                                                                                                                                                                    |  |  |             | 
|----------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  | ----------- | 
|Page(s) in This
    Form 10-K
|                             
|a.                            |  | Documents filed as a part of the report:                                                                                                                                                                                                                                                                                                                                                           |  |  |             | 
|(1)                           |  | Financial Statements of BellSouth Corporation:                                                                                                                                                                                                                                                                                                                                                     |  |  |             | 
|                              |  | Consolidated Statements of Income                                                                                                                                                                                                                                                                                                                                                                  |  |  | 50          | 
|                              |  | Consolidated Balance Sheets                                                                                                                                                                                                                                                                                                                                                                        |  |  | 51          | 
|                              |  | Consolidated Statements of Cash Flows                                                                                                                                                                                                                                                                                                                                                              |  |  | 52          | 
|                              |  | Consolidated Statements of Shareholders
    Equity and Comprehensive Income                                                                                                                                                                                                                                                                                                                       |  |  | 53          | 
|                              |  | Notes to Consolidated Financial Statements                                                                                                                                                                                                                                                                                                                                                         |  |  | 54          | 
|                              |  | Reports of Independent Registered Public
    Accounting Firms                                                                                                                                                                                                                                                                                                                                      |  |  | 84          | 
|                              |  | Consolidated Financial Statements of Cingular
    Wireless LLC:                                                                                                                                                                                                                                                                                                                                    |  |  |             | 
|                              |  | Reports of Independent Registered Public
    Accounting Firms                                                                                                                                                                                                                                                                                                                                      |  |  | Exhibit 99a | 
|                              |  | Consolidated Balance Sheets                                                                                                                                                                                                                                                                                                                                                                        |  |  | Exhibit 99a | 
|                              |  | Consolidated Statements of Income                                                                                                                                                                                                                                                                                                                                                                  |  |  | Exhibit 99a | 
|                              |  | Consolidated Statements of Changes in
    Members Capital                                                                                                                                                                                                                                                                                                                                         |  |  | Exhibit 99a | 
|                              |  | Consolidated Statements of Comprehensive Income                                                                                                                                                                                                                                                                                                                                                    |  |  | Exhibit 99a | 
|                              |  | Consolidated Statements of Cash Flows                                                                                                                                                                                                                                                                                                                                                              |  |  | Exhibit 99a | 
|                              |  | Notes to Consolidated Financial Statements                                                                                                                                                                                                                                                                                                                                                         |  |  | Exhibit 99a | 
|(2)                           |  | Financial statement schedules have been omitted
    because the required information is contained in the financial
    statements and notes thereto or because such schedules are not
    required or applicable.                                                                                                                                                                                  |  |  |             | 
|(3)                           |  | Exhibits: Exhibits identified in parentheses
    below, on file with the SEC, are incorporated herein by
    reference as exhibits hereto. All management contracts or
    compensatory plans or arrangements required to be filed as
    exhibits to this Form 10-K pursuant to Item 15(c) are
    filed as Exhibits 10f through 10aaa inclusive.                                                 |  |  |             | 
|2a                            |  | Stock Purchase Agreement, dated as of
    March 5, 2004, by and among Telefónica Móviles,
    S.A., each of the entities listed on Schedule I to the
    Agreement, and BellSouth Corporation (for purposed of the
    Sections and Articles identified in the Preamble only)
    (incorporated by reference to Exhibit 2-a to
    BellSouths Form 8-K dated March 5, 2004, File
    No. 1-8607.) |  |  |             | 
|2a-1                          |  | Amendment No. 1 to Stock Purchase Agreement,
    dated as of July 8, 2004, by and among Telefónica
    Móviles, S.A. and the entities listed on the signature
    pages thereto (incorporated by reference to Exhibit 2a-1 to
    Form 10-Q for the quarter ended September 30, 2004,
    File No. 1-8607.)                                                                                        |  |  |             | 
|2a-2                          |  | Amendment No. 2 to Stock Purchase Agreement,
    dated as of October 4, 2004, by and among Telefónica
    Móviles, S.A. and the entities listed on the signature
    pages thereto (incorporated by reference to Exhibit 2a-2 to
    Form 10-Q for the quarter ended September 30, 2004,
    File No. 1-8607.)                                                                                     |  |  |             | 
|2a-3                          |  | Amendment No. 3 to Stock Purchase Agreement,
    dated as of October 14, 2004, by and among Telefónica
    Móviles, S.A. and the entities listed on the signature
    pages thereto (incorporated by reference to Exhibit 2a-3 to
    Form 10-Q for the quarter ended September 30, 2004,
    File No. 1-8607.)                                                                                    |  |  |             | 
|2a-4                          |  | Amendment No. 4 to Stock Purchase Agreement,
    dated as of October 27, 2004, by and among Telefónica
    Móviles, S.A. and the entities listed on the signature
    pages thereto (incorporated by reference to Exhibit 2a-4 to
    Form 10-Q for the quarter ended September 30, 2004,
    File No. 1-8607.)                                                                                    |  |  |             | 
|3a                            |  | Amended Articles of Incorporation of BellSouth
    Corporation adopted December 5, 2000 (incorporated by
    reference to Exhibit 3a to Form 10-K for the year
    ended December 31, 2000, File No. 1-8607.)                                                                                                                                                                                      |  |  |             | 



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##### Table of Contents







|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  |  |  | 
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|3b   |  | By-laws of BellSouth Corporation adopted
    April 26, 2004 (incorporated by reference to
    Exhibit 3b to Form 10-Q for the quarter ended
    March 31, 2004, File No. 1-8607.)                                                                                                                                                                                                                                                                                                                                                                                                             |  |  |  | 
|4a   |  | BellSouth Corporation Shareholder Rights
    Agreement dated November 22, 1999 (incorporated by
    reference to Exhibit 1 to Report on Form 8-A dated
    November 23, 1999, File No. 1-8607.)                                                                                                                                                                                                                                                                                                                                                                                               |  |  |  | 
|4a-1 |  | Amendment No. 1 to BellSouth Corporation
    Shareholder Rights Agreement, dated as of March 2, 2005
    (incorporated by reference to Exhibit 4a to Current Report
    on Form 8-K dated February 28, 2005, File No. 1-8607.)                                                                                                                                                                                                                                                                                                                                                                |  |  |  | 
|4b   |  | No instrument which defines the rights of holders
    of long and intermediate term debt of BellSouth Corporation is
    filed herewith pursuant to Regulation S-K,
    Item 601(b)(4)(iii)(A) Pursuant to this regulation,
    BellSouth Corporation hereby agrees to furnish a copy of any
    such instrument to the SEC upon request.                                                                                                                                                                                                                                                     |  |  |  | 
|10a  |  | Agreement and Plan of Merger by and among
    AT&T Wireless, Inc., Cingular Wireless Corporation, Cingular
    Wireless LLC and Links I Corporation, and, solely with respect
    to Sections 5.3, 6.1(b), 6.5(b) and Article IX of the
    Agreement and Plan of Merger, SBC Communications Inc. and
    BellSouth Corporation dated as of February 17, 2004
    (incorporated by reference to Exhibit 99.1 from the Current
    Report on Form 8-K/A of Cingular Wireless LLC dated
    February 17, 2004 and filed on February 18, 2004, File
    No. 001-31673.)                          |  |  |  | 
|10b  |  | Investment Agreement dated February 17, 2004
    between BellSouth Corporation and SBC Communications Inc.
    (incorporated by reference to Exhibit 10nn to
    Form 10-K for the year ended December 31, 2003, File
    No. 1-8607.)                                                                                                                                                                                                                                                                                                                                                        |  |  |  | 
|10c  |  | Investment and Reorganization Agreement, dated as
    of October 25, 2004, by and among BellSouth Corporation,
    SBC Communications Inc., Cingular Wireless Corporation, Cingular
    Wireless LLC, Links I Corporation, Cingular Wireless II, Inc.,
    BLS Cingular Holding, LLC, SBC Alloy Holdings, Inc., BellSouth
    Enterprises, Inc., BellSouth Mobile Systems, Inc., BellSouth
    Mobile Data, Inc. and SBC Long Distance, Inc. (incorporated by
    reference to Exhibit 99.01 of the Form 8-K of Cingular
    Wireless LLC filed on October 28, 2004, File
    No. 001-31673.) |  |  |  | 
|10d  |  | Revolving Credit Agreement by and among BellSouth
    Corporation, SBC Communications, Inc. and Cingular Wireless LLC,
    dated as of August 1, 2004 (incorporated by reference to
    Exhibit 10pp to the Form 10-Q for the quarter ended
    June 30, 2004, File No. 1-8607.)                                                                                                                                                                                                                                                                                                              |  |  |  | 
|10e  |  | Credit Agreement dated as of October 4, 2004
    among BellSouth Corporation, the Lenders Party Thereto and
    JPMorgan Chase Bank, as Administrative Agent (incorporated by
    reference to Exhibit 10xx to BellSouths Form 8-K
    dated October 4, 2004, File No. 1-8607.)                                                                                                                                                                                                                                                                                                              |  |  |  | 
|10f  |  | BellSouth Corporation Executive Long Term
    Disability and Survivor Protection Plan as amended and restated
    effective January 1, 1994 (incorporated by reference to
    Exhibit 10c-1 to Form 10-K for the year ended
    December 31, 1993, File No. 1-8607.)                                                                                                                                                                                                                                                                                                                          |  |  |  | 
|10g  |  | BellSouth Corporation Executive Transfer Plan
    (incorporated by reference Exhibit 10ee to Registration
    Statement No. 2-87846.)                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |  |  | 
|10h  |  | BellSouth Corporation Death Benefit Program
    (incorporated by reference to Exhibit 10ff to
    Form 10-K for the year ended December 31, 1989, File
    No. 1-8607.)                                                                                                                                                                                                                                                                                                                                                                                                                       |  |  |  | 
|10i  |  | BellSouth Corporation Executive Incentive Award
    Deferral Plan as amended and restated effective
    September 23, 1996 (incorporated by reference to
    Exhibit 10g to Form 10-K for the year ended
    December 31, 1996, File No. 1-8607.)                                                                                                                                                                                                                                                                                                                                             |  |  |  | 
|10j  |  | BellSouth Corporation Nonqualified Deferred
    Compensation Plan as amended and restated effective
    November 25, 1996 (incorporated by reference to
    Exhibit 10h to Form 10-K for the year ended
    December 31, 1996, File No. 1-8607.)                                                                                                                                                                                                                                                                                                                                              |  |  |  | 
|10k  |  | BellSouth Corporation Supplemental Executive
    Retirement Plan as amended on March 23, 1998 (incorporated
    by reference to Exhibit 10i to Form 10-Q for the
    quarter ended March 31, 1998, File No. 1-8607.)                                                                                                                                                                                                                                                                                                                                                                          |  |  |  | 



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##### Table of Contents



EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES CONTINUED


BELLSOUTH CORPORATION

|      |  |                                                                                                                                                                                                                                                  |  |  |  | 
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  |  |  | 
|10k-1 |  | Amendment to BellSouth Corporation Supplemental
    Executive Retirement Plan, as amended on March 23, 1998,
    dated as of December 23, 2004.                                                                                                  |  |  |  | 
|10l   |  | BellSouth Corporation Executive Financial
    Services Plan, effective January 1, 2004.                                                                                                                                                          |  |  |  | 
|10m   |  | BellSouth Split-Dollar Life Insurance Plan, as
    amended and restated and effective as of November 24, 2003.                                                                                                                                   |  |  |  | 
|10n   |  | BellSouth Officer Compensation Deferral Plan as
    amended and restated effective January 1, 2002
    (incorporated by reference to Exhibit 10z to Form 10-Q
    for the quarter ended September 30, 2001, File
    No. 1-8607.)                |  |  |  | 
|10o   |  | BellSouth Officer Personal Vehicle Perquisite
    Plan, effective January 1, 2004.                                                                                                                                                               |  |  |  | 
|10p   |  | BellSouth Supplemental Life Insurance Plan, as
    amended and restated effective April 1, 2004.                                                                                                                                                 |  |  |  | 
|10q   |  | BellSouth Officer Compensation Deferral Plan, as
    Amended and Restated Effective January 1, 2005.                                                                                                                                             |  |  |  | 
|10r   |  | BellSouth Executive Stock Ownership Program, as
    revised September 27, 2004.                                                                                                                                                                  |  |  |  | 
|10s   |  | BellSouth Corporation Officer Short Term
    Incentive Award Plan (incorporated by reference to
    Exhibit 10y to Form 10-Q for the quarter ended
    September 30, 1996, File No. 1-8607.)                                                     |  |  |  | 
|10t   |  | 2005 Named Executive Officer Compensation Term
    Sheet.                                                                                                                                                                                        |  |  |  | 
|10u   |  | BellSouth Corporation Plan For Non-Employee
    Directors Travel Accident Insurance (incorporated by
    reference to Exhibit 10ii to Registration Statement
    No. 2-87846, File No. 1-8607.)                                                 |  |  |  | 
|10v   |  | BellSouth Corporation Deferred Compensation Plan
    for Non-Employee Directors, as amended and restated effective
    March 9, 1984 (incorporated by reference to
    Exhibit 10gg to Registration Statement No. 2-87846,
    File No. 1-8607.) |  |  |  | 
|10w   |  | BellSouth Corporation Directors
    Compensation Deferral Plan as Amended and Restated effective
    May 1, 2001 (incorporated by reference from
    Exhibit 101-1 to Form 10-Q for the quarter ended
    March 31, 2001, File No. 1-8607.)     |  |  |  | 
|10w-1 |  | First Amendment to BellSouth Corporation
    Directors Compensation Deferral Plan dated as of
    February 6, 2004.                                                                                                                             |  |  |  | 
|10x   |  | BellSouth Non-Employee Directors Charitable
    Contribution Program (incorporated by reference to
    Exhibit 10z to Form 10-K for the year ended
    December 31, 1992, File No. 1-8607.)                                                      |  |  |  | 
|10y   |  | BellSouth Personal Retirement Account Pension
    Plan, as amended and restated effective January 1, 1998
    (incorporated by reference to Exhibit 10q to Form 10-K
    for the year ended December 31, 1998, File No. 1-8607.)                 |  |  |  | 
|10y-1 |  | Amendment dated December 22, 1998 to the
    BellSouth Personal Retirement Account Pension Plan (incorporated
    by reference to Exhibit 10q-1 to Form 10-K for the
    year ended December 31, 1998, File No. 1-8607.)                         |  |  |  | 
|10y-2 |  | Amendment dated March 22, 1999 to the
    BellSouth Personal Retirement Account Pension Plan (incorporated
    by reference to Exhibit 10q-2 to Form 10-Q for the
    quarter ended March 31, 1999, File No. 1-8607.)                            |  |  |  | 
|10y-3 |  | Amendment dated April 7, 1999 to the
    BellSouth Personal Retirement Account Pension Plan (incorporated
    by reference to Exhibit 10q-3 to Form 10-Q for the
    quarter ended March 31, 1999, File No. I-8607.)                             |  |  |  | 
|10y-4 |  | Amendment dated May 6, 1999 to the BellSouth
    Personal Retirement Account Pension Plan (incorporated by
    reference to Exhibit 10q-4 to Form 10-Q for the
    quarter ended June 30, 1999, File No. 1-8607.)                                |  |  |  | 
|10y-5 |  | Amendment dated May 6, 1999 to the BellSouth
    Personal Retirement Account Pension Plan (incorporated by
    reference to Exhibit 10q-5 to Form 10-Q for the
    quarter ended June 30, 1999, File No. 1-8607.)                                |  |  |  | 
|10y-6 |  | Amendment dated May 7, 1999 to the BellSouth
    Personal Retirement Account Pension Plan (incorporated by
    reference to Exhibit 10q-6 to Form 10-Q for the
    quarter ended June 30, 1999, File No. 1-8607.)                                |  |  |  | 



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##### Table of Contents







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



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##### Table of Contents



EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES CONTINUED


BELLSOUTH CORPORATION

|       |  |                                                                                                                                                                                                                                                                        |  |  |  | 
|------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|10aa-2 |  | Second Amendment dated July 8, 2002 to the
    BellSouth Telecommunications, Inc. Trust Under Executive Benefit
    Plan(s) (incorporated by reference to Exhibit 10s-2 to
    Form 10-Q for the quarter ended September 30, 2002,
    File No. 1-8607.)               |  |  |  | 
|10aa-3 |  | First Amendment dated November 1, 2003 to
    the BellSouth Telecommunications, Inc. Trust Under Executive
    Benefit Plan(s) (incorporated by reference to Exhibit 10s-3
    to Form 10-K for the year ended December 31, 2003,
    File No. I-8607.)                |  |  |  | 
|10aa-4 |  | Second Amendment dated December 17, 2003 to
    the BellSouth Telecommunications, Inc. Trust Under Executive
    Benefit Plan(s) (incorporated by reference to Exhibit 10s-4
    to Form 10-K for the year ended December 31, 2003,
    File No. 1-8607.)              |  |  |  | 
|10aa-5 |  | Third Amendment dated March 15, 2004 to the
    BellSouth Telecommunications, Inc. Trust Under Executive Benefit
    Plan(s) (incorporated by reference to Exhibit 10s-5 to the
    Form 10-Q for the quarter ended March 31, 2004, File
    No. 1-8607.)              |  |  |  | 
|10bb   |  | BellSouth Corporation Trust Under Board of
    Directors Benefit Plan(s) as amended April 28, 1995
    (incorporated by reference to Exhibit 10w-1 to
    Form 10-Q for the quarter ended June 30, 1995, File
    No. 1-8607.)                                         |  |  |  | 
|10bb-1 |  | Amendment dated May 23, 1996 to the
    BellSouth Corporation Trust Under Board Directors Benefit
    Plan(s) (incorporated by reference to Exhibit 10u-1 to Form 10-Q
    for the quarter ended June 30, 1996, File No. 1-8607.)                                      |  |  |  | 
|10bb-2 |  | First Amendment dated November 1, 2003 to
    the BellSouth Corporation Trust Under Board of Directors Benefit
    Plan(s) (incorporated by reference to Exhibit 10t-2 to Form
    10-K for the year ended December 31, 2003, File
    No. 1-8607.)                    |  |  |  | 
|10bb-3 |  | Second Amendment dated December 17, 2003 to
    the BellSouth Corporation Trust Under Board of Directors Benefit
    Plan(s) (incorporated by reference to Exhibit 10t-3 to
    Form 10-K for the year ended December 31, 2003, File
    No. 1-8607.)                  |  |  |  | 
|10bb-4 |  | Third Amendment dated March 15, 2004 to the
    BellSouth Corporation Trust Under Board of Directors Benefit
    Plan(s) (incorporated by reference to Exhibit 10t-4 to the
    Form 10-Q for the quarter ended March 31, 2004, File
    No. 1-8607.)                  |  |  |  | 
|10cc   |  | BellSouth Telecommunications, Inc. Trust Under
    Board of Directors Benefit Plan(s) as amended April 28,
    1995 (incorporated by reference to Exhibit 10x-1 to
    Form 10-Q for the quarter ended June 30, 1995, File
    No. 1-8607.)                            |  |  |  | 
|10cc-1 |  | Amendment dated May 23, 1996 to the
    BellSouth Telecommunications, Inc. Trust Under Board of
    Directors Benefit Plan(s) (incorporated by reference to
    Exhibit 10v-1 to Form 10-Q for the quarter ended
    June 30, 1996, File No. 1-8607.)                  |  |  |  | 
|10cc-2 |  | First Amendment dated November 1, 2003 to
    the BellSouth Telecommunications, Inc. Trust Under Board of
    Directors Benefit Plan(s) (incorporated by reference to
    Exhibit 10u-2 to the Form 10-K for the year ended
    December 31, 2003, File No. 1-8607.)   |  |  |  | 
|10cc-3 |  | Second Amendment dated December 17, 2003 to
    the BellSouth Telecommunications, Inc. Trust Under Board of
    Directors Benefit Plan(s) (incorporated by reference to
    Exhibit 10u-3 to the Form 10-K for the year ended
    December 31, 2003, File No. 1-8607.) |  |  |  | 
|10cc-4 |  | Third Amendment dated March 15, 2004 to the
    BellSouth Telecommunications, Inc. Trust Under Board of
    Directors Benefit Plan(s) (incorporated by reference to
    Exhibit 10u-4 to the Form 10-Q for the quarter ended
    March 31, 2004, File No. 1-8607.)     |  |  |  | 
|10dd   |  | Amended and Restated BellSouth Corporation Stock
    Plan Effective April 24, 1995 (incorporated by reference to
    Exhibit 10v-1 to Form 10-K for the year ended
    December 31, 2000, File No. 1-8607.)                                                            |  |  |  | 
|10ee   |  | BellSouth Corporation Stock and Incentive
    Compensation Plan as amended June 28, 2004 (incorporated by
    reference to Exhibit 10v-3 to the Form 10-Q for the quarter
    ended June 30, 2004, File No. 1-8607.)                                                   |  |  |  | 
|10ff   |  | Non-Employee Director Non-Qualified Stock Option
    Terms and Conditions (incorporated by reference to
    Exhibit 10-qq to BellSouths Form 8-K dated
    September 30, 2004, File No. 1-8607.)                                                                      |  |  |  | 
|10gg   |  | 2004 Non-Qualified Stock Option Terms and
    Conditions (incorporated by reference to Exhibit 10-rr to
    BellSouths Form 8-K dated September 30, 2004,
    File No. 1-8607.)                                                                                       |  |  |  | 



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##### Table of Contents







|        |  |                                                                                                                                                                                                                                                                                       |  |  |  | 
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|10hh    |  | BellSouth Retirement Savings Plan as amended and
    restated effective July 1, 2001 (incorporated by reference
    to Exhibit 10w to Form 10-K for the year ended
    December 31, 2001, File No. 1-8607.)                                                                           |  |  |  | 
|10hh-1  |  | First Amendment dated December 18, 2001 to
    the BellSouth Retirement Savings Plan (incorporated by reference
    to Exhibit 10w-1 to Form 10-K for the year ended
    December 31, 2001, File No. 1-8607.)                                                                         |  |  |  | 
|10hh-2  |  | Second Amendment dated March 14, 2002 to the
    BellSouth Retirement Savings Plan (incorporated by reference to
    Exhibit 10w-2 to Form 10-Q for the quarter ended
    September 30, 2002, File No. 1-8607.)                                                                       |  |  |  | 
|10hh-3  |  | Third Amendment to the BellSouth Retirement
    Savings Plan effective as of May 1, 2002 and
    December 10, 2002 (incorporated by reference to
    Exhibit 10w-3 to Form 10-K for the year ended
    December 31, 2002, File No. 1-8607.)                                           |  |  |  | 
|10hh-4  |  | Fourth Amendment dated December 23, 2003 to
    the BellSouth Retirement Savings Plan (incorporated by reference
    to Exhibit 10w-4 to Form 10-K for the year ended
    December 31, 2003, File No. 1-8607.)                                                                        |  |  |  | 
|10hh-5  |  | Fifth Amendment dated December 22, 2004 to
    the BellSouth Retirement Savings Plan.                                                                                                                                                                                                 |  |  |  | 
|10ii    |  | Agreement with Chief Executive Officer
    (incorporated by reference to Exhibit 10dd to
    Form 10-K for the year ended December 31, 1998, File
    No. 1-8607.)                                                                                                                    |  |  |  | 
|10jj    |  | Agreement dated October 18, 2000 with
    Francis A. Dramis (incorporated by reference to
    Exhibit 10gg to Form 10-K for the year ended
    December 31, 2000, File No. 1-8607.)                                                                                                   |  |  |  | 
|10jj-1  |  | BellSouth Corporation Stock Plan Restricted
    Shares Award Agreement dated October 18, 2000 for Francis
    A. Dramis (incorporated by reference to Exhibit 10gg-1 to
    Form 10-K for the year ended December 31, 2000, File
    No. 18607.)                                      |  |  |  | 
|10jj-2  |  | BellSouth Corporation Stock Plan Restricted
    Shares Award Escrow Agreement dated October 18, 2000 for
    Francis A. Dramis (incorporated by reference to
    Exhibit 10gg-2 to Form 10-K for the year ended
    December 31, 2000, File No. 1-8607.)                              |  |  |  | 
|10kk    |  | Agreement dated May 19, 2003 with Ronald M.
    Dykes (incorporated by reference to Exhibit 10hh-4 to
    Form 10-Q for the quarter ended June 30, 2003, File
    No. 1-8607.)                                                                                                        |  |  |  | 
|10kk-1  |  | BellSouth Corporation Stock Plan Restricted
    Shares Award Agreement dated October 26, 2000 for Ronald M.
    Dykes (incorporated by reference to Exhibit 10hh-1 to
    Form 10-K for the year ended December 31, 2000, File
    No. 1-8607.)                                       |  |  |  | 
|10kk- 2 |  | BellSouth Corporation Stock Plan Restricted
    Shares Award Escrow Agreement dated October 26, 2000 for
    Ronald M. Dykes (incorporated by reference to
    Exhibit 10hh-2 to Form 10-K for the year ended
    December 31. 2000, File No. 1-8607.)                                |  |  |  | 
|10ll    |  | Agreement dated December 16, 2003, between
    BellSouth Corporation and Mark L. Feidler (incorporated by
    reference to Exhibit 10kk to Form 10-K for the year
    ended December 31, 2003, File No. 1-8607.)                                                                      |  |  |  | 
|10mm    |  | Agreement dated as of October 18, 2000 by
    and between BellSouth Corporation and Richard A. Anderson
    (incorporated by reference to Exhibit 10zz to Form 10-Q for
    the quarter ended September 30, 2004, File No. 1-8607.)                                                   |  |  |  | 
|10nn    |  | Form of Director Indemnity Agreement
    (incorporated by reference to Exhibit 10ll to
    Form 10-K for the year ended December 31, 2003, File
    No. 1-8607.)                                                                                                                      |  |  |  | 
|10oo    |  | Form of BellSouth Corporation Stock and Incentive
    Compensation Plan Restricted Stock Award Agreement (incorporated
    by reference to Exhibit 10-ss to BellSouths
    Form 8-K dated September 30, 2004, File
    No. 1-8607.)                                                  |  |  |  | 
|10pp    |  | Form of BellSouth Corporation Stock and Incentive
    Compensation Plan Restricted Stock Award Agreement
    (Non-Retirement Eligible, Change in Control) (incorporated by
    reference to Exhibit 10-tt to BellSouths
    Form 8-K dated September 30, 2004, File
    No. 1-8607.) |  |  |  | 
|10qq    |  | Form of BellSouth Corporation Stock and Incentive
    Compensation Plan Restricted Stock Award Agreement (Retirement
    Eligible, No Change in Control) (incorporated by reference to
    Exhibit 10-uu to BellSouths Form 8-K dated
    September 30, 2004, File No. 1-8607.)      |  |  |  | 



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##### Table of Contents



EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES CONTINUED


BELLSOUTH CORPORATION

|      |  |                                                                                                                                                                                                                                                                                                     |  |  |  | 
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|10rr  |  | Form of BellSouth Corporation Stock and Incentive
Compensation Plan Restricted Award Agreement (Non-Retirement
Eligible) (incorporated by reference to Exhibit 10-vv to BellSouths Form 8-K
dated September 30, 2004, File No. 1-8607.)                                                            |  |  |  | 
|10ss  |  | Form of BellSouth Corporation Stock Plan
    Restricted Shares Award Agreement (used in connection with
    Restricted Share grants to executive officers in 2000)
    (incorporated by reference to Exhibit 10aaa to
    Form 10-Q for the quarter ended September 30, 2004,
    File No. 1-8607.) |  |  |  | 
|10tt  |  | Form of BellSouth Change in Control Executive
    Severance Agreements (incorporated by reference to Exhibit 10y-1
    to Form 10-Q for the quarter ended September 30, 2003,
    File No. 1-8607.)                                                                                                 |  |  |  | 
|10uu  |  | Form of BellSouth Corporation Stock and Incentive
    Compensation Plan Annual Incentive Award Agreement for Executive
    Officers (2005 Awards) (incorporated by reference to Exhibit
    10ss to Form 8-K dated January 24, 2005, File
    No 1-8607.)                                           |  |  |  | 
|10vv  |  | Form of BellSouth Corporation Stock Plan
    Performance Shares Award Agreement (2002 Awards) (incorporated
    by reference to Exhibit 10tt to Form 8-K dated
    January 24, 2005, File No 1-8607.)                                                                                               |  |  |  | 
|10ww  |  | Form of BellSouth Corporation Stock Plan
    Performance Shares Agreement (2003 Awards) (incorporated by
    reference to Exhibit 10uu to Form 8-K dated
    January 24, 2005, File No 1-8607.)                                                                                                     |  |  |  | 
|10xx  |  | Form of BellSouth Corporation Stock and Incentive
    Compensation Plan Performance Shares Award Agreement (2004
    Awards) (incorporated by reference to Exhibit 10-ww to
    BellSouths Form 8-K dated September 30, 2004,
    File No. 1-8607.)                                                |  |  |  | 
|10yy  |  | Form of BellSouth Corporation Stock Plan
    Performance Shares Award Agreement (2005 Awards 
    total shareholder return) (incorporated by reference to
    Exhibit 10yy to BellSouths Form 8-K dated
    February 28, 2005, File No. 1-8607.)                                                  |  |  |  | 
|10zz  |  | Form of BellSouth Corporation Stock Plan
    Performance Shares Award Agreement (2005 Awards 
    internal performance metrics) (incorporated by reference to
    Exhibit 10zz to BellSouths Form 8-K dated
    February 28, 2005, File No. 1-8607.)                                              |  |  |  | 
|10aaa |  | Form of BellSouth Corporation Stock Plan
    Performance Shares Award Agreement (2005 Awards 
    non-162(m) officers) (incorporated by reference to
    Exhibit 10aaa to BellSouths Form 8-K dated
    February 28, 2005, File No. 1-8607.)                                                      |  |  |  | 
|11    |  | Computation of Earnings Per Share.                                                                                                                                                                                                                                                                  |  |  |  | 
|12    |  | Computation of Ratio of Earnings to Fixed Charges.                                                                                                                                                                                                                                                  |  |  |  | 
|21    |  | Subsidiaries of BellSouth.                                                                                                                                                                                                                                                                          |  |  |  | 
|23a   |  | Consent of Independent Registered Public
    Accounting Firm.                                                                                                                                                                                                                                       |  |  |  | 
|23b   |  | Consent of Independent Registered Public
    Accounting Firm.                                                                                                                                                                                                                                       |  |  |  | 
|23c   |  | Consent of Independent Registered Public
    Accounting Firm.                                                                                                                                                                                                                                       |  |  |  | 
|24    |  | Powers of Attorney.                                                                                                                                                                                                                                                                                 |  |  |  | 
|31-a  |  | Section 302 certification of F. Duane
    Ackerman.                                                                                                                                                                                                                                                 |  |  |  | 
|31-b  |  | Section 302 certification of Ronald M. Dykes.                                                                                                                                                                                                                                                       |  |  |  | 
|32    |  | Statement Required by 18 U.S.C.
    Section 1350, as adopted pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002.                                                                                                                                                                         |  |  |  | 
|99a   |  | Consolidated Financial Statements of Cingular
    Wireless LLC as of and for the three years ended December 31,
    2002, 2003 and 2004 with the Report of Independent Registered
    Public Accounting Firm.                                                                                       |  |  |  | 
|99b   |  | Annual report on Form 11-K for BellSouth
    Retirement Savings Plan for the fiscal year ended
    December 31, 2004 (to be filed under Form 11-K within
    180 days of the end of the period covered by this report).                                                                             |  |  |  | 
|99c   |  | Annual report on Form 11-K for BellSouth
    Savings and Security ESOP Plan for the fiscal year ended
    December 31, 2004 (to be filed under Form 11-K within
    180 days of the end of the period covered by this report).                                                                      |  |  |  | 



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##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

BELLSOUTH CORPORATION

/s/ W. PATRICK SHANNON




W. Patrick Shannon


Senior Vice President  Finance and
Controller


March 7, 2005


Pursuant to the requirements of the Securities
Exchange Act of 1934, this

report has been signed below by the following
persons on behalf of


the registrant and in the capacities and on the
date indicated.


PRINCIPAL EXECUTIVE OFFICER:

F. Duane Ackerman*

CHAIRMAN OF THE BOARD, PRESIDENT


AND CHIEF EXECUTIVE OFFICER


PRINCIPAL FINANCIAL OFFICER:

Ronald M. Dykes*.

CHIEF FINANCIAL OFFICER


PRINCIPAL ACCOUNTING OFFICER:

W. Patrick Shannon*

Senior Vice President  Finance and
Controller


DIRECTORS:

F. Duane Ackerman*

Reuben V. Anderson*


James H. Blanchard*


J. Hyatt Brown*


Armando M. Codina*


Kathleen F. Feldstein*


James P. Kelly*


Leo F. Mullin*


Robin B. Smith*


William S. Stavropoulos*




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




W. Patrick Shannon

(INDIVIDUALLY AND AS ATTORNEY-IN-FACT)


March 7, 2005